PhD´s, engineers, and scientists who participate in the Small Business Innovative Research (SBIR) and other Federal Government funded research programs are typically professionals who are paid an annual salary, and frequently work more than a standard forty hour week.
This creates a cost accounting issue when dealing with cost-type government contracts and grants, such as an SBIR Phase 2 award.
For example, if an employee was paid $62,400 per year, their labor would have been charged to various jobs at a standard hourly rate of $30.00 ($62,400/2,080 hours per year). On a monthly basis, when invoicing the government or using the Payment Management System, you would use $30.00 per hour as your base billing rate.
However, if the employee´s actual hours worked for the year totaled 2,200, then their effective hourly rate is $28.36 – so, you have over billed the government!
How will you account for this “uncompensated overtime” when preparing your annual incurred cost submission?
To account for uncompensated overtime properly, you have a couple of options:
1. Pay your employees for the overtime that they earned. This avoids the whole uncompensated overtime issue, but can be expensive. Many employers chose this option as the employees view it as a bonus and it will simultaneously create goodwill among your staff. Remember, you have billed the government for this time and it´s not coming from your pocket. Please note that some contracts may prohibit this without customer approval.
2. Reduce your F&A rate with the NIH or overhead rate with the DoD. The second option is to take the amount of unpaid overtime that has accrued and credit it against your indirect rate pool (overhead or F&A rate) at the end of the year. Choosing this option will allow you to bill for the time as it is earned while remaining in compliance with the government. This method is frequently used when the amount to credit is not planned to be overly material.
3. Credit the direct and indirect labor categories on a pro-rata basis. Using this method, you are actually reducing the hourly rate charged on a monthly basis to the effective hourly rate incurred. This can be time consuming, but is probably the best option when you have a lot of over-timers.
Your organization´s policies and procedures manual should state your policy regarding uncompensated overtime. This can include whether employees can bank their overtime hours to be used later as comp time; under what circumstances they can be paid for any accumulated overtime hours at the end of the year; and whether any accrued comp time is forfeited at the end of the year or carried over to the next year.
In order to have an acceptable accounting system your employees must report all time worked in their timesheet, so any “informal” ways of trying to avoid this issue could ultimately lead to being blacklisted by the federal government, or worse!
Finally, as a way to introduce our firm´s unique services, we are happy to provide the following free of charge:
1. provide benchmarking feedback on your indirect rate projection,
2. assist in the preparation of the financial portion of your government proposal,
3. negotiate your initial provisional indirect rate agreement
Ready to Learn More? Speak With A Government Funding Award Expert!
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Edward G. Jameson, CPA
How to Treat Overtime for Indirect Cost Proposals and Indirect Rate Agreements for SBIR accounting
November 02, 2009