April 24, 2018

Do you reflect all the hours your salaried employees worked when you submit U.S. Government contract estimates and billings?


  • Establish a consistent practice for accounting for hours worked by salaried individuals that exceed 40 hours a week.
  • Ensure that estimating and billing practices are consistent with accounting practices.
  • Record and bill all qualifying hours worked for competitively awarded T&M contracts, unless prohibited by specific contract terms.

While the terminology is a misnomer, estimating, accounting and billing for the “uncompensated overtime” of salaried individuals has different requirements and customer expectations depending on the nature of the contract award. Federal Acquisition Regulation (FAR) Part 2 defines overtime as time worked by a contractor’s employee in excess of the employee’s normal workweek. You may employ some people who are compensated with an hourly rate and others who are compensated with an annual salary.

Typically, the employees to whom you pay an annual salary are exempt from the Fair Labor Standards Act (FLSA) policy that requires payment for hours exceeding the employees standard 40-hour work week.

Accounting for Uncompensated Overtime

The term “uncompensated overtime” refers to hours in excess of the standard 40-hour week worked by employees exempt from the FLSA policy. Exempt employees usually do not receive payment for the specific number of extra hours worked. These “uncompensated” hours are part of their annual salary regardless of how many extra hours they work each week.

The method you use to record and bill for the excess hours and their associated cost is often termed “accounting for uncompensated overtime.”

When you employ salaried individuals who can work on two or more cost objectives within a timekeeping period — incurring a significant amount of uncompensated overtime — there are several acceptable methods for recording the uncompensated overtime hours. The two most prevalent are to:

1. Record all hours worked. This is known as total time accounting. It is the method preferred by U.S. Government oversight officials.

2. Record only the hours assigned to a standard work period, such as a 40 hour workweek.

Using the second method, you allocate the total hours an employee actually worked proportionately to each cost objective. That way, the sum of all the hours equals a standard work week (e.g. 40 hours, but could be more or less if the company has flexible work schedules or some other reasonable policy).

For example, let’s say an employee works 20 hours on Task A, and 30 Hours on Task B, for a total of 50 hours. You would record 20/50 (40 percent) of 40 hours equaling 16 hours (40 percent times 40 hours) to Task A, and 30/50 (60 percent) of 40 hours equaling 24 hours (60 percent times 40 hours) to Task B.

Your cost reimbursable, time and material, and fixed price contracts that are awarded based on estimated costs, or reimbursed based on actual costs or hours, are subject to:

  • FAR Table 15.2 estimating requirements,
  • FAR Part 31.2 cost accounting requirements, and, in many cases,
  • The requirements of some or all of the Cost Accounting Standards (CAS).

You are also expected (and many times specifically required) to maintain adequate estimating, accounting and/or billing systems.

Consistency Counts Heavily

These requirements, as well as several of your other contract terms — either implicitly or explicitly — state that you must consistently follow your established accounting practices for estimating, accumulating and reporting your costs, including your practices for addressing uncompensated overtime.

For example, if your accounting practice is to record all hours worked, then this practice must be followed in developing estimated labor rates for proposals by dividing annual salaries by the total anticipated hours to be worked. Your actual cost per labor hour would be computed by dividing actual salaries by total actual recorded hours worked. Your billings would include all hours worked at your computed cost per labor hour.

Conversely, if your accounting practice is to reflect only the number of hours worked in a standard work week, then you must follow this practice in developing estimated labor rates for proposals by dividing annual salaries by the annual total of standard work week hours to be recorded. Your actual cost per labor hour would be computed by dividing actual salaries by the total work standard work week hours (in other words, the total hours worked proportionally reduced by the number of hours in the standard workweek). Your billings would include only the standard workweek hours recorded at your computed cost per labor hour.

Comply with Cost Terms

Inconsistent estimating, accounting and reporting for uncompensated overtime will result in findings that your accounting, billing and estimating system is inadequate. For cost reimbursable contracts, if you were to compute your labor rates using a 40-hour workweek and then submit bills based on all hours worked, you would bill more than the actual amounts of direct labor costs. That, among other offenses, is not compliant with the allowable cost terms of your contract.

Let’s say you have time and materials (T&M) contracts with fixed hourly labor rates that were noncompetitively awarded to you based on your cost proposal. If you use a 40-hour workweek to develop, propose and negotiate your fully loaded fixed hourly labor rates and then submit your billing based on all hours worked, your accounting practices would be inconsistent and result in over-billing.

Similarly, if your firm’s fixed price contracts are negotiated based on estimated costs using hourly rates computed on a 40-hour workweek, and your practice is to record total time, you will overstate and potentially defectively price your cost per labor.

Worst Case Scenario

At best, these practices could result in an inadequate estimating system. In a worst-case scenario, depending on the circumstances, they could result in allegations of defective pricing and irregular conduct.

However, not all T&M contracts are covered by these rules and regulations. Your competitively awarded T&M contracts do not contain any prescribed FAR prohibitions against billing for all hours worked even if your established accounting practice for other contracts is to record only the standard workweek.

For these awards, your proposed hourly rates are evaluated based on a comparison of competitive offers, with no consideration of cost data or accounting practices for uncompensated overtime. The impact of uncompensated overtime is reflected in the competitive nature of the labor market as both you and your competitors — acutely aware of the impact of uncompensated overtime on actual cost per labor hour — will reduce proposed rates as considered appropriate to win the award.

As a result, for competitively awarded T&M contracts you are not precluded from recording and billing all hours worked unless there is a specific contract clause addressing this issue. This is the case even when your established accounting practice for other U.S .Government contracts is to record only the total hours in a standard workweek.

© 2018