Does the contractor get to bill the labor rates agreed to in the final cost proposal or does he bill the rate he actually charged for the work? If the later, he will never overrun the contract ceiling, correct? Because he's lowering his rates based upon extended hours to match the higher rate/hours.
This issue addresses what appears to be a deviation in the hourly rates being billed and hourly billing rate established under the basic contract. I recommend reviewing the contract to determine if a modification exists which changes salaried individuals and their billing rate which technically includes overtime given the standard work week is 40 hours. Also review the basic contract for the clause 52.222-2 Payment of Overtime (see FAR 22.103--3) Normally salaried individuals do not receive overtime compensation even if the overtime computation is included in a lower billed rate. I also would review Service Contract Act and FAR Part 37 Service Contracting for additional information on Overtime Compensation for "professional employees".
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