Learn why payroll-to-labor cost reconciliation helps government contractors improve compliance, prevent errors, strengthen accuracy, and maintain audit-ready records across operations.
Reconciling payroll to labor cost ensures that employee payroll payments accurately match the labor distribution in the accounting system.
This is both best practice and a compliance requirement. DFARS 252.242-7006 requires labor costs to be traceable and reconcilable from timesheets through to the general ledger, while SF-1408 Pre-Award Survey evaluates whether contractors have adequate controls to support that same expectation. In addition, Schedule L of the Incurred Cost Submission requires reconciliation of Forms 941 to the labor cost recorded in the general ledger. Most recently, the SBA data call due reinforced this requirement by requesting payroll registers and supporting reconciliations covering the prior three years.
FAR 31.201-2 requires contractors to properly account for costs and maintain records demonstrating that costs claimed were incurred, allocable to the contract, and comply with applicable cost principles. For service-based government contractors, payroll is typically their largest expense, inaccuracies in labor costs have a ripple effect distorting budgets, billings, and forecasts. There is also a practical downside: paying an employee incorrectly often means running a costly, time-consuming out-of-cycle payroll.
Contractors should reconcile labor costs to payroll records before payroll is finalized to identify and correct errors early, such a missing hours, unpaid leave, or incorrect pay codes. Reconciliation can also uncover system discrepancies, such as salary increases recorded in the payroll system but not updated in the accounting system, resulting in understated labor costs. Most importantly it helps ensure every paycheck is supported by a valid timesheet. For example, if a terminated employee is not removed from the payroll system in time, an automatic payroll run may generate an improper payment that can be difficult to recover. For government contractors, the related labor and payroll costs would be unallowable.
A Few Things That Help
- Reconcile before payroll runs – catching issues early keeps them small and manageable.
- Use a consistent format – templates ensure nothing slips through and let others repeat the process consistently.
- Document as you go – capture explanations for variances in the moment, rather than trying to recall them later. Over time, this record also helps surface recurring issues, making it easier to spot systemic problems and fine-tune workflows.
- Leverage tools where possible – automation can reduce manual work and errors. Identifying a common field shared between two systems (like employee ID) can let you build quick comparisons in Excel, making discrepancies easier to spot without manual line-by-line review.
Conclusion
Reconciling payroll to labor cost may seem like a routine administrative task, but it is critical to maintaining compliance and financial accuracy. By making reconciliation part of the payroll process rather than an after-the-fact exercise, contractors can identify errors before they compound, avoid unallowable costs, and maintain the kind of clean, traceable records that auditors and contracting officers expect. A little consistency and documentation up front goes a long way toward saving time, money, and headaches down the road.