Labor cost is an important element of project cost accounting, not only for the professional services industry, but for manufacturing and other industries. The US government requires that cost be allocated fairly and equitably across a company's various cost objectives, in reasonable proportion to the benefit accruing to them. A cost objective can be a product, a project, a service, or a customer – anything for which separate measurement of cost is desired. When an employee's time is divided between multiple cost objectives, the labor cost must be equitably distributed over them. It might be tempting to have employees who work on both fixed price and cost reimbursable contracts charge more of their time to the latter. Obviously this would be something less than fair and equitable allocation of cost.
In addition, as uncompensated overtime has become more and more the rule for salaried exempt employees, the employee's actual labor rate may vary significantly from one period to the next. This can potentially result in overcharging the customer.
For example, an exempt employee who is paid $104,000 annual salary is effectively paid $50 per hour, assuming she works a 40 hour work week. But if she works 50 hours in the week of an important deadline, her actual hourly rate falls to $40 per hour for that period. Assuming she is working at least part of the time on a cost reimbursable government contract, the government stands to be overcharged $10 per hour for her labor for that period if she doesn't record the extra 10 hours of work. Clearly this will be an audit finding - particularly if the extra 10 hours of work was non-billable or on a fixed price contract, because the cost of her labor for the week is not allocated fairly and equitably. But regardless of what cost objective they are charged to, or whether the hours are allowable or billable, the total working hours for the period must be known in order to determine the actual labor rate.
So, how to ensure an employee charges the correct contract, and the government is charged the employee's actual rate? The Defense Contract Audit Agency (DCAA) Contract Audit Manual (CAM) answers this by requiring that all hours are recorded. This concept is called Total Time Accounting (TTA), or Total Time Reporting (TTR).
While there is no specific regulation that requires TTA, the DCAA cites FAR 31.201-4: Cost Allocability and Assignability to Final Cost Objectives, CAS 401: Consistency Between Accounting and Bids and Proposals, and CAS 418: Proper Allocation Bases for Direct and Indirect Costs as justification.
Federal Acquisition Regulation (FAR) 31.201-4 and Cost Accounting Standard (CAS) 418 essentially require that cost be allocated to final cost objectives on a beneficial or causal basis. It is implied that all hours worked are needed to correctly determine the beneficial/causal relationship between the cost and the cost objective.
How does TTA relate to consistency between accounting and B&P? The actual hours/cost of performing on the contract are needed to accurately estimate cost and bid on follow-on or similar contracts in future. The premise of CAS 401 is that consistent application of cost accounting practices will result in reliable cost estimates, and later facilitate comparing the estimated cost of contract execution with the actual cost. In terms of compliance, it is just as important that the actual cost is accumulated consistently with the way cost is estimated as vice-versa.
Not all timekeeping systems support TTA. But if a company is seeking government contracts that are subject to the cost principles or CAS, it must have a compliant timekeeping system – one that can capture all hours worked and then allocate cost equitably across all hours worked.
Dassian's GOVCON solution features our Actual Labor Costing (ALC) module, which meets these TTA compliance requirements. ALC augments SAP functionality to track and record an actual rate on the final cost objective, which can include both base labor and associated fringes on separate elements of cost. Dassian ALC provides the capability to capture, calculate, and post all elements of labor over the actual hours worked on the final cost objective. ALC installs into your SAP landscape just like any other SAP functionality, without complicated, error prone or manual interfaces to an external system or spreadsheet.