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Like others have said, the tracking software hasn't proven to be effective in stopping contractors who want to pad hours.

The contracts who were doing this before are still doing it, and those who are offended by the practice have all but left.

Unless I am mistaken, it is not obligatory (at least on oDesk) to track time using their "spy" software. Instead you can report offline hours if you have previously agreed with the client.

That's correct - when the client makes a hire, she can decide whether or not to allow offline hours.

It's not required on Elance, either, thankfully.

And it's not actual effective in preventing fraud. The only real way would be having a live video stream + recording you can return to watch.