Payroll rate vs. Job Cost rate for Salaried Employees

Sorry ahead of time for the long post.

We have a Sole Sourced Cost-Plus government contract that has certain requirements, one being the segregation and accumulation of direct & indirect costs. I’m trying to verify this in Epicor, and I’ve run into an issue. Payroll pay rate vs. job-costing pay rate, for a salaried employee that is clocking in & out of a job.

Here’s the example scenario;

Salaried Emp makes $104,000 per year or $50 an hour (rate made up for simplicity). Normally a salary paycheck without Clocking In & Out would be; 40 * $50 = $2,000. If the employee Clocks In & Out during the week and accumulates 50 hours, when paying for this week, the payroll system will calculate a new pay rate based on the total 50 hours worked. It would look like this; $2000 / 50 = $40/hour. The system is doing what I expect it to do because it knows that total hours and what the weekly pay is.

However, the job costing is in real time, so it does not have the knowledge, of the 50 hours, at that point to calculate a new pay rate. Therefore, job costing is done at the regular pay rate. Which cause a disparency between the Direct Labor GL (payroll, $40 /hours) and the Applied Direct Labor (job costing, $50).

Now, Epicor does allow you to enter a different payroll rate vs. a job costing rate, but it’s still a static rate and as far as I can see would never be dynamic. The only possible solution I can envision would be that once payroll is posted, a job adjustment gets created to offset the difference between the 2… But that sounds complicated and hard to audit.

Has any other government contractors dealt with this? Or does anyone know something I don’t?

Thanks for taking the time to read this.

Norman Hutchins
System Administrator
Howell Laboratories, Inc.

Hello Norman,

Are you Project module users? There is a place for different pay types but that’s the same “real time” problem. I wonder if you could use burden sets to do this…

Mark W.

I have no idea if this will be helpful…our system is set up to use a department labor rate for estimated job labor costs, but actual labor costs are calculated using our employees’ actual pay rate. The difference between estimated and actual is a variance. When we started on Vantage, I tested posting a partial time slip for a salaried employee. The cost to the job was calculated correctly using his hourly rate. His pay check calculated the same way it always did. I haven’t tested on versions after Vantage 8.03.4xx, it may no longer behave the same way.

Mark & Sue, appreciate both of your thoughts, I’m not sure either will
work, but I’m going to look in both. I’ve done a little more research on
this issue; it’s referred to as Uncompensated Overtime or Total Time
Accounting. Here’s a little background, I’m wondering if the last
paragraph will work for us.

In 1938, the Fair Labor Standards Act (FLSA) created the concept of

overtime by establishing that a standard work week shall consist of 40
hours and anything in excess would be classified as overtime. At that
point in time, the concept of uncompensated overtime was created.
Uncompensated overtime are the hours worked in excess of 40 hours in a week
by a salaried employee or employee who is otherwise exempt from additional
compensation for the extra hours worked.

There is an important distinction however, between uncompensated overtime
and unpaid overtime. Unpaid overtime is when an employee that qualifies
for overtime under FLSA is denied that extra pay which is owed;
uncompensated overtime applies to employees who are exempt from FLSA
overtime rules and are already considered compensated through their
salaries for all hours worked.

To prevent an imbalance in the determination of the cost of a Government
contract, contractors should record all hours that employees work, commonly
known as total time accounting. If uncompensated overtime is worked but
not captured correctly in the contractor’s timekeeping and accounting
systems, and especially if a salaried employee works on more than one
contract, there is a greater potential for contractors to manipulate their
labor accounting system. The Defense Contract Audit Agency (DCAA) Contract
Audit Manual (CAM) (Section 6-410) provides for three different ways that a
contractor can address uncompensated overtime:

  • Computing a separate average hourly, 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
    (contracts) worked on during the period based on this rate.

  • 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.

  • 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 credited to overhead.

There are two additional methods allowed by DCAA but these methods would
require additional evaluation by DCAA and must be tailored to the
contractor. The most common method that we see among our clients is the
first option, which uses an effective rate per hour to allocate labor costs
to contracts. The problem that can occur with this method is evident in
cost reimbursable type contracts. If a salaried employee is paid $1,000
per week and works 40 hours on a contract, the contract is charged $25 per
hour. But if the same employee works 50 hours on the contract, the diluted
rate is now $20 per hour. The contractor does not get to claim any
additional revenue for the extra hours worked, and the Government has
essentially received 10 hours of work free of charge.

If instead of using the first method the contractor used the third method
allowed by DCAA, the employee’s standard hourly rate would still be $25 per
hour, but if the employee works 50 hours in a week, the contractor would be
able to charge $1,250 to the contract instead of $1,000. The uncompensated
overtime, $250, is then credited to overhead. This method allows the
contractor to still account for all of the hours worked, to bill for all
hours worked and see the difference in revenue, and to strategically
decrease their overhead rate.

Thanks,

Norman Hutchins
System Administrator
Howell Laboratories, Inc.