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Title: Uncompensated Overtime for Exempts - Overview

Brief description: This page offers an overview of the three primary methods of accounting for uncompensated overtime for exempts, those deemed acceptable by DCAA. 

What’s covered in this document:

Summary of Methods

DCAA outlines three methods as acceptable in accounting for uncompensated overtime for Exempt employees. The following come from the DCAA Contract Audit Manual, Section 6-410.4 (see link below in Additional Information).

The three methods are listed in the table below. 

#Method as defined by DCAAAlso known asDescription/CommentsLink which handles this Method
1"Computing a separate average labor rate for each labor period, based on the salary paid divided by the total hours worked during the period, and distributing the salary cost to all cost objectives worked on during the period based on this rate."
  • "Effective Rate"
  • "Diluted Rate"
  • "Dilution"
  • "Rate Dilution"
  • "Cost Dilution"

This is handled in Unanet via standard Unanet Dilution functionality via calculation of effective/diluted cost rates at the timesheet cell level. 

With Dilution, an effective hourly rate is determined based on standard hours in period, hours worked in period, and standard cost rate. See the dilution examples below, as well as the Dilution section of the KC for further discussion. Dilution is turned on in a Unanet property setting.

KC - Dilution

Help Docs - Dilution

KC - What is an example of Dilution?

2"Determining a pro rata allocation of total hours worked during the period and distributing the salary cost using the pro rata allocation. For example, if an employee was paid on a weekly basis and worked 25 hours on one cost objective and 25 hours on another cost objective, each cost objective would be charged with one-half of the employee's weekly salary."
  • “Hour Dilution”
  • "Hour Proration” 

Unanet offers both cost and hour dilution, although most reports will display cost dilution.

Hour dilution is available in the Adhoc Reports and Exports.

Mathematically, the effect of cost dilution is the same as hourly dilution even though the calculation is different. With Hourly dilution, the total salary is distributed pro rata to the cost objectives as opposed to Cost Dilution where the hours are multiplied by a net effective rate.

Help Docs - Hour Dilution
3"Computing an estimated hourly rate for each employee for the entire year based on the total hours the employee is expected to work during the year and distributing salary costs to all cost objectives worked on at the estimated hourly rate. Any variance between actual salary costs and the amount distributed is charged/credited to overhead."
  • “Overhead Credit”
  • "Payroll Variance"
  • "Standard Cost"
  • "Standard Hourly Cost"

With this method, all hours for a given employee are costed at the same rate. There is no dilution applied (Dilution is OFF in Unanet). Payroll Variance calculates the variance between actual wages and hours worked as a lump sum Journal Entry.

Using the Payroll Variance method, any difference between the Accrued Wages Payable and the Labor Cost are recorded to one or more payroll variance accounts that roll up to the appropriate indirect cost pool(s). See payroll variance examples below. Unanet Dilution will be turned off even though there are salaried Exempt employees who work more or less hours than in a standard pay period (with the variance recorded in an Overhead account).

This can become complicated when multiple pools are involved. Reconciliation of labor distribution to payroll can be extremely difficult. DCAA may not prefer this method since it needs to be tested for accuracy upon each review.

The reason some companies utilize the Payroll Variance methodology is to streamline the variability that dilution has on companies who utilize semi-monthly timekeeping. The wide variability that is caused by dilution can result in difficulties when the PM's are forecasting their labor costs. What happens is one of two things:

  1. If every salaried employee only worked exactly 8 hour days with no overtime or undertime, at the end of the year the payroll variance account, while it would have gone up and down all year long, will be $0. The billing and costs are straight-lined over the year.
  2. In practice, salaried employees typically work more then 8 hour days. In this case, the payroll variance account is a negative number at the end of the year. This in turn lowers the Overhead rate. 

For Cost Plus contracts, using Payroll Variance, every hour will be billed at the same raw hourly cost rate (undiluted), plus indirects and fee. PM's plan a certain amount of spending, but dilution can complicate this so PM's may prefer the Payroll Variance method.  

For Time and Materials contracts, every person's labor hour will have a set margin since the bill rate for a person will be one rate and the cost rate for that person will be another undiluted rate. For example, if a person bills at $200/hour but costs $50/hour, the set margin for that person will always be $150/hour (barring any scheduled increase in bill rates or pay rates.) In other words, there is no advantage for a PM in increased margin based on more labor hours charged in a period (like there would be with dilution). 

This method may be handled in Unanet according to the steps on this page:

KC - Handling Payroll Variance in Unanet


Dilution Example

Payroll Variance Example

Is the end result the same with Payroll Variance and Dilution?

Yes, at a macro level (you may have variations by projects).  

With Dilution, the diluted/lowered direct wage cost and higher number of hours will be used with the standard OH or G&A rate.   

With Payroll Variance, you allow charges of more direct wages, with a lower OH or G&A rate. The variance between wages paid and wages payable is a credit to one or more pools.

Additional Information

DCAA - Contract Audit Manual - DCAM 6-410.4 - Incurred Cost Audit Procedures - Acceptable Accounting Methods

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