One question we always get is how to account for uncompensated overtime. Almost every small business has at least one employee working gazillion hours over a standard 40-hour work week. The DCAA considers these hours "at work labor." They want these hours captured in the name of treating all contractors accounting and pricing systems equitably and consistently.
Not addressing this issue successfully now poses a huge risk since DCAA auditors have no wiggle room in overlooking it as a minor problem. Any deficiency in your accounting system will likely lead to a failing grade, according to the latest DCAA guidance to its auditors (see previous article). This could prevent you from obtaining lucrative flexibly-priced contracts or fixed price contracts financed through progress payments.
The DCAA way
The basic DCAA audit guidance for addressing uncompensated overtime is very simple and straight-forward. They will divide your yearly salary by all the hours you worked and used for personal time off. This results in your "effective" billing rate. The DCAA expects you to adjust your rate in your accounting system each pay period to reflect this effective rate. The drawback to this system is contractors have to make these adjustments in their accounting system every pay period. It also artificially reduces your hourly rate. The DCAA will use this lower rate when evaluating any proposal you have submitted to the government or a prime.
A better way
The DCAA guidance does recognize other methods as being suitably fair and consistent. One approach lets you use your existing timekeeping system to segregate your "extra effort" hours, dollarize those hours, and direct those dollars to the appropriate place on your balance sheet as a liability, similar to how you might already treat regular accrued wages. Periodically, you can bring those dollars back to the income statement as a credit expense in an indirect pool. This reduces your pool costs, which gives the government credit for your extra work. You also won't have to adjust your billing rates in your accounting system or for proposals.
Everyone's happy, even the DCAA. That's what life's all about for government contractors, right?
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ReliAscent® LLC is the only government contract accounting firm that specializes in all aspects of government contracting compliance. From our DCAA compliant accounting services, to monthly government contract accounting for all government agency awards, contract management & administration, and financial services & planning, our goal is to ensure the success of our clients, and all small business government contractors and grantees.
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Uncompensated Overtime - A DCAA Hot Button
Posted by Tyler Link on Wed, Feb 05, 2014 @ 12:53 PM
Topics: DCAA compliance, government cost accounting, DCAA audit, uncompensated overtime dcaa, uncompensated overtime
Provisional Rates - A potential DCAA focus area in 2012
Posted by Mike Anderson on Tue, Jan 24, 2012 @ 03:01 PM
Provisional Rates
Over the last year or so the DCAA has focused attention on larger government contractors. Many smaller businesses may feel left out since they have not been visited by the DCAA. More likely, they may feel that everything is "ok" since for most of us "no news is good news". Our Account Managers here have been hearing bits of news from various sources that this might change in 2012. First, the DCAA is apparently going to focus more on completing Incurred Cost Proposal audits in 2012, especially from smaller contractors. The backlog of Incurred Cost audits was estimated to have quadrupled over the last 10 years but even DCAA Director Fitzgerald didn't know the exact number in a meeting with Senators Brown (R-MA) & McCaskill (D-MO) in February last year. Rest assured the number is huge. We have recently seen clients that have received letters from the DCAA that demand the Provisional Billing Rates for Jan. 1, 2012 thru Dec. 31, 2012 be completed and turned in to the DCAA by February 1, 2012. So we are seeing focus not only on the provisional rates (Ref Far 42.704(b)) but we expect to see a focus on cleaning up the backlog of Incurred Cost Proposals. Both of these efforts will affect small business contractors. The Provisional rates affect your ability to bill the government in the near future. Once the DCAA audits the Incurred Cost Proposals the provisional rates become final rates. The government is bound to payment based on the final indirect rates so these are very important numbers. If your final indirect cost rates are lower than your provisional indirect cost rates, then the contractor could be liable for repayment to the government. The important message for all government contractors is twofold: 1) it is important that your provisional rates are calculated correctly so that they come as close as possible to the final rates and 2) it is important that your Incurred Cost Reports are correctly done and accurate. We envision spending a lot of time on those two areas this year. It would be wise for all government contractors to do the same.
Topics: Indirect billing rates, Year end indirect rates, Provisional rates, DCAA, DCAA audit
Budget Cuts, Fraud & Inefficiency Means Stricter Compliance
Posted by Mike Anderson on Wed, Oct 12, 2011 @ 08:30 AM
Topics: FAR, DCAA compliance, Government Contractors, DCAA, DCAA audit
Federal Contracts: Quick-closeout procedure
Posted by Mike Anderson on Mon, Oct 03, 2011 @ 02:52 PM
Topics: DCAA audit, Quick Closeout, Federal Contract, Indirect rates, unsettled indirect costs
Accounting System DCAA Adequacy
Posted by Mike Anderson on Wed, Jul 06, 2011 @ 05:18 PM
Topics: DCAA compliance, DCAA audit, Adequacy Audit
Government Contracting not getting any easier
Posted by Mike Anderson on Thu, Oct 14, 2010 @ 01:45 PM
Topics: government contracting, DCAA compliance, DCAA, DCAA audit
DCAA Timekeeping Requirements - Part 3
Posted by Mike Anderson on Wed, Sep 29, 2010 @ 03:05 PM
Topics: Government Contractors, DCAA, DCAA audit, timekeeping