Uncompensated Overtime

Uncompensated overtime is time worked by exempt salaried employees beyond a standard workweek (typically 40 hours) for which they receive no additional pay, and which federal contractors must track, disclose, and properly account for when pricing and billing government contracts.

What is Uncompensated Overtime?

FAR 52.237-10 and OFPP Policy Letter 92-1 require federal contractors to disclose their policies on uncompensated overtime when pricing contracts with labor-hour or time-and-materials pricing structures. If salaried employees routinely work more than their standard hours, the effective hourly labor rate drops, a contractor billing at a rate based on 40 hours per week but getting 50 hours of productive effort effectively delivers more labor for less cost per hour.

The concern from the government's perspective is twofold. First, uncompensated overtime can be used to make a labor rate appear artificially low in proposals, winning contracts that would otherwise price out, while building unsustainable workforce expectations. Second, inadequate tracking of uncompensated overtime distorts indirect rate structure calculations, if fringe benefits are allocated on direct labor hours, unreported hours reduce the denominator and inflate the rate.

DCAA-compliant accounting systems must capture total hours worked by salaried employees, including overtime, even when no additional compensation flows. This data is used in incurred cost submissions and audits. Contractors must also disclose uncompensated overtime policies in cost proposals and Forward Pricing Rate Agreements when material to the pricing.

Why uncompensated overtime matters for government contractors

Failure to disclose significant uncompensated overtime practices can constitute defective pricing under the Truth in Negotiations Act (TINA). DCAA auditors specifically look for inconsistencies between proposed labor hours and actual hours worked, and patterns of uncompensated overtime that inflate effective hourly cost can trigger proposal deficiency findings or post-award price adjustments.

Example

A defense IT firm employs senior engineers at $150K/year, billing them at $72/hour based on a 2,080-hour work year. In practice, these engineers average 2,400 hours per year due to program demands, making the effective rate $62.50/hour. When the firm bids a new task order at $72/hour without disclosing this pattern, DCAA flags the discrepancy during a post-award audit, and the contracting officer seeks a retroactive price reduction.

Frequently Asked Questions

Does uncompensated overtime apply to hourly workers?

No. Uncompensated overtime is relevant only for exempt salaried employees who are not entitled to overtime pay under the Fair Labor Standards Act (FLSA). Hourly employees receive additional compensation for overtime, which is captured directly in their labor cost without distortion.

When must a contractor disclose uncompensated overtime in a proposal?

Contractors must disclose uncompensated overtime policies when their proposals are subject to cost or pricing data requirements (TINA), when the solicitation specifically requests disclosure, or when uncompensated overtime has a material effect on proposed labor costs. FAR 52.237-10 is the operative clause.

How should total hours be tracked in a GovCon timekeeping system?

The timekeeping system should capture actual hours worked by all employees, not just hours within the standard workweek. Many systems use a "total time accounting" approach where employees enter all hours worked, and the system allocates them to contracts or overhead based on actual activities, automatically computing effective hourly rates.

Can uncompensated overtime reduce a company's competitiveness?

In the short term, uncompensated overtime can lower effective labor costs and make proposals appear more competitive. However, it creates workforce sustainability risks, can distort indirect rates, and may trigger DCAA scrutiny if not properly disclosed, potentially outweighing the pricing benefit.