We previously talked about uncompensated overtime and what it means. (If you missed that blog, check it out.) Now that you understand what uncompensated overtime is, we need to talk about how you want to account for it. To start, we’ll look at our first method: Adjust the effective pay rate for exempt employees each pay period based on the total hours worked during that pay period…effectively diluting the pay and billing hourly rates.
FAR 52.237-10 defines the uncompensated overtime rate as “the rate that results from multiplying the hourly rate for a 40-hour work week by 40, and then dividing by the proposed hours per week.” For example, an employee whose salary is $41,600/yr is paid an hourly rate of $20 ($41,600 / 2,080 hrs per year). If that employee works 50 hours during a particular work week, the employee’s uncompensated overtime rate is $16 (($20 x 40 hrs) / 50 hrs). This means the contractor uses the uncompensated OT rate (the employee’s standard pay rate diluted by the OT hours) to determine the labor cost to be charged to the various labor categories in the general ledger.
Pros: Using this method results in no liability on the balance sheet (accrued payroll) for uncompensated OT that would have to be taken into account when calculating the contractor’s indirect rates (to be discussed under Method #2).
Cons: Pay rates need to be adjusted each pay period that OT is worked. And more importantly, the contractor needs to adjust their billing rates each pay period to match the pay rates, since you can’t charge the government more than your cost.
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Still have questions about this option? Comment below, and we'll get back to you!