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Labor Distribution 101

Accounting Tools on computerWhen it comes to undergoing a DCAA pre-award survey, a common pitfall to the acceptability of an adequate accounting system is your Labor Distribution subsystem. To be sure, criteria 2f on the SF1408 Evaluation Checklist - "A labor distribution system that charges direct and indirect labor to the appropriate cost objectives." - has been the point of failure for many aspiring contractors.

Let's begin by defining Labor Distribution as the methodology for assigning employee and consultant labor hours and dollars to a contract or other cost objective (e.g., overhead labor). The hours by cost objective are recorded on each worker's timesheet and then multiplied by the unburdened dollars per hour (i.e., pay rate) to come up with your overall labor costs for a weekly, bi-weekly, semi-monthly or monthly labor period. While this may seem simple enough, it gets more complex when your employees are salaried and work more hours than there are hours (based on an 8-hour day) in the labor period. This is often referred to as uncompensated overtime. 

SYMPAQ offers two compliant methods for calculating your labor distribution for salaried employees who are typically not paid overtime for additional hours worked. We refer to these as the nominal method and the standard method, respectively.

To illustrate, suppose that you employ a salaried staff member who is paid $40.00 per hour or $84,200 annually based on 2080 work hours in a year and that your pay frequency is bi-weekly

Example #1: Nominal Method 

Although there are 80 hours in each labor period, the employee logs 85 hours in a given period. This method divides the hours recorded on the timesheet into the period salary for the employee to derive an effective rate of hourly pay as follows:

$3,200.00/85 = $37.65 per hour

This method "dilutes" the hourly rate for the hours worked and therefore matches the salary paid to that particular employee for the period. The DCAA prefers this method for two reasons. The first reason in the case of employees working on a billable cost reimbursable contract is that the raw cost of the employee equals the amount of labor billed. The second reason is that the government in essence gets free work for uncompensated overtime hours that are worked on a billable task order.  

Example #2: Standard Method 

Using the same parameters as in the above scenario, this method multiplies the hourly rate of the employee by the hours worked as if though the salaried employee was a non-exempt wage earner who gets paid for each hour worked as follows:

$40.00 x 85 = $3,400.00

This method creates a $200 variance between the labor costs recorded to a contract and the period salary paid to the employee. At first blush, one could conclude that the government is getting overbilled since the raw labor costs invoiced are greater than the amount of the employee's biweekly salary. This is where your written labor recording policies come into play and how it is that you ultimately deal with the variance. A popular method of handling the variance that the DCAA will most often accept is the issuance of a credit to your overhead pool for the amount of the variance. Another tactic is to have a comp time policy in writing where the employee receives time off in exchange for the extra hours worked in the period. 

From a costing standpoint, there are a few variations to these methods when the pay period has a variable number of hours as in a semi-monthly or monthly pay frequency. In this case, you could elect to use the fixed standard method that takes the average number of hours in a labor period (i.e., 86.667 hours for semi-monthly) or elect use the actual number of hours in a period (e.g., 80, 88, 96) as a basis for computing your costs.   

To conclude, if you have a fully functioning labor distribution system that enables the accurate recording of both direct and indirect labor charges and can also accommodate uncompensated overtime for salaried staff members, this will go a long way towards passing your DCAA pre-award audit.

SYMPAQ 728X90 7.21

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