Properly reporting all of your costs related to each contract is essential to remaining in compliance with federal contracting requirements. If you hope to remain in good standing so that you can continue to receive contracts from the federal government, then you must report every detail of your financials accurately, including employee PTO and holiday pay. What’s the accurate way to report these expenses? Keep reading to find out more.

Report PTO Based on Accrual, Not Usage

It would seem logical to cost out PTO and holiday pay when your employees actually use it. However, this tends to lump these expenses onto certain contracts, since more employees tend to use these benefits during the winter holidays and in the summer, when they’re more likely to travel and take vacations. To avoid overburdening certain contracts with your employees’ time-off expenses, CAS requirements state that you should be costing employee PTO and holiday pay when those benefits are accrued, rather than when they’re used.

One exception to this, as stated in CAS 408-50(b)(1), is when an employee is required to complete a probationary period before your company is liable to pay out the PTO. In these cases, you may assign the costs of PTO when it is used, if you prefer, or you can still record all accrued PTO for each employee when it is earned. Either is acceptable, but this must be applied consistently to all new employees.

Report Benefits That Aren’t Paid Out upon Usage

The above-stated requirement is applied to all types of personal leave that the employer is required to pay out to the employee, regardless of usage. This means that if an employee does not use their PTO, their unused benefit would be paid out at the end of the year or when they retire or leave the company (depending on what your company policy is). However, not all types of leave are often handled this way. Sick leave, for example, typically does not roll over or pay out if it goes unused.

The proper way to cost sick leave differs from costing PTO and holiday pay, because you must record it as it is used, as opposed to when it is accrued. This makes it incredibly important that you separately allocate these expenses in order to ensure they are being reported accurately.

Reduce Estimated Costs by Anticipated Non-Utilization

As stated in CAS 408-50(c)(2), your measurement of anticipated PTO and sick leave costs must be reduced by anticipated non-utilization, or the amount of paid leave that employees typically don’t use. For example, let’s say you provide your employees with 10 days of PTO per year, and they can carry over accumulated leave up to a maximum of 20 days. In the past, employees have lost an average of 10% of accumulated vacation days due to non-use.

This year, your employees earn a cumulative $100,000 in PTO. However, you must reduce this estimated expense by the 10% of estimated non-utilization, which means your compensated personal absence cost for the year would be $90,000 (10% less than the total $100,000 accumulated).

Prepare Your Accruals on a Monthly Basis

Finally, make sure that you are preparing accruals monthly for your business. If you’re using QuickBooks, you will have to work around the software’s default, which allocates costs on a cash basis and allocates labor to the month in which payroll is paid. In terms of PTO, this means that the amount appears on the QuickBooks P&L with the amount used, rather than the amount accrued. So, you ‘ll need to prepare PTO accruals monthly to show the sum of each employee’s total accrued hours, multiplied by their hourly rates.

Get Help with Proper Costing on Government Contracts

Keeping your books tidy and accurate is important for any business. For government contractors, however, simple mistakes like allocating PTO incorrectly can cost you the ability to apply for these lucrative contracts. It’s simply not a mistake that most government contractors can afford to make.

If you complete contracts for the federal government, or you hope to do so in the future, remaining compliant with CAS and other federal contractor accounting standards is essential. Contact Peter Witts CPA today to get help with properly allocating and reporting your costs, so you can remain in good standing as a contractor. We can help you to maintain accurate books and provide further accounting support, tax guidance, and more. Call now to schedule a consultation with one of our experienced government contracting accountants.