DOT Position

DOT has questioned costs associated with uncompensated overtime on the grounds that Contractor’s treatment of such costs is not consistent with DCAA standards of treatment of uncompensated overtime. DOT asserts Contractor (1) must account for all labor hours, both direct and indirect (2) does not adjust the direct labor base for UOT and (3) if total hours are not accounted for then adjustments must be made to indirect and direct labor accounts.

Contractor Response

1. Total time. We disagree that all contractors must record total hours. DCAA does not require it and has, in fact, resisted efforts by other government agencies to impose such a requirement. Its position is that if UOT is not a “significant” element contractors should not be required to record total hours but if it is a significant portion of total hours, then contractors should be encouraged to do so. In the most recent Grant Thorton’s “Annual Government Contractor Industry Survey 2006” discussed above it found 64% of government contractor respondents said their exempt employees record total time while 36% said they did not. Notwithstanding there being no requirement to record total time, Contractor’s exempt employees do account for total time. All employees, whether they are direct or indirect, do record total time to the cost objectives where work is done.

2. Adjusting direct labor base. DOT is presumably referring to the need for those contractors who compute an effective rate (divide salary by hours worked) to adjust their direct labor base to account for the difference between normal rates (salary divided by standard work period e.g. work week of 40 hours) and effective rates. If the contractor does compute effective rates for costing jobs but uses normal rates times actual hours to compute the direct labor base then we agree that the direct labor base should be adjusted. However, if the contractor uses other acceptable methods prescribed by DCAA then there is no need for an adjustment.

Is computation of an effective rate required? The answer is no. The DCAM Section 6-410.4 lists three acceptable methods of treating uncompensated overtime: (1) calculating an average rate for each pay period based on salary divided by hours worked (2) assign hours on a pro rata basis to all cost objectives during a pay period or (3) allocate costs using an estimated annual rate and credit or debit any variance to an indirect account.

Contractor’s method of treating UOT is Method 3 where each direct hour is charged at the normal hourly rate and the direct labor base is the total of all direct labor hours multiplied by the normal rate. Under this method, the direct labor base is not adjusted but rather the overhead pool is adjusted with either a credit or debit for the different amount of hours worked.

Since total time is recorded there is no need to adjust indirect and indirect accounts.

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