Government Contracts Issue Update: Uncompensated Overtime

Much has been written about the various methods available for Government contractors to account for uncompensated overtime. Unfortunately, almost all of the published information concentrates on the accounting mechanics of timekeeping and labor cost allocation issues and fails to address the one question that should really matter to contractors — which method creates reasonable revenue for the work actually performed?

Uncompensated Overtime

The DCAA Audit Manual (Section 6-410) discusses uncompensated overtime in some detail from the perspective of whether contractors should record all actual hours in their timekeeping systems (i.e., whether contractors should use “total time accounting”). Surprisingly, DCAA never reaches a conclusion on the subject. DCAA effectively seems to condone the submission of signed timesheets that represent less than time actually worked.

In our view, contractors performing labor-hour, time-and-material, or cost reimbursable contracts should avoid any timekeeping system that fails to accurately report the total time worked. Such a system under bills clients for work performed and thereby affects a company’s bottom line. Moreover, any timekeeping system that by its very design under reports actual hours worked invites labor mischarging and false claim allegations.

Total Time Accounting System

A total time accounting system that accurately reports hours will generate the proper amount of revenue for contractors on each of their labor-hour and time-and-material contracts. Cost reimbursable contracts have an added twist.

Many cost reimbursable contractors who report total time use a diluted hourly rate approach for distributing labor costs to projects. For example, if an employee is paid $1,000 per week and works 40 hours, the projects are charged $25 per hour. If the same employee works 50 hours the following week, the hourly rate is diluted and projects are charged $20 per hour. In this example the contractor gets no additional revenue for the extra 10 hours of effort — they are provided free of charge to the Government.

Fortunately, acceptable standard cost approaches will negate this windfall to the Government and still allow the contractor to take advantage of uncompensated overtime.

The most common of these approaches involves charging direct labor to projects at a standard hourly rate established annually for each direct labor employee. Actual hours are charged to projects at this standard rate. For uncompensated overtime situations, the variance between labor charged to projects and actual compensation is credited to overhead.

Such an approach allows contractors to account for their hours in an accurate, straightforward manner, bill for the hours actually worked, and effect a competitively beneficial decrease in their overhead rates. DCAA has recognized this as an acceptable method of accounting for labor costs, and we think that it generally beats just giving the Government hours of effort for free.

Editors Note:

Significant changes have been made to the regulations that require auditing and accounting for overtime hours worked by salaried employees.

The DCAA 6-410 (2016) provides that the Fair Labor Standards Act (FLSA) requires overtime compensation for hourly workers who work in excess of 40 hours per week. However, salaried employees are not required to be compensated for overtime. Hours that a salaried employee works over 40 hours is called uncompensated time.

According to Federal Acquisitions Regulation 52.237.10, uncompensated overtime is, "hours worked without additional compensation in excess of an average 40 hours per week by direct charge employees who are exempt from the Fair Labor Standards Act." In addition to this definition a new definition for "adjusted hourly rate" has been included.

Contractors are now required to apply an adjusted rate whenever there is uncompensated overtime, which is applied to all proposed hours, whether regular or overtime. The adjusted rate is calculated multiplying the hourly rate by 40 hours and then dividing by the proposed hours per week including the uncompensated overtime hours. For example, 45 hours proposed on a 40 hour week at at salary of $20.00 per hour would give a rate of $17.78 hours for all time worked ($20.00 x 40 divided by 45 = $17.78). FAR 52.237-10