Time and Material Contracts and Uncompensated Overtime

From time to time, we are asked about how uncompensated overtime should be billed under T&M or labor-hour contracts. This is not really an easy question to answer - it depends upon the particular clauses in the contract. But we can offer a "general" (non-legal) opinion.

Under T&M or labor-hour contracts, the Government and contractor negotiate fixed hourly rates for particular skill sets. Cost for particular task orders are calculated by multiplying the number of agreed-to hours by the negotiated rates. As the contractor works the hours, it can get reimbursed at the agreed-to hourly rates. Whether the employee was paid for those hours, is irrelevant to the contract (though a contractor could face other issues if these employees were not exempt under the Fair Labor Standards Act). If the employee performed the work, the contractor should get paid at the agreed-to rate.

A 2012 ASBCA (Armed Services Board of Contract Appeals) affirms this position. In this particular case, an Army contracting officer, based on a review by contract auditors, disallowed about $50 thousand in billings from GaN Corporation because the company had billed the Army for hours that they actually worked but did not compensate its employees who had performed the work. Those employees were exempt employees and were working uncompensated overtime.

The Board found the Government's interpretation of the contract and its arguments "unpersuasive and without merit.

The contract is clear: "Firm fixed price rates will be established [in] Section B of the contract. Task orders will be Labor Hour (LH) and/or Firm Fixed Price (FFP) and will be priced in accordance with the pricing schedule in Section B." ... The pricing schedule is cross referenced with Sections (a)(2) and (3) of the Payments clause, which controls: "the amounts shall be computed by multiplying the appropriate hourly rates prescribed in the Schedule by the number of direct labor hours performed." Further, "[t]he hourly rates shall be paid for all labor performed on the contract that meets the labor qualifications specified in the contract. ... " There is no question that the labor was performed and the employees paid their regular salaries .... The government's argument that the other provisions of the clause that refer to costs (Sections (d) Total Cost and (e) Ceiling Price) "make all employees hourly workers for purposes of reimbursing the contractor" ... is not a reasonable interpretation of the entire clause. First, these sections are not germane to the issue at hand as they merely reference "costs" in conjunction with the ceiling price of the contract and the procedures to ensure that the contractor does not exceed such limit. Secondly, and most importantly, these sections do not specifically prohibit the contractor from collecting its hourly rates for work performed by salaried employees (subject to the ceiling price). Thus, to "read out" or ignore portions of Sections (a)(2) and (3) of the Payments clause is not legally defensible.

When we were auditors and assessing proposed rates for T&M or LH contracts, we would try to reflect the impact of uncompensated overtime, if any, into the hourly rate buildup. If a contractors experienced a significant amount of overtime historically, there was a reasonable assumption that it would continue to do so. By adding uncompensated overtime hours in the denominator when calculating average hourly rates, the impact of uncompensated overtime is addressed. Sometimes negotiators accepted the position, sometimes not.

You can read the entire ASBCA case by clicking here.