News and Events : PVBS Newsletter April 2007

By Carl Sweetnam, Black Ink, LLC.

This is another in a series of articles to inform high-growth government contractors on management techniques available to increase their bottom line.

Many high-growth contractors have expressed an interest on techniques available to increase or maximize profitability on professional services contracts.  As more firms are competing for fewer opportunities, the need to competitively posture the firm typically results in shrinking negotiated margins. One technique to maximize the negotiated margin is the use of standard direct labor cost rates in accounting for uncompensated overtime.  With a little preparation and notification, contractors have the ability to increase collected revenue and provide their businesses the opportunity to become more competitive.

First, it is important to know the regulations and governing authorities dictating policy.  The Fair Labor Standards Act provides the necessary guidance in determining whether an employee is exempt from the act.  For the purposes of this article, we only address those work forces that are predominantly exempt from FLSA.  The Federal Acquisition Regulation (FAR) 31.201-4 is the guidance the Defense Contract Audit Agency (DCAA) uses to dictate “Full-time” or “Total-time” accounting of hours worked.  For DCAA, a system to account for all hours worked versus a system using a forty hour work week is essential to the ability of the costs to be allocated.  The only question left for the contractor is the mechanics of allocating the cost of the total time worked.

Many contractors allocate total time cost by diluting the hourly rate applied to projects.  The salaried rate is divided by the total hours reported in the period (reported hours include all paid leave categories) to arrive at a diluted rate.  For example, if an employee is paid a salary of $1,000 per week and works 40 hours, cost is allocated to projects at $25 per hour.  If the same employee works 50 hours the following week, cost is allocated to projects at a diluted rate of $20 per hour.

For cost reimbursable type contracts, the contractor receives no additional revenue for the extra 10 hours worked.  While this is the preferred mechanism for DCAA, acceptable alternative methods will allow the contractor to collect revenue on the additional 10 hours worked and provide better analytics on the true cost of the work performed.

The DCAA Contract Audit Manual (DCAM) Section 6.410 provides audit guidance on acceptable accounting methods for uncompensated overtime.  The most common method applies a standard hourly cost rate to the hours charged to projects.  The standard rate is determined annually by dividing the annual salary by the number of business hours anticipated in a year (typically 2,080 hours).  The difference between the amounts allocated to projects or leave and the amount paid to employees is credited to an overhead account and represents the mechanics of uncompensated overtime.  The result is the contractor gets compensated for uncompensated overtime on cost reimbursable contracts and the Government receives the benefit of the uncompensated overtime through a reduction in overhead costs.

As previously stated, a little preparation and notification is required to overcome any cost reasonableness questions in pre-award reviews.  FAR 37.115-2 and FAR 37115-2 is the guidance used by procuring contracting officers to identify uncompensated overtime in proposal submissions.  The preliminary work here is well worth the effort given the opportunity to increase billed revenues on cost-reimbursable contracts, competitively posture the firm on time and materials and fixed price contracts by realizing lowered overhead costs and provide real analytics to management on the true cost of work performed.

Black Ink (LLC) offers a suite of Hosted Application Services specifically tailored for aggressive, growing businesses.  Black Ink offers Microsoft Dynamics NAV for Government Contractors from PVBS as a hosted application suite.  Dynamics NAV financial management and project accounting software was created specifically for high-growth government contractors, and are now available to small business government contractors through Black Ink hosted offerings.