Understanding Uncompensated Overtime for Federal Contractors

At a glance

• Uncompensated overtime refers to the hours worked beyond the standard 40-hour week by exempt employees who receive an annual salary without additional payment for extra hours.
• CAS 418 states that for CAS-covered contracts, Federal contractors must account for all hours worked, including uncompensated overtime, to accurately calculate labor costs and indirect expenses.
• Therefore, Federal contractors should accurately record all hours worked by salaried employees, including uncompensated overtime, and factor these accumulated hours into contract proposal estimates. 

The full story:

As a federal contractor, understanding the concept of “uncompensated overtime” and its implications is essential for maintaining compliance with government regulations. Uncompensated overtime refers to the hours worked beyond the standard 40-hour week by exempt employees who do not receive additional payment for these extra hours. Instead, these hours are considered part of their annual salary.

The Relevance of Uncompensated Overtime

The Fair Labor Standards Act (FLSA) establishes regulations for minimum wage, overtime pay, and other labor-related matters. Exempt employees, typically classified as professionals, administrators, or executives, are not eligible for overtime pay as they are exempt from FLSA’s overtime provisions. Instead, they receive a fixed annual salary, regardless of the number of hours worked per week.

However, excluding uncompensated overtime from contract estimates and billings can distort the true cost of labor and associated overheads. The total time employees spend working is a crucial factor in determining labor costs and indirect costs for federal contracts. Therefore, it is imperative to account for all hours worked, whether paid or not, to ensure accurate cost calculations and prevent potential compliance issues.

Compliance with CAS 418 Allocation of Direct and Indirect Costs

The Cost Accounting Standards (CAS) are a set of regulations imposed on federal contractors to ensure consistency and fairness in cost accounting practices. CAS 418 specifically deals with the proper basis for allocating direct and indirect costs. The Defense Contract Audit Agency (DCAA) cites CAS 418 to emphasize that excluding uncompensated overtime hours from cost calculations can lead to a distorted cost base.

To maintain compliance with CAS 418 and other relevant regulations, federal contractors must take the following steps:

1. Record All Hours Worked: Implement a robust timekeeping system that accurately captures and records the hours worked by salaried employees, including uncompensated overtime.
2. Calculate Labor Rates Correctly: When estimating contract costs, ensure that labor rates are computed based on the total hours worked, not just the paid hours. This will prevent potential cost discrepancies and promote fair labor pricing.
3. Reflect All Costs in Contract Estimates: Indirect costs associated with labor, such as overhead expenses, must also factor in all hours worked, irrespective of whether they are compensated or not.
4. Consistent Billing Practices: Bill the U.S. Government for contract work based on the correct labor rates, considering all hours worked by salaried employees.

The Bottom Line

Compliance with labor regulations and maintaining consistent and accurate cost accounting practices are paramount as a federal contractor. Properly accounting for uncompensated overtime ensures that labor costs and associated indirects are accurately reflected in contract estimates and billings submitted to the U.S. Government.

By adhering to the guidelines set forth by CAS 418 and other relevant regulations, contractors can demonstrate transparency and integrity in their financial practices, fostering trust with the U.S. Government and maintaining a strong reputation within the industry.

Aprio’s experienced Government Contracting professionals are here to help advise you through your work with the federal government. For assistance with properly accounting for uncompensated overtime, connect with our team today.

Related Resources

Government Contracting Strategy & Compliance 

GSA Schedules 101

GWACS, MACS and Other IDIQ Contracts: What Contractors Need to Know

Aprio’s Government Contracting team can help you accurately assess and include all hours worked, including uncompensated overtime, into your contract proposal estimates for the Federal government. Connect with us today!