Premium Overtime-Another Side to Compensation By: T. Wayne Owens, CPA Compensation has been a major topic of conversation for the past couple of years between the DOTs and consultants. Typically, people think of executive compensation levels, but there is another side to this compensation discussion: allocation. How is compensation allocated to the different ‘cost objectives’? In other words, how much payroll cost does a project incur for any given hour charged to the job? Uncompensated overtime has been discussed at great lengths, but I have not heard much formal discussion of premium overtime until recently. The premium portion of overtime for hourly employees keeps creeping up in conversations I have with DOT auditors. They are receiving overhead audit reports without any consistency in how premium overtime is treated. This is probably due to a lack of consistency in how firms are treating the cost. The problem begins when firms choose to charge the premium portion of overtime directly to a project. Based upon conversations I have had with multiple principals, it appears there are a multiple of reasons for this direct charging of the premium portion. They range from a simple “it has to go somewhere” to “we want to accurately charge all jobs” or “we have always done it this way.” The simple truth of premium overtime is we typically do not know which project caused the overtime. People typically work on multiple jobs during the week and it is hard to know if it is the first job or the last job that caused the overtime. Given the choice, most principals believe a cost plus job will create the overtime over a lump sum job. This will create a system of adverse selection for cost plus jobs. The real problem: will the cost plus contract allow you to charge the premium portion? Typically, these contracts don’t allow the premium portion, thus you are charging dollars to a job for which you will not be reimbursed. The cost stays in the direct labor base and reduces your overhead 24
annual overhead statement should reflect the costs incurred by the firm with no adjustments for direct labor. This creates a base that accurately reflects the costs of the firm and allows the consultant to be reimbursed at a fair rate allowing them to recovr all costs. This is the intention of the cost plus contracting method. v T. Wayne Owens rate. Not only are you not being reimbursed on the direct labor portion but you are reducing your reimbursement on all jobs. Some firms try to correct this problem by reducing direct labor on their overhead statement by the premium portion of the overtime cost. However, this only fixes part of the problem. Firms are still not being reimbursed for all of their costs. Basically, legitimate costs are being incurred which are not being reimbursed by the government. This is not a case of the government refusing to pay, but simply the consultant not requesting the reimbursement. We (or I) believe you should stay true to your labor costing policy. The two choices are standard cost or average (effective) cost. With standard cost, all employees have a standard cost, and all hours are charged with this cost. Any difference in standard cost and actual payroll cost is charged to the payroll (job cost) variance. In other words premium overtime increases overhead, and uncompensated overtime reduces overhead. With average cost, the total payroll (including premium overtime) is divided by total hours for each employee which creates a cost rate for that period. Premium overtime increases the cost, and uncompensated overtime reduces the cost. The only real problem with the typical costing methods is when a contract reimburses for the premium portion of overtime. This creates a situation where the firm must change their policy for this contract through a forward pricing agreement.The The Georgia Contractor