FAR Compliance Spotlight: Evaluating Time Transfers and Labor-Related Adjustments

Viewed strategically, labor adjustments aren’t just an audit issue. They’re a window into the accuracy, efficiency, and maturity of your organization’s project accounting environment.

New to overhead rate audits or gearing up for your next one? Be ready: auditors are zeroing in on time transfers and labor-related adjustments. It’s one of the first places they look, and one of the quickest ways to raise red flags.

During the 2024 audit season, there was a notable shift in audits performed using the AASHTO Uniform Audit & Accounting Guide (UAAG). Auditors are required to evaluate time transfers and labor-related adjustments as part of their procedures. Previously, those evaluations included assessing – with various degrees of earnestness – a variety of optional audit steps, or, worse, relying exclusively on sampling under the legacy 26 timesheet rule. This change is consistent with the profession-wide pivot toward a more robust risk-based auditing framework, in particular the revised auditing standard AU-C 315.

Because labor adjustments represent some of the highest risk transactions in a business contracting with a government entity, this enhanced focus isn’t just technical – it’s critical to a well-run business.

What are time transfers and labor-related adjustments?

In practical terms, these adjustments include any after the fact changes to labor allocations, such as:

• Moving hours from one job number, project, or task to another

• Reallocating time between billable and non-billable work

• Manually adjusting timekeeping entries

• Adjusting labor related general ledger accounts

Any modification affecting labor cost allocation, billing, or indirect rate calculations falls into this category.

Why the increased scrutiny?

At the heart of this shift is Federal Acquisition Regulations (FAR) 31.201-2, Determining Allowability, which emphasizes the importance of allocability, reasonableness, and adequate documentation. Adjustments made after the fact are inherently more vulnerable because they often rely on human judgment and, sometimes, limited documentation.

More importantly, time transfers can act as a red flag – signaling potential cost shifting, unallowable cost recovery, or improper rate manipulation. Under AU-C 315, auditors are required to directly link their risk assessments to the design and execution of audit procedures. That means not only identifying whether time adjustments exist, but also assessing their materiality, frequency, and potential to distort indirect rates.

In short: there are presumptive expectations for auditors to form and document a clear conclusion on whether labor adjustments meaningfully affect the contractor’s cost representations.

Best practices for firms and contractors

Strong internal controls over labor adjustments are no longer just advisable - they are essential.

Here are practical steps to prepare:

• Document time transfer policies and procedures: Ensure there is a written, up-to-date protocol for making and approving labor-related adjustments. Also, make sure your team reads it.

• Require supervisory review and documented approval: At a minimum, every adjustment should have the critical three: a reason, a reviewer, and a timestamp.

• Enable audit trails within timekeeping software: Where feasible, use systems that track user changes, approvals, and timestamps. Notably, just because your technology doesn’t help automate the trail, your company isn’t absolved of the basic audit trail requirement – you must maintain a manual trail if nothing else.

Move on from compliance

High-performing Chief Financial Officers often ask: What do our labor adjustments really say about us? If your organization frequently makes after the fact corrections, it may reflect deeper operational realities:

• Control gaps: Excessive adjustments may indicate inadequate timekeeping oversight, weak managerial review, or lax enforcement of policies.

• Process inefficiencies: Are employees unclear on how to charge time properly? Are project codes or billing structures confusing or poorly maintained? Are just-in-time approvals from complex procurement realities creating inefficiencies?

• Technology limitations: If your systems don’t support real-time allocation, approvals, or audit trails, you’re likely compensating with manual workarounds - which carry greater risk and audit scrutiny. Prepare accordingly.

  
  

Leaders in finance and accounting regularly assess these factors with their team. Viewed strategically, labor adjustments aren’t just an audit issue. They’re a window into the accuracy, efficiency, and maturity of your organization’s project accounting environment.

Closing thoughts

If your company has had surprises in this area, don’t wait until they are uncovered again in the next audit! The time to strengthen controls, upgrade processes, and clarify responsibilities in light of technology limitations is now.