My company has a time-and-materials (T&M) contract with the Federal Government to provide information technology services (network administration and web development), and an issue has come up regarding the use of exempt (salaried) personnel, the hours they work, and how those hours are billed. All of the personnel performing under the contract are exempt from the Fair Labor Standards Act (FLSA) and routinely work more hours than what would be considered a typical workday (8 hours). Since our employees are exempt from FLSA, they do not receive additional compensation for the extra hours that they work. In accordance with DCAA guidance, our employees record all hours worked on their timesheets.

It is our contention that under a T&M contract we can bill the government for all hours worked in direct support of the contract (within the stated ceiling price, of course), regardless of whether any extra hours worked result in increased costs to the company or not. Our customer’s view is that since we are not incurring additional costs as a result of the extra hours worked by exempt personnel, we should cap our billings at the number of full-time hours available in a given billing period. A simple example for a one-person contract: if the month of June ’02 has 160 full-time hours available (20 business days x 8 hours/day) and our employee ends up working 200 hours (20 business days x 10 hours/day), our customer wants us to cap our billing at 160 hours. We say were entitled to 200 hours, given the nature of a T&M contract (it purchase hours worked, not costs incurred). They say they’ll reject the invoice if it’s for more than 160 hours. We need to keep cash flow positive and keep the customer happy, so we acquiesce, but it creates all sorts of internal problems with our accounting system (timesheets don’t match billings, etc.)(not to mention the fact that we continue to disagree with the customer's decision).

Any words from the wise as to the best way to handle this situation?

By John Ford on Sunday, June 02, 2002 - 03:29 pm:

Point 1, DCAA's concern with uncompensated overtime is proper allocaton of costs between commercial and government contracts. DCAA's position is not regulatory in nature and a contractor does not have to follow it.

Point 2, while you may be technically correct that you do not have to incur a cost before you can bill the government for hours worked, this seems like a very short sighted policy to want to enforce. Can you imagine the headlines you will make when your profit rate on this contract is disclosed (which it will be by the IG in its semi-annual report to Congress and is then leaked to the Washington Post?)

Point 3, the FLSA does not prohibit you from paying your employees overtime. Why not do that then bill the government? You will then get the profit component of each hour. Further, because you will probably burn up our hours at a faster rate, you will probably have to get an extension of the contract to be able to finish it. This means more legitimate profit.

By anoncon on Sunday, June 02, 2002 - 09:02 pm:

anon62:
Check and see if your contract has an SCA wage determination-you might find that certain categories are covered under the SCA-forget the FLSA. I had a similar situation at one support job site where, upon my arrival, I found that many of the people were placed in exempt category, when in fact they fell under the SCA. There was substantial payback and increase in wages. SCA is probably one of the most misunderstood problems in Federal Contracting.Under the SCA, for certain of your personnel, there can be no argument, however, you might want to check your contract further reference approval of premium overtime which was another problem I ran into.

By AnonYmus on Monday, June 03, 2002 - 09:40 am:

The issue you describe is not only germane to T&M contracts, but also to cost type as well.

The DCAA contract audit manual has a number of methods, some preferred and others deemed acceptable on a "case by case" basis, for handling uncompensated overtime.

I suggest you check out what DCAA has to say at their website, www.dcaa.mil.

By Vern Edwards on Monday, June 03, 2002 - 11:12 am:

I must be missing something.

The T&M payment clause, FAR § 52.232-7, paragraph (a), is very clear that if the contractor devoted a direct labor hour to the performance of the contract work, then it is entitled to payment at the hourly rate stipulated in the contract schedule. The clause does not condition payment on what the contractor paid or did not pay the employee who did the work. Under a T&M contract, payment for labor is not based upon incurred cost.

While there may be merit to John Ford's comments about customer relations, the contractor is entitled to payment in accordance with the payment clause. The argument put forth by Anon62's customer has no legal merit that I can think of. It would be breach of contract to refuse payment because the work was done by an FLSA-exempt employee working overtime without additional compensation.

If there is a board or court decision that interprets the T&M payment clause otherwise, I would like to know about it.

By cm on Tuesday, June 04, 2002 - 09:38 am:

It almost appears that the contracting agency is treating this contract as if it were a personal services contracrt(ie employmernt contract). Vern is absolutly correct and full payment for all hours worked must be invoivced and paid.

By Anon2U on Tuesday, June 04, 2002 - 03:16 pm:

Full payment is required but I would sure hate to work for that "sweat shop" operator.

By formerfed on Tuesday, June 04, 2002 - 03:37 pm:

Anon2U,

This isn't uncommon in many areas, pariculary professional occupations such as IT, financial, and consulting. I've heard many people starting out in the big accounting firms say extensive work hours are required to become a partner one day. Those same people often working 60 and 70 hours weeks get billed to government clients for the actual times.

"Sweat shop" or not, that's the formula required for advancement in many occupations.

By Anonymous on Tuesday, June 04, 2002 - 08:10 pm:

These people likely have no opportunity to become partners. They frequently work the hours without even a hope for promotion.

I know some that today came in and sat at the same workstations they have been at for years keeping government systems going. They are without company health insurance for months. They have lost their vacation time. They suffered sudden panic one day when called in to a meeting. Why? The contract changed. They didn't miss a day. The new contractor picked up the experience. For that these employees can be thankful.

More than a few look at Civil Service workers arriving late, leaving early, taking long lunches and knowing they will have a job next week. These contractors sitting in the same spaces do not make that much more money. They work at the pleasure of their boss. Their corporate benefits can vanish in hours. Why do they do it? They need to pay the rent, feed the kids, hope to build a nest egg so they can take a big leap to better pastures without disaster.

I do indeed think of some of these contracts as near government sponsored sweatshops. Of course, I think of the secret smiles these contractors may have as the government workers excite themselves about A-76 and reductions bringing new recruits to the rat race.

By anoncon on Tuesday, June 04, 2002 - 08:37 pm:

Okay anon62:
Since several people are waxing philosophical, I am going to say it one more time, just in case. Does your contract contain an SCA determination or more importantly, could it. Judging by the type of work you are doing, you might want to take a look at the SCA Directory of occupations issued by DOL. Look at the description for ADP personnel-code 03000, I believe. Take a strong look at those labor descriptions and see if they fit with what you are calling exempt personnel.

I can tell you, based on experience, and having once worked for a $4B engineering company, that when I arrived at the site, 40% of the personnel were placed in the exempt status, when in fact, they fell under SCA categories by definition. Big corporation-big mistake.

Point is if you can prove this, the Agency cannot deny paying your personnel in accordance with hours actually worked, its the law. The only problem being that you may have a clause (I don't know that)that states you must seek approval for premium time which is what you have to pay SCA personnel. Premium time (time and a half) may differ from state to state. Premium time may be based on an 8 hour day or a 40 hour week-California has fluctuated.

I am just advising that it might be something your company might look at and use as a fair negotiating tool-Good luck-been there

By Anon2U on Wednesday, June 05, 2002 - 09:50 am:

As I understand the SCA, the company can exempt personnel as professionals and it is up to the employees to disagree and go to DOL with their complaint. If the company loses the DOL protest and have based their contract prices on workers performing free work several hours every week, they have a real problem.

The government pays for all hours worked regardless. The billing rate is x.xx per hour. This applies no matter if the company is paying the workers or not.

By Eric Ottinger on Wednesday, June 05, 2002 - 12:02 pm:

Vern is correct. The contractor is paid a fixed rate for each hour.

The customer is taking concepts appropriate to a CPFF LOE contract and applying these concepts inappropriately to a T&M.

Anon62 didn't say anything about DCAA. I don't think DCAA is causing the problem. If I were Anon62, I would get in touch with DCAA and ask them to help me straighten out the customer's thinking.

Eric

By AnonYmus on Wednesday, June 05, 2002 - 03:03 pm:

I have no doubt that Eric and Vern have provided the right responses to the question. I'd like to pose a few additional questions -- not specifically about the initial question -- if I may.

1. In the RFP, would you recommend that the pricing instructions require the contractor to disclose its overtime policies and practices?

2. If the contract was subject to TINA, would the historical percentage of uncompensated overtime be cost or pricing data? Would the contractor's expectations regarding the amount of uncompensated overtime to be incurred on the contract, if awarded, be cost or pricing data?

4. If this was subject to TINA, would government negotiators reasonably expect the contractor's use of uncompensated overtime to affect the negotiated price significantly? If so, would failure to disclose be considered to be defective pricing?

5. Should the cost analysis, if required, examine the amount/effect of uncompensated overtime? How would that effect, if any, be captured or shown in a contractor's cost proposal?

6. Should the contractor's proposed price, if based on its anticipated costs -- which, by definition, would not include uncompensated overtime -- be adjusted? If so, when and how in the procurement process?

Obviously, I'm less interested in the contractor's costs than I am in establishing the contract price. I'd appreciate any thoughts people may have.

By Anon on Wednesday, June 05, 2002 - 03:23 pm:

The offeror is supposed to disclose their uncompensated overtime policy and the average # of hours per week that are uncompensated. See 37.115 and 52.237-10.

By Eric Ottinger on Wednesday, June 05, 2002 - 03:28 pm:

AnonYmus,

Take a look at FAR 37.115 Uncompensated overtime.
and
FAR 52.237-10 Identification of Uncompensated Overtime.

Eric

By John Ford on Wednesday, June 05, 2002 - 04:15 pm:

While the FAR requires the contractor to identify certain categories of uncompensated overtime, it does not require the identification of all uncompensated overtime. Thus, FAR 52.237-10 does not apply in all situations.  The Navy has used an interesting evaluation tool in some of its negotiated procurements. It requires the contractor to identify the total hours employees will be required to work in the typical work day. The Navy then applies a decrement factor to the efficiency it can expect to receive from those employees who will work more than 8 hours a day. "Sweat shop" contractors have found that this process sometimes knocks them out of consideration for contracts. By the way, the GAO has approved of the Navy's use of these procedures.  One other consideration in the use of uncompensated overtime in some situations. If the same employees are working on more than one contract in a day under situations not covered by the FAR, and are working uncompensated overtime, how does the government assure itself of an equitable allocation of costs relating to their labor? This issue can arise either in pricing the contract or post award in flexibly priced contracts.

By Anonymous on Thursday, June 06, 2002 - 09:21 am:

There is a FAR provision that might be useful here ..it is 52-222.46 and deals with evaluating professional employees compensation.

By Vern Edwards on Thursday, June 06, 2002 - 10:47 am:

While the Service Contract Act rules about who is FLSA exempt and the FAR's treatment of uncompensated overtime are interesting issues, and well worth thinking about, they have no bearing on the original issue in this thread, so let's not get confused.

Under a T&M contract, payment to the contractor for labor is based on fixed-hourly-labor-rates (essentially, fixed-unit-prices) and the number of direct labor hours devoted to the performance of the contract work. Payment is not based on what the contractor paid the employees who did the work; payment is not based on the contractor's incurred cost for labor. That's the plain meaning of the T&M payment clause.

By AnonYmus on Friday, June 07, 2002 - 08:48 am:

Thanks all for the responses. As usual, I learn something from this site on nearly every thread.

Vern -- see my 2nd post, posing the additional questions. We are clear that the original scenario has been answered satisfactorily. It is just that I got to thinking about the issue from a TINA standpoint and cost analysis standpoint, and had some additional questions, which have also been nicely handled.

Interestingly (from my standpoint, at least), the clause 52.237-10 contains the requirement that "(c) The offeror's accounting practices used to estimate uncompensated overtime must be consistent with its accounting practices used to accumulate and report uncompensated overtime hours."

At first glance, the requirement seems to mirror 48 CFR 9904.401 -- CAS 401. However, on further thought it doesn't and I have several problems with it, including:

1. It seems to confuse accounting practices with estimating practices. Accounting practices are also defined in the CAS -- 48 CFR 9903.302. If the contractor doesn't track uncompensated overtime (and many, if not most, do not) then there are no accounting practices associated with the issue. However, there is a requirement (per the clause) to estimate such costs and be consistent with ... what? Nothing, it seems to me. Unless I'm missing the boat here, It's going to be difficult for a contractor to comply.

2. Even if the contractor does accumulate and track uncompensated overtime "hours" that is not an accounting practice -- that is a payroll or timekeeping or time reporting practice. Accounting practices are concerned with measurement, assignment or allocation of costs -- not hours. Again, see 48 CFR 9903.302

I could go on -- such as contractors are not required anywhere in the CAS or FAR (or even GAAP) to actually "accumulate and report" such hours (except in the minds of DCAA) but I don't want to belabor the point.

I see this as a problematic requirement for contractors to really comply with and would appreciate any thoughts about my points from people who have had to oversee contractors.

Do they really meet this? Does DCAA report on compliance with it? What would you do if you thought the contractor's actual accounting for uncompensated overtime varied from its estimate? If it's not defective pricing, is there a real remedy for noncompliance with this clause?

I appreciate the input and am learning a lot from this thread!