Salaried Hours Worked

Dear Dave
We have picked up some public sector work for the very first time this year. Not having worked with governmental agencies, we find ourselves confused by some of the rules and regulations we must now cope with in order to comply with the restrictions which come along with this type of work. Specifically, what are we suppose to do when a salaried staff member works more than forty hours in a week on a cost plus contract? Since salaried staff is not being paid overtime, do we stop recording and billing this time against the project when it is over forty hours in a week?
DR IL

Dear DR
The timesheet for any individual must always reflect all hours worked. There are two acceptable ways to handle the situation you described. You may recalculate the effective hourly pay rate for those weeks in which salaried staff worked more than forty hours, or you may elect to keep the hourly rate constant and credit (reduce) the firm’s overhead pool for the equivalent dollar value of the unpaid hours charged directly to the projects.

First Method: Let’s assume a salaried individual’s weekly salary is $1,000. That individual’s standard hourly payroll cost per hour is $25 ($1,000 divided by 40 hours). If that individual were to work say 50 hours some week, the hourly rate for that particular week would become $20 ($1000 divided by 50 hours). Your first choice would be to change the hourly cost rate for that week to the effective rate of $20. If you elect this method, you must continue to adjust the hourly charge rate each and every week by recalculating the effective hourly rate each subsequent week based on how many unpaid hours are actually worked.

Second Method: The alternative is to maintain the hourly cost rate charged to projects at a constant $25 per hour. Any and all hours would be assessed to projects at the fixed cost of $25 per hour. In weeks in which a salaried individual works more the forty hours, a payroll variance is created equal to the amount by which the payroll charged to projects is greater than the amount actually paid. This payroll variance is credited back as an offset against the firm’s indirect overhead cost pool (thereby reducing the firm’s calculated overhead cost).

Current versions of today’s modern engineering accounting packages are capable of handling either method. Just be sure to be consistent is whichever method you elect to employ.