Timekeeping and Cost Allocation for LSC-Funded Programs

Timekeeping failures are one of the most common findings in LSC grantee audits. The rules aren’t ambiguous. Most organizations build their timekeeping systems around attorneys and paralegals and stop there. What they find out during fieldwork is that the requirement extends further than they planned, that the records they’ve been keeping don’t meet what the regulation actually asks for, and that, by that point, the findings are already written.

Who the Timekeeping Requirement Actually Covers

The scope of 45 CFR Part 1635 is broader than many organizations expect. The regulation applies to any attorney, paralegal or other recipient employee who performs work charged to one or more awards as a direct cost. The critical phrase is “charged as a direct cost.” If an employee’s salary is allocated to the LSC grant, that employee is subject to the timekeeping requirement regardless of title or role.

This means administrative staff, intake coordinators and other non-legal personnel whose salaries are treated as direct costs are covered. Organizations that limit their timekeeping compliance efforts to attorneys and paralegals are leaving a gap that auditors find.

The LSC Financial Guide section 2.2 and 45 CFR Part 1635 together set the standard. Both should be read together when designing or reviewing a timekeeping system.

What the Records Have to Show

Under 45 CFR § 1635.4, time records must meet several specific standards. For most organizations, the gap between what they’re capturing and what the regulation requires shows up here:

LSC recommends that organizations require employees to record time in increments no greater than one quarter hour. The regulation doesn’t mandate a specific increment but the recommendation reflects what auditors expect to see when they pull timesheet samples.

The records need to cover both LSC-funded and non-LSC direct cost activities. A timesheet that only captures LSC hours without accounting for how the rest of the employee’s compensated time was spent doesn’t satisfy the requirement. The full picture of how an employee’s time is allocated has to be visible in the record.

Part-Time Employees and the Certification Requirement

Organizations with employees who work part-time for the recipient and part-time for an organization that engages in restricted activities face an additional requirement. Those employees must certify in writing, on a quarterly basis using a form determined by LSC, that they have not engaged in restricted activity during any time for which they were compensated by the recipient and have not used recipient resources to carry out restricted activities.

The August 2025 LSC OIG quality control review findings identified missing part-time employee certifications as one of the specific timekeeping deficiencies appearing in 24% of grantee audits reviewed. The certification requirement isn’t new, but it’s consistently missed in organizations that don’t have a systematic process for collecting and retaining the forms quarterly.

Timekeeping records, including certifications, must be retained for at least three years per LSC Financial Guide Section 2-3.

The Annual Reconciliation Requirement

Timekeeping records don’t stand alone. The LSC Financial Guide requires that timekeeping reports be reconciled with labor cost distribution reports or alternative reports at least annually before final fund allocation entries are made. The purpose of that reconciliation is to confirm that LSC funding is being used to pay costs associated with LSC-eligible activity and that payroll allocations across funding sources are accurate.

Organizations that complete timesheets throughout the year but skip the reconciliation step are still out of compliance. Reconciliation is the control that ties individual records to the financial statements. Without it, the timekeeping and accounting systems can drift apart in ways that only surface during an audit.

Cost Allocation: What Makes a Methodology Defensible

Shared costs that benefit both LSC and non-LSC programs need allocation methodologies that are cost-driven, documented and applied consistently. The LSC Financial Guide explicitly states that budgeted amounts and percentages of revenue are not allowable allocation bases. The methodology has to measure the actual benefit provided to each cost objective.

Common defensible bases include headcount ratios for administrative costs, square footage for facility costs and time studies for positions that split work across programs. The choice of methodology matters less than the documentation supporting it and the consistency with which it’s applied. A cost allocation methodology that changes from year to year without a documented reason signals to auditors that the numbers are being shaped rather than calculated.

When a non-LSC funder refuses to pay indirect costs, the organization cannot simply absorb those costs into the LSC grant. Under 45 C.F.R. § 1630.5(g), recipients must have written policies and procedures to calculate and allocate those indirect costs consistently with LSC requirements, regardless of whether another funder covers them.

Build the System Around the Requirement, Not Around the Audit

Timekeeping and cost allocation systems that produce clean audit results aren’t assembled at year-end. They’re built to capture the right information at the right frequency throughout the year. The reconciliation, the certifications, the allocation documentation, all of it needs to be a routine operational function, not a compliance sprint before the auditor arrives.

For organizations also managing the fund accounting requirements that underpin LSC compliance, the single audit process for LSC grantees tests exactly this documentation.

James Moore’s nonprofit accounting team works with LSC-funded legal aid organizations on timekeeping systems, cost allocation methodologies and the documentation practices that support clean audit results. Contact us when you want an objective assessment of where your current systems stand.

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