OVERTIME AND TOTAL TIME ACCOUNTING
-- Eric S. Sobota
the United States continues to expand its service-based economy,
the cost of labor has been an exceedingly crucial element of managing
the overall costs of projects. In the realm of Federal contracting,
it is not only critical, but a regulatory mandate. Most government
contractors know the drill well: timecards, approvals, project charge
codes and cost accounting by contract. However, the idea of recording
all hours worked during a day has not been a hugely important issue
to many companies, especially given the use of specialized, yet
salaried employees. The use of total time accounting ("TTA") and
its resultant impact on contract costs is more important than ever.
But how should you effectively manage its use at your organization?
Total time accounting,
in its most simplistic form, is accounting for the cost of labor
utilizing ALL hours worked. It sounds easy, but many contractors
do not record and track all hours worked. Instead, some business
accounting systems only allow employees to charge labor costs for
a maximum of 8 hours of work per day. For many employees covered
by the Fair Labor Standards Act (FLSA), this poses no problem because
they are statutorily limited to 8 hours of work per day. However,
for employees who are exempt from the FLSA, working more than 8
hours is common and increasingly the norm.
to the weekly hours that an exempt employee works in excess of the
40 hours that can be recorded and charged by a 40-hour-only accounting
system? The answer is that companies often differ in their methods
for handling this "uncompensated overtime," and the varying
methods have different effects on revenues and ultimately a company's
bottom line. Given this real potential for contractors to manipulate
revenues, government auditors are understandably wary of accounting
systems that do not account for all hours worked. The following
example further illustrates the point:
Doe is an exempt employee earning a fixed salary of $50,000 per
year from his employer. John works on two government contracts.
One is a fixed-price contract and the other is a cost reimbursable
contract. John works 12 hours per day: 6 hours on the fixed price
contract and 6 hours on the cost reimbursable contract. John's employer's
accounting system only allows John to enter 8 hours of labor per
day. Which 8 hours of John's 12 hour days does John record?
If John records 2 hours to the cost reimbursable contract and the
remaining 6 hours of the day to the fixed-price contract, his employer
will be compensated for 2 hours of time on the cost reimbursable
contract. However, if John instead charges 6 hours to the cost reimbursable
contract and 2 hours to the fixed price contract, John's employer
will be compensated for 6 hours on the cost reimbursable contract.
Since his employer will receive the same revenues on the fixed-price
contract regardless of how many hours John records, his employer
would clearly rather be compensated for 6 (instead of 2) of John's
hours on the cost reimbursable contract. John's salary is fixed
at $50,000, and the excess revenue gained by John charging 6 hours
to the cost reimbursable contract is added revenue. The judgment
involved in such a system of time charging results in the ability
for an employer to potentially game the system.
A slightly different
scenario presents the same problem. Assume John is only working
on a cost reimbursable contract. He works 2 hours on the contract
in the morning then spends the next 6 hours working on non-billable
activities. After those 6 hours, he spends 4 more hours working
on the cost reimbursable contract again. How does he charge his
time if the system only accepts 8 hours? As in the example above,
it would be most advantageous to his employer if John chose to charge
all 6 hours worked on the contract despite the fact that 4 of those
hours are worked using uncompensated overtime. To gain this advantage,
companies will sometimes schedule cost reimbursable work first or
simply allow employees the ability to choose which cost objectives
Last, in situations
where an employee is only required to charge 8 hours of work per
day, there may be no incentive to charge non-billable time worked
in excess of 8 hours per day. (Why would the employee be motivated
to charge the time if the company will not receive compensation
for it?) There may be a similar disincentive to charge time in excess
of 8 hours per day on a fixed-price contract that is over budget.
If the hours are not recorded, however, then the effective hourly
rate charged to the government will be unjustifiably high.
how this occurs, assume an employee receives an annual salary of
$52,000 per year ($1,000 per week). If this employee works 40 hours
per week on a government contract the effective hourly rate, the
government would pay for that employee would be $25 ($1,000/40 hrs).
However, if the employee actually works 40 hours per week on a government
contract and 10 additional hours per week on non-billable activities
the employee's actual effective hourly rate would instead be $20
($1,000/50 hrs). If the employee did not record the excess 10 hours,
either because the time was non-billable or because it was spent
performing on an over-budget fixed-price contract, the government
will be overcharged $5 per hour, the difference between the $25
hourly rate and the $20 hourly rate.
Total time accounting
prevents companies from gaming the time charging process. The Defense
Contract Audit Agency ("DCAA") considers TTA a requirement
of FAR 31.201-4 and CAS 418. The DCAA audit manual recognizes the
following three acceptable methods of accounting for uncompensated
Labor Rate Method.
Calculate a separate average labor rate for each labor period.
That is, the salary paid divided by the total hours worked during
the period, and distribute the salary cost to all cost objectives
worked on during the period using the average rate.
- Pro Rata
(Percentage) Allocation. Calculate
a percentage of total hours worked over a period of time on each
cost objective and allocate an employee's salary during that time
period according to the pro rata distribution of work performed.
Hourly Rate Method. Compute
an estimated hourly rate for each employee for the entire year
based on the total hours the employee is expected to work during
the year and distribute salary costs to all cost objectives worked
on at the estimated hourly rate. At the end of the year charge/credit
any variance between actual salary costs and the amount distributed
are simple, effective and most importantly, required by government
contracting regulations. Accordingly, all government contractors
should ensure that their time charging system is capturing all hours
worked and allocating the cost to all hours worked using one of
the aforementioned methods. Doing so not only requires investment
in compliant accounting and timekeeping systems, it is also requires
the implementation of effective policies, procedures and employee
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