The first question from the contract auditor will be for your policies, procedures, and internal controls on overtime. Those policies and procedures should comply with FAR 22.103 and ensure that overtime will be limited to the actual need for the accomplishment of specific work. The second question will be how you account for, distribute, or charge the premium portion of overtime pay. The auditor will need to ascertain that the amount of work performed at premium rates is equitably divided between Government and commercial operations and within Government contracts, equitably divided between fixed, cost-type, and T&M (Time and Materials) contracts.
Specific audit objectives might include the following determinations:
- Is management is properly authorizing, scheduling, and controlling overtime, extra-shift, and multi-shift work?
- Does the contractor obtain contracting officer's written approval when required by contract provisions? And, were overtime costs incurred consistent with such approval?
- Are premium costs reasonable and properly allocable to the Government contracts?
- Are adequate control exercised over productivity when overtime is worked?
- Is compensatory overtime work by salaried personnel properly authorized, and application against subsequent working hours is properly monitored?
The auditor will, perhaps, be most interested in the accounting treatment accorded overtime premium pay. There are a lot of ways to account for overtime premium and the challenge is to find one that equitably distributes overtime premium to all work of the contractor. So for example, if an employee works two hours of overtime, that overtime should not be charged to the last job worked on that day. It should be pro-rated among all jobs worked on during that day.
Overtime premium pay may be treated as indirect expense or as a direct charge when it is the contractor's regularly established policy and when appropriate tests clearly demonstrate that this policy results in equitable cost allocations. Irrespective of disclosed practices, the question of whether or not, or the extent to which, overtime premium pay is allowable, allocable, and reasonable under a contract remains for consideration in each specific instance considering contractual requirements and applicable Government regulations.