invoicing on cost-reimbursement contract

[Fara Fasat]

I'm not a finance guy so please cut me some slack on my use of the terms and the concepts. Feel free to educate me. This maybe could have gone under the newbie topic too, as I am new to CR contracting. Just not a complete newbie, so it's here under pricing and costs.

On a cost-reimbursement contract, how do you invoice for the hours expended by salaried employees? Do you invoice for the hours worked on the contract during the billing period, even if the employee put in more than the standard 8-hour day a few times? That sounds right, but then what happens at the end of the year if the employee has put in 100 hours more than a standard work year? If the employee is on salary, he or she isn't getting paid more, so the company hasn't incurred additional cost. If the company invoices for all hours worked, wouldn't that result in a windfall for the company? Do invoices get adjusted to account for the actual cost of the employee, as opposed to the hours worked? 

[ji20874]

You said cost-reimbursement, right?  The contractor invoices for incurred costs (within the guidelines of the contract and FAR part 31).

[Retreadfed]

Fara, this is a fairly complicated question that has not been fully answered by the appeals boards or courts.  The question you have raised is how to account and bill for uncompensated overtime (UCOT).  In my view, the first question to be answered is whether the employee is working on more than one project during the accounting period.  If the employee works on only one project that is a cost reimbursement contract, there should be no problem with charging the employee's hours at the hourly rate computed by dividing the annual salary by the contractor's normal work week.  However, if in addition to the cost reimbursement contract, the employee works on some other project such as a proposal or another contract, you need to have a mechanism for equitably allocating costs to those projects (cost objectives).  This is usually done by calculating an abated hourly rate.  This requires the contractor to use a total time accounting system (which it should do in any event if for no other reason so management can get a complete picture of how the company if performing).  When total time accounting is used, UCOT is captured in the timekeeping system.  The abated hourly rate is computed by dividing what the employee is paid during an accounting period by the total hours shown in the timekeeping system for that period.  You would then allocate costs to the various cost objectives using the resulting abated hourly rate.  In this way, each cost objective gets allocated its fair share of costs for that period.

[Fara Fasat]

Thanks Retread. I can't say I fully understand the answer, especially the term "abated."

In your first example (working on only one CR contract) -- you're saying that the hourly rate is set by dividing the annual salary by the normal work week. Sounds fine, but that doesn't answer what happens when the employee works more than a normal work week. Does the company charge every hour worked, or does the company stop charging after 8 hours per day, even if the employee worked 9 or 10? Or stop charging at 40 hours for the week even though the employee worked 45 hours? Since the employee isn't getting paid more for the extra hours (as all of us salaried employees know), it seems that the incurred cost stops at 8 hours per day, 40 hours per week, etc. 

[joel hoffman]

 

On 7/7/2023 at 7:02 PM, Fara Fasat said:

On a cost-reimbursement contract, how do you invoice for the hours expended by salaried employees? Do you invoice for the hours worked on the contract during the billing period, even if the employee put in more than the standard 8-hour day a few times? That sounds right, but then what happens at the end of the year if the employee has put in 100 hours more than a standard work year? If the employee is on salary, he or she isn't getting paid more, so the company hasn't incurred additional cost. If the company invoices for all hours worked, wouldn't that result in a windfall for the company? Do invoices get adjusted to account for the actual cost of the employee, as opposed to the hours worked? 

See 52.237-10 , Identification of Uncompensated Overtime for example. If the company’s normal practice is not to pay for salaried overtime, then there is no additional expense to bill or to be reimbursed.

See also 37.115 Uncompensated overtime.

[Retreadfed]

17 hours ago, Fara Fasat said:

what happens when the employee works more than a normal work week. Does the company charge every hour worked, or does the company stop charging after 8 hours per day,

Fara, if the employee only charges time to one cost objective (contract) it doesn't matter how many hours are charged to the contract.  What you are really concerned about is how much cost do you allocate to each contract to which the employee charges effort.  When the employee charges time to only one contract, the amount you pay the employee during that period is all going to be charged to that one contract.  Thus, if you use a total time accounting system, and the employee is paid $2,000 during a billing period, that is what you bill the government regardless of whether the employee worked 40 hours, 80 hours or 100 hours.

If the employee charges time to more than one cost objective during a period, things can get complicated.  If the total number of hours an employee works in an accounting period doesn't exceed 40, figuring out what to charge to each contract is fairly simple.  For example, if the employee is paid $2,000 and charges 20 hours to contract A and 20 hours to contract B, you would simply divide the $2,000 by 40 to determine the hourly rate ($50) and then multiply that rate by the number of hours worked on each contract to determine how much of the employee's salary is allocated to each contract, $1,000 to each in this case.

However, if the employee charges 40 hours to Contract A and 10 hours to Contract B you have to divide the $2,000 salary by 50 instead of 40.  This gives you an hourly rate of $40 instead of an hourly rate of $50 as used in the previous example.  This is an example of an abated hourly rate.   Here, Contract A would have $1,600 allocated to it and Contract B would have $400 allocated to it.  

[ji20874]

On 7/8/2023 at 12:17 PM, Retreadfed said:

The question you have raised is how to account and bill for uncompensated overtime (UCOT).

No, the question was "how do you invoice for the hours expended by salaried employees?" and

Quote

If the employee is on salary, he or she isn't getting paid more, so the company hasn't incurred additional cost. If the company invoices for all hours worked, wouldn't that result in a windfall for the company? Do invoices get adjusted to account for the actual cost of the employee, as opposed to the hours worked? 

OP was not asking about internal bookkeeping and accounting for uncompensated overtime (UCOT).  He or she was asking about invoicing for UCOT hours -- the simple answer is that the contractor does not invoice for UCOT hours.

A contractor does not invoice for an hourly rate in a cost-reimbursement contract -- rather, a contractor invoices for incurred costs.  If a salaried employee's salary for a two-week pay period is $10,000, and he or he works full-time only on this one contract, the contractor invoices for $10,000.  It is irrelevant for invoicing purposes whether the employee works 40-hour weeks or 45-hour weeks.  UCOT is not an incurred cost, so It is not invoiced on a cost-reimbursement contract.

The provision at 52.237-10, Identification of Uncompensated Overtime, is used in solicitations and applies to proposals -- it is not included in contracts and is irrelevant to invoicing questions.

Simple answer:  UCOT is uncompensated, by definition -- the employee is not compensated for UCOT, and the employer does not pay the employee for UCOT, so UCOT is not an incurred cost and the contractor does not invoice the government for UCOT.  A cost-reimbursement contract reimburses a contractor's incurred costs -- it does not pay for billable hours.  Thinking with a billable hours mindset is error.

[Retreadfed]

16 hours ago, ji20874 said:

UCOT is not an incurred cost, so It is not invoiced on a cost-reimbursement contract.

I agree that UCOT is not an incurred cost.  I thought I had made that clear earlier.  However, while it is not an incurred cost, it is relevant in determining costs that are allocated to contracts when a salaried employee works UCOT and charges time to more than one cost objective.  Therefore, UCOT does have a relationship to the costs that are billed to the government on a cost reimbursement contract in that a contractor cannot bill the government for more costs than are allocated to a contract.  

 

16 hours ago, ji20874 said:

UCOT is uncompensated, by definition

This is another example of misleading language used in government contracting.  When we talk about UCOT we are really saying that the employee does not receive compensation in addition to a salary when the employee works overtime.  On the other hand, a salary compensates the employee for all hours worked by the employee.  Thus, an employee is compensated for hours worked in excess of the employer's normal work hours. If an employee works on more than one cost objective during a pay period, we need to allocate the cost of those hours to each cost objective in an equitable way so that each cost objective bears its fair share of the employee's salary.

[Fara Fasat]

Still confusing, but let me see if i have the basics: the key isn't invoicing for the hours worked; the key is the rate you charge for each hour, and therefore the costs you invoice. If the salaried employee works on one CR contract, and works normal hours every week for the full year, then there is no problem -- the invoiced charges equal the cost to the employer. If the employee works more than the standard  hours, the hourly rate must be adjusted so that the invoiced charge represents the true cost to the employer. In other words, you would show the true hours worked, but the hourly rate would be adjusted lower.

If the employee works on more than one contract, the adjustment becomes more complicated, but the principle is the same.

Am I on track or have I hopelessly muddled it?

[Retreadfed]

56 minutes ago, Fara Fasat said:

If the employee works more than the standard  hours, the hourly rate must be adjusted so that the invoiced charge represents the true cost to the employer.

No.  Assuming the employee works a minimum of the contractor's standard work week, if the employee works on only one contract you do not have to do any adjustment to the hourly rate.  That is because the cost of the employee's salary will be charged (allocated) to only that one contract.  Thus, what the employee is paid is what would be billed to the government.  You don't have to worry about an hourly rate.

[LuketheNuke]

Check your contract! The contract should have a clause addressing Overtime dollars.  Overtime may not be authorized! Often the during  negotiations an  amount of overtime dollars is budgeted for the effort and is specifically identified in the contract.  Someone on the Gov't's end should be reviewing your invoices to see that what is billed is aligned with the terms of the contract.

[Fara Fasat]

Retread -- if, over a year, a salaried employee works more than the standard work-week hours, and the employer invoices for all of the hours worked without adjusting the rate, wouldn't that result in a windfall to the contractor? Again, assuming a CR contract. It seems to me that the employer/contractor is invoicing for costs that were not actually incurred, because the employee was not paid more for those extra hours.

[Retreadfed]

7 minutes ago, Fara Fasat said:

if, over a year, a salaried employee works more than the standard work-week hours, and the employer invoices for all of the hours worked without adjusting the rate, wouldn't that result in a windfall to the contractor?

Not if the contractor only worked on one contract.  In this case, the entire cost of the employee's salary is allocated to only that one contract.  Remember as ji noted, you are invoicing for costs, not hours.  The cost the contractor has incurred is the amount of the employee's salary.  On the other hand, if the employee worked on more than one contract, the contractor would have to allocate the employee's salary cost to both contracts.

[Retreadfed]

44 minutes ago, LuketheNuke said:

The contract should have a clause addressing Overtime dollars. 

If you are thinking of FAR 52.222-2, that clause would not apply to UCOT worked by salaried employees.  That clause puts a limit on overtime premium costs that may be allowable.  When a salaried employee works UCOT, no overtime premium is involved.

[Fara Fasat]

yes, but the employer was invoicing for all hours worked. Unless the employee's hourly rate was adjusted for the extra hours worked, wouldn't they be invoicing for more than the actual cost? In other words, if the hourly rate was based on a 2000 hour year, but they invoiced for 2050, that's 50 extra hours at the 2000/year rate.

[Retreadfed]

13 minutes ago, Fara Fasat said:

the employer was invoicing for all hours worked.

I'm not sure what you mean by this.  On cost reimbursement contracts, contractors don't invoice for hours worked but for costs incurred.  You've got to come off the notion of invoicing for hours.  Let's go back to what is actually happening.  Let us assume the contractor has calculated that the employee's hourly rate is $40 an hour by dividing the employee's annual salary by 2000 hours.  Are you saying that the contractor is billing the government $40 for every hour worked by the employee even if the resulting amount would exceed what the contractor actually paid the employee?  

[ji20874]

6 minutes ago, Retreadfed said:

On cost reimbursement contracts, contractors don't invoice for hours worked but for costs incurred.  You've got to come off the notion of invoicing for hours.

Right!

[Fara Fasat]

I think I am inartfully stating my conclusion, and that we are saying the same thing. A contractor can only invoice for the costs it has incurred. If it is not paying a salaried employee extra for working more than the standard hours on which the hourly rate is based, then the contractor must make an adjustment either to the hourly rate or to the hours. The end result must be that it can only invoice for the actual compensation paid to the employee.

This applies to a CR contract of course. According to the GaN case, under a TM or LH contract, the contractor would be able to invoice for all hours performed regardless of the compensation to the employee. (Hope that sentence doesn't open up another can of worms)

[joel hoffman]

1 hour ago, Fara Fasat said:

This applies to a CR contract of course. According to the GaN case, under a TM or LH contract, the contractor would be able to invoice for all hours performed regardless of the compensation to the employee. (Hope that sentence doesn't open up another can of worms)

Yes, let’s restrict this conversation to cost reimbursement contracts and the situation specifically expressed where the employer doesn’t pay overtime to salaried employees.

[Retreadfed]

15 hours ago, Fara Fasat said:

If it is not paying a salaried employee extra for working more than the standard hours on which the hourly rate is based, then the contractor must make an adjustment either to the hourly rate or to the hours.

Why are you concerned with an hourly rate when we are talking about salaried employees who are working on only one contract? Is this a contract requirement?  Normally, hourly rates are the basis upon which effort by wage employees is billed.  

[Fara Fasat]

Why? Because several posts above say that the rate has to be adjusted to an 'effective rate' when a salaried employee works more than a standard 40 hour week without additional compensation. Even if the employee works only one contract, you are billing at a lower effective rate when the employee works more than 40 hours on that contract. $1000/40 hrs = $25/hr. The same $1000 for 48 hours of work gives an effective rate of $20.83/hr.

[Retreadfed]

1 hour ago, Fara Fasat said:

Why? Because several posts above say that the rate has to be adjusted to an 'effective rate' when a salaried employee works more than a standard 40 hour week without additional compensation.

See my post of yesterday at 1:23.  You only have to do an adjustment if the employee works on more than one contract.  No adjustment is necessary if the employee works on only one contract and works the minimum number of hours for a full pay period.

[Fara Fasat]

Well, we aren't talking about uncompensated overtime if they are only working the minimum, are we?

[Retreadfed]

14 hours ago, Fara Fasat said:

Well, we aren't talking about uncompensated overtime if they are only working the minimum, are we?

OK I think I see a problem.  I should have said that the employee works at least the minimum hours for a full pay period.  I was trying not to make this more complicated than it seems.  If the employee works less than the minimum hours for a full pay period, unless the contractor reduces the amount the employee receives for that pay period, an adjustment would have to be made to the amount billed to the government.  Obviously, the contractor would not normally bill the government for the employee's full salary when the employee did not work the minimum number of hours for that salary.  However, we are not talking about that situation.  Instead we are talking about an employee working more than the minimum number of hours.  If the employee worked all those hours on only one contract, unless there is a contract requirement to do so, it is not necessary for the contractor to make any adjustments to an hourly rate.  Instead, all the contractor would be required to do is show that the employee charged all his/her time to the contract and got paid his/her normal salary for that period.

[Fara Fasat]

Thanks. I think we have covered my question. You can't invoice the government for more than the costs you incur, and there are various ways of handling that when there is uncompensated overtime.