DOT states “Overtime premium, (just the premium portion) is completely unallowable in overhead costs, per FAR 22.103 and DOT Overhead Policy.”

Contractor Response

We have examined the contract, FAR and DOT overhead policy alluded to as well as DCAA audit guidance in Chapter 6-409.2 and found no prohibition against overtime premium costs charged indirect.

• Contract

We examined the contract and there was no allusion to overtime premium costs – it was silent as to the allowability of the costs.

• FAR Part 22

FAR Part 22 provides general guidance concerning the government policies, procedures, approval process and use of overtime. It provides guidance to contracting officials on under what circumstances may overtime be allowed for different contracts in the acquisition of products and supplies and leaves it up to the contracting officer to choose an overtime policy for specific contracts.  The section does not address the proper accounting treatment of those overtime expenses (e.g. direct or indirect) nor whether these costs are allowable or not in general or after the fact. Rather, it expresses a general policy that “so far as practicable” overtime should not be used unless “lower overall costs to the government will result” or to “meet urgent needs.”  Under such circumstances, “any approved overtime, extra-pay shifts, and multi-shifts should be scheduled to achieve these objectives.”

• DOT Overhead Policy

We have closely examined DOT Overhead Policy and failed to identify any specific references to overtime premium costs.  Several examples of both allowable and unallowable overhead costs are alluded to but overtime premiums are not.  The Overhead Policy states that FAR cost principles and the contractor’s policies should cover the allowability of overhead costs which presumably should include overtime premiums.

• DCAA Audit Guidance

Chapter 6-409 of the DCAA Contract Audit Manual (DCAM) addresses the evaluation of overtime, extra-pay shifts and multi-shift work. The DCAM alludes to the fact that auditors should be familiar with FAR 22.103, which includes “definitions and conditions under which overtime costs may be approved under Government contracts” (Italics added). It recommends that auditors ensure that when overtime work is required that the contractor’s policies and procedures are sufficient to ensure the costs are “limited to actual need for the accomplishment of specific work” and that the overtime premiums are “equitably divided between government and commercial operations.”  It further states that overtime pay is “generally treated as indirect expense” but that it “may be acceptable as a direct charge.” In no place does it state that overtime premiums are an unallowable cost and that overtime premiums should not be included as an indirect expense. In fact, the opposite is true.  The guidance recognizes that though direct charging of overtime premiums are acceptable, it acknowledges that inclusion of overtime premium pay as an indirect cost is the “general” practice.

Allowability. We believe overtime premium is an allowable cost of government contracts unless there are specific prohibitions included in specific contracts. Unless direct overtime costs are prohibited under a specific contract, overtime is sometimes a necessary cost (e.g. urgency, meeting performance requirements, producing overall lower costs – its often more cost effective to pay exiting employees overtime than to hire and train new employees).

Allocability as indirect costs. We also believe that inclusion of overtime premium costs as an indirect cost is appropriate and best satisfies DCAA’s concern that overtime premium costs be equitably allocated to all contracts.  Contractor, like most companies, chooses to include such allowable costs in its indirect cost pool rather than charging it to individual contracts. This
method is reasonable because it is often difficult if not impossible to allocate overtime premium costs to individual contracts.  For example, if an employee works 10 hours in a day on three contracts and in accordance with FSLA is paid two hours at time in a half, how does a company determine which of the three contracts incurred the overtime premium. That is why most companies, including Contractor, charge overtime premium to an indirect labor pool which is allocated across multiple contracts and other final cost objectives.

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