Do you see any issue with this practice? How about if the contract mix would change where the employee works on cost reimbursement contracts?
1. If an employee charges 10 hours directly to a contract, and then the company charges two (2) of the ten (10) hours to a personal time off (PTO) account, which is part of an indirect pool, which then the indirect pool is charge back to government contracts, this becomes a violation of Cost Accounting Standard (CAS) 402, Consistency in Allocating Costs Incurred for the Same Purpose.
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2. The purpose of CAS 402 (9904.402-20) is "to require each type of cost is allocated once and on only one basis to any contract or other cost objective". "Adherence to these cost accounting concepts is necessary to guard against the overcharging of some cost objectives nd to prevent double counting. Double counting occurs most commonly when cost items are allocated directly to a cost objective without eliminating like cost items from indirect cost pools which are allocated to that cost objective."
3. CAS 402 (9904-402-40 - Fundamental Requirement) states "All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective."
4. Therefore, if two (2) hours of an employee's time is charged directly to a contact, and the same two (2) hours are included in an indirect pool (which then is utilized as a rate) and charged to all government contracts, then the company is being reimbursed twice for the same two (2) hours. Once as a direct cost and the second time as part of the indirect cost rate. This becomes double counting, which not in compliance with CAS 402.
5. There are several possible solutions. One is to charge the ten (10) hours as a direct cost to the contract; the employee is paid for those ten (10) hours and no hours are charged to a PTO account. The company is reimbursed by the government for the entire ten (10) hours as a direct cost. (This assumes that the 10 hours are allowable). A second solution is that eight (8) hours are charged to the contract, the employee being reimbursed directly for those eight (8) hours, and two (2) hours go to a PTO account. While the employee worked ten (10) hours, the company is reimbursed by the government directly for the eight (8) hours, and indirectly for the two (2) hours through an indirect pool. (Assumes the direct cost and indirect pool are both allowable).