🇺🇸United States

Labor Mischarging and Cost Misallocation Uncovered by DCAA Floor Checks

4 verified sources

Definition

DCAA labor‑charging and floor‑check audits routinely uncover mischarging of labor hours, falsified timesheets, or improper allocation of costs to government contracts. When systemic, these issues result in disallowed costs, repayments, and sometimes civil or criminal fraud actions.

Key Findings

  • Financial Impact: DoD IG and DOJ enforcement actions in the aerospace/defense sector regularly involve multi‑million‑dollar settlements for labor mischarging and misallocation; beyond legal settlements, affected contractors lose recovery of the mischarged costs, incur investigation and remediation expenses, and may suffer suspension or debarment risk on future awards.
  • Frequency: Annually
  • Root Cause: Weak timekeeping controls, poor training on DCAA labor‑charging rules, and cultural pressure to ‘keep contracts whole’ encourage employees and supervisors to mischarge time or allocate costs improperly. DCAA’s emphasis on surprise floor checks and labor‑charging audits is specifically aimed at detecting such fraud and abuse.

Why This Matters

This pain point represents a significant opportunity for B2B solutions targeting Defense and Space Manufacturing.

Affected Stakeholders

Shop Floor and Engineering Staff, Supervisors and Project Leads, Program Managers, Payroll and Timekeeping Administrators, Internal Audit and Compliance, Legal Counsel

Deep Analysis (Premium)

Financial Impact

$1.2M to $8M (FMS customer loss of confidence, contract non-renewal, potential trade/diplomatic friction); contractor reputation damage in allied government sales channel • $1.5M - $4M (disallowed costs on DHS contracts + settlement negotiation costs + debarment risk penalty to future DHS awards + internal investigation) • $1.5M-$6M in questioned costs per IC audit; investigation costs $300K-$1M; potential contract suspension or termination; damage to cleared facility status

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Current Workarounds

Contracts Admin receives subcontractor timesheets via email/PDF; manually uploads into spreadsheet; flags inconsistencies; sends invoice approval/rejection via email with comments • Contracts Admin receives timesheets from Program Manager; manually verifies NASA labor category alignment; creates audit-ready timesheet summary; responds to NASA cost questions via email with spreadsheet attachments • Contracts Administrator manually pulls timesheets from various systems (HR, payroll, project mgmt); creates audit workpaper spreadsheet; responds to DCAA data requests via email with attached files

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Methodology & Sources

Data collected via OSINT from regulatory filings, industry audits, and verified case studies.

Evidence Sources:

Related Business Risks

Withheld and Disallowed Costs from Inadequate DCAA Audit Support

Common DCAA practice is to recommend withholds of 5–15% of billings or disallow questioned costs; in a 2023 DCAA report to Congress, auditors questioned $3.7 billion in costs across all audits, a significant share attributable to inadequate supporting documentation and non‑compliant systems, implying recurring multi‑million‑dollar leakage for larger defense/aerospace manufacturers each year.

Excessive Internal Labor and Consultant Spend on DCAA Audit Fire‑Drills

Industry practitioners report that medium to large defense manufacturers routinely incur hundreds to thousands of internal hours per major DCAA audit, plus six‑figure consulting engagements; for a portfolio with multiple concurrent audits, this can easily exceed $500,000–$2,000,000 per year in avoidable recurring preparation and remediation costs.

Rework and Re‑submission of Incurred Cost and Supporting Schedules After DCAA Findings

DCAA’s annual reports show high volumes of questioned and unsupported costs; contractors then expend significant additional internal labor to correct and justify those costs, often representing tens of thousands of staff hours across major defense manufacturers annually, translating into recurring multi‑hundred‑thousand‑dollar rework burdens per large enterprise.

Payment Delays from DCAA‑Driven Voucher Holds and Questioned Costs

Contractors can face 60–90+ day delays on significant invoices when DCAA or the contracting officer suspends or withholds payment; for large programs with monthly billings in the tens of millions, this represents recurring working‑capital exposure easily in the $10M–$100M range and associated interest costs annually.

Finance and Program Management Capacity Consumed by DCAA Audit Cycles

For large defense/aerospace manufacturers with dozens of active contracts, recurring audit‑related capacity loss can total thousands of high‑value hours per year; at blended fully burdened rates of $100–$200/hour, this equates to hundreds of thousands to low millions of dollars in lost productive capacity annually.

Penalties, Interest, and Adverse Rate Adjustments from DCAA Non‑Compliance

DCAA’s annual reports detail billions of dollars in questioned and disallowed costs government‑wide each year; where issues are sustained, contractors not only forgo recovery but may also owe refunds and interest. High‑profile DoD IG and DOJ cases tied to defective pricing and non‑compliant accounting have resulted in multi‑million to multi‑hundred‑million‑dollar settlements in the aerospace and defense sector.

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