The Free Hours Problem: Uncompensated Overtime and Honest Cost Accounting

Published 2026 | TIKC NewsWire

Here is a problem that sounds like accounting trivia but can turn into a billing issue fast. Your salaried people are exempt, so they often work more than 40 hours without extra pay. That is normal. But on government cost and labor-hour contracts, those extra unpaid hours, called uncompensated overtime, do not just disappear. How you record and allocate them affects your labor rates and what each contract is charged. Handle it loosely and you can end up overstating costs on one job, understating them on another, and billing the government in a way you cannot defend.

What uncompensated overtime is

Uncompensated overtime is the time a salaried, exempt employee works beyond the standard 40-hour week without additional pay. Say someone earns a salary for 40 hours but actually works 50. Those 10 extra hours still represent real effort spent on real projects. The question the government cares about is how you spread that person’s fixed salary across all the hours they actually worked, and across all the contracts they touched, so that no single contract gets charged a distorted rate.

Why loose handling becomes a billing problem

If you record only the 40 hours and charge them to one contract, that contract absorbs the person’s whole salary while the other projects they worked get a free ride. Your effective labor rate on that job looks higher than reality. Do that across a workforce and your billing drifts away from what the work actually cost, which is a form of labor mischarging. It also runs against cost accounting principles that expect costs to land where the work really happened.

The fix is recording all the hours

The honest and expected approach is total time accounting, which simply means recording all the hours a salaried person actually works, not just the first 40, and spreading their salary across that true total and the contracts they served. It feels strange to log hours nobody is paid extra for, but that is exactly what keeps your rates honest. Auditors look at this directly, and it is the kind of thing a clean incurred cost record is expected to show. Record every hour, and your labor costs tell the truth on their own.

What to do now

• Record all hours worked. Have salaried staff log their full time, not just 40, when they work more.
• Spread salary fairly. Allocate a person’s pay across every hour and every contract they actually worked.
• Use total time accounting. Adopt a consistent method that captures uncompensated overtime.
• Be consistent. Apply the same approach across people and contracts, not case by case.
• Check your rates. Make sure no single contract is absorbing effort that belonged to another.

Uncompensated overtime feels like a technicality, but it is really just the same honesty you already practice, carried into your timekeeping. Record every hour your people truly work, let each contract carry its fair share, and your labor rates become something you can stand behind in any audit. Brick by brick.

FAQ

What is uncompensated overtime?

The hours a salaried, exempt employee works beyond the standard 40-hour week without extra pay. Those hours still represent real effort on real contracts.

Why does it matter for billing?

How you record and allocate those hours affects your labor rates. Mishandling it can overstate costs on one contract and understate them on another, a form of mischarging.

What is total time accounting?

Recording all the hours a salaried person actually works and spreading their salary across that full total and the contracts they served, so rates stay accurate.

How do I stay compliant?

Have salaried staff record all hours worked, allocate pay across every hour and contract, use a consistent total time accounting method, and check that no contract absorbs another’s effort.

Sources

Federal Acquisition Regulation. (2026). FAR 52.237-10 and cost principles on total time accounting for uncompensated overtime.

Defense Contract Audit Agency. (2026). Contract Audit Manual, guidance on uncompensated overtime and labor accounting.

This article is general information, not legal advice.