Uncompensated Overtime
Definitions
Uncompensated Overtime (Definition)
General Overview to Uncompensated Overtime
Solicitation Provision Related to Uncompensated Overtime
FAR 52.237-10 - Identification of Uncompensated Overtime
FAR 37.115-2 Uncompensated Overtime - General Policy
Please note: FAR 37 is Service Contracting
(a) Use of uncompensated overtime is not encouraged.
(b) When professional or technical services are acquired on the basis of the number of hours to be provided, rather than on the task to be performed, the solicitation shall require offerors to identify uncompensated overtime hours and the uncompensated overtime rate for direct charge Fair Labor Standards Act—exempt personnel included in their proposals and subcontractor proposals. This includes uncompensated overtime hours that are in indirect cost pools for personnel whose regular hours are normally charged direct.
(c) Contracting officers must ensure that the use of uncompensated overtime in contracts to acquire services on the basis of the number of hours provided will not degrade the level of technical expertise required to fulfill the Government’s requirements (see 15.305 for competitive negotiations and 15.404-1(d) for cost realism analysis). When acquiring these services, contracting officers must conduct a risk assessment
and evaluate, for award on that basis, any proposals received that reflect factors such as—
- (1) Unrealistically low labor rates or other costs that may result in quality or service shortfalls; and
- (2) Unbalanced distribution of uncompensated overtime among skill levels and its use in key technical positions.
37.115-3 Solicitation provision
The contracting officer shall insert the provision at 52.237-10, Identification of Uncompensated Overtime, in all solicitations valued above the simplified acquisition threshold, for professional or technical services to be acquired on the basis of the number of hours to be provided.
DCAA - Contract Audit Manual - Evaluation of Uncompensated Overtime [Abridged]
6-410.1 Introduction
The Fair Labor Standards Act (FLSA) requires employers to compensate hourly workers for hours worked in excess of 40 hours per week, but the FLSA does not require employers to pay overtime to salaried employees. Salaried or exempt employees are paid a salary to provide a service. The salary (weekly, monthly, or annual) is based on providing that service in whatever time is required. Therefore, exempt employees are compensated for all hours worked including those worked beyond the normal 40-hour week. However, because most contractors' accounting systems account for labor based on a 40-hour week, the hours worked in excess of the normal 40 hours per week are commonly called uncompensated overtime. In October 1997 a new solicitation provision and contract clause, FAR 52.237-10, Identification of Uncompensated Overtime, was issued which defines uncompensated overtime as "hours worked without additional compensation in excess of an average of 40 hours per week by direct charge employees who are exempt from the Fair Labor Standards Act."
Many contractors' accounting systems do not assign costs to those hours worked by exempt employees in excess of 8 hours per day or 40 hours per week. In some cases, labor costs are distributed only to cost objectives worked on during the first 8 hours of the day. In other cases, employees are permitted to select the cost objectives to be charged when more than 8 hours per day are worked or the contractor has an informal policy as to how employees should select the objectives to charge. For example, when a contract and B&P project are worked on the same day, the actual hours incurred on the contract might be charged first and the balance up to 8 hours might be charged to the B&P project. Obviously, there is serious risk of mischarging costs to Government contracts under such circumstances.
6-410.2 Audit Objectives
The basic audit objectives are to determine:
- (1) whether the contractor is accounting for all hours worked;
- (2) whether the contractor is allocating an equitable share of salary costs paid to all effort performed in accordance with FAR 31.201-4; and
- (3) whether all work accomplished, including that using excess hours worked by exempt employees, is included in the base for distribution of overhead costs in accordance with CAS 418.
6-410.3 Basic Audit Procedures
Evaluate the contractor's policies and procedures relative to work performed by exempt employees in excess of 8 hours per day or 40 hours per week. For service contracts to be awarded on the basis of the number of hours to be provided, FAR 52.237-10 requires an offeror to submit a copy of its policy addressing uncompensated overtime with its proposal. In addition, this FAR requires that an offeror's accounting practices used to estimate uncompensated overtime be consistent with its cost accounting practices used to accumulate and report uncompensated overtime hours. CAM 9-500 has addition discussion regarding Evaluating Direct Labor Cost Estimates.
Determine whether the contractor is recording all hours worked by exempt employees. If a review of the employee time records discloses that exempt employees consistently record only 8 hours per day/40 hours per week, conduct floor checks and/or employee interviews to see whether exempt employees work in excess of 8 hours per day or 40 hours per week. If they do, discuss with contractor representatives the need to record all hours worked by exempt employees in order to ensure that salary and applicable indirect costs are being equitably allocated to all effort performed by the employees during the period. If the contractor refuses to record all hours worked by exempt employees, expand the floor checks and employee interviews to determine whether the failure of the contractor to record all time worked results in a material difference in the allocation of costs to final cost objectives.
Determine whether the contractor is allocating salary costs paid to exempt employees to all effort performed in accordance with FAR 31.201-4 and CAS 418.
If it is determined that Government contracts are being over charged by a material amount due to an inequitable allocation of costs because the contractor does not record all time worked, the contractor should be cited as being in noncompliance with FAR 31.201-4 and CAS 418. Any material excess allocation of costs to Government contracts should be questioned or disapproved as applicable. Materiality is the governing factor when determining whether noncompliances should be cited and whether a contractor should be required to implement a total-hour accounting system. (See 6-410.6)
6-410.4 Acceptable Accounting Methods
Accounting for excess hours worked by exempt employees may be accomplished by a variety of methods, including:
- a. Computing a separate average labor rate for each labor period, based on the salary paid divided by the total hours worked during the period, and distributing the salary cost to all cost objectives worked on during the period based on this rate.
- b. Determining a pro rata allocation of total hours worked during the period and distributing the salary cost using the pro rata allocation. For example, if an employee was paid on a weekly basis and worked 25 hours on one cost objective and 25 hours on
another cost objective, each cost objective would be charged with one-half of the employee's weekly salary.
- c. Computing 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 distributing salary costs to all cost objectives worked on at the estimated hourly rate. Any variance between
actual salary costs and the amount distributed is charged/credited to overhead.
6-410.5 Other Possible Accounting Methods
Other methods of accounting for excess hours worked by exempt employees may be used by the contractor. Some of these are unacceptable and others require further evaluation to determine acceptability. Examples of methods that would require further evaluation are:
- (1) distributing the salary cost to all cost objectives based on a labor rate predicated on an 8-hour day/40-hour week and crediting the excess amount distributed to overhead; and
- (2) determining a pro rata allocation of hours worked each day and distributing the daily salary cost using the pro rata allocation (use of daily distribution increases the possibility for "gaming").
6-410.6 Materiality Considerations a. During the evaluation of uncompensated overtime, the risk that the unrecorded uncompensated overtime will materially impact the allocation of labor and overhead costs on Government contracts is an important consideration in deciding whether or not to require a contractor to record all hours worked.
Auditors should make two basic determinations as part of their preliminary evaluation of uncompensated overtime:
- (1) Does the risk that contractor labor cost allocations could be materially impacted by the existence of uncompensated overtime justify an expanded evaluation (e.g., number of contracts, contract mix, etc.)?
- (2) Does significant uncompensated overtime exist?
If the preliminary evaluation of uncompensated overtime determines that:
- • uncompensated overtime could materially impact labor cost allocations and
- • a significant amount of uncompensated overtime exists
a determination must be made as to whether requiring the contractor to account for uncompensated overtime would have a material impact on the contractor’s allocation of labor costs to Government contracts. This determination is necessary for: (1) Recovering any costs due to the Government as a result of the unrecorded uncompensated overtime, and (2) Supporting a recommendation to modify the contractor’s labor system to account for all hours worked.
In those situations where sufficient risk is present and the unrecorded uncompensated overtime is significant, the auditor must take appropriate steps to determine the cost impact. Reliance on a contractor’s assertion that the unrecorded uncompensated overtime is not material, in lieu of an independent and timely assessment of the situation, does not satisfy the auditor’s responsibility. At a minimum, in situations when both risk and significant unrecorded uncompensated overtime have been identified, steps need to be performed to determine if recording and accounting for the uncompensated overtime would have a material impact on the contractor’s allocation of labor and overhead costs to Government contracts.
General Comments - Handbook on Fraud Indicators for Contract Auditors (Inspector General Handbook 766.3)
Uncompensated overtime is hours worked in excess of 8 hours a day or 40 hours per week by salaried employees who are paid a fixed amount per week, month or year regardless of the number of hours worked. Salaried employees are generally exempt from the Fair Labor Standards Act (FLSA) because their rate of pay exceeds a threshold below which the payment of overtime for hours worked in excess of 8 a day or 40 per week is required. The FLSA recognizes a cutoff at which employees no longer require the protection of law from working overtime without pay because they are adequately paid for their services. Therefore, "uncompensated overtime" or "unpaid overtime " are really misnomers since the salaries of exempt employees under the FLSA are considered compensation for all hours worked. Also, because of the added responsibilities of their jobs, salaried employees are usually paid significantly higher wages than hourly employees. Nearly every segment of the United States society has professional salaried employees who work uncompensated overtime.
However, an inequity in the costing of Government contracts may occur if uncompensated overtime is worked, but not accounted for, and more than one contract or project is worked on by the salaried employee. The lack of proper accounting for the overtime hours can create the potential for the manipulation of the contractors labor accounting system.
