VALVALUEADDED (Labor)

What is VALVALUEADDED (Labor)?

VALVALUEADDED (Labor) refers to labor costs that a government auditor, particularly the Defense Contract Audit Agency (DCAA), identifies as potentially excessive or unjustified compared to a reasonable baseline. It often signifies a deviation from established labor rates or staffing levels without adequate documentation or justification, raising concerns about cost efficiency and the value received by the government. Essentially, it's the labor portion deemed "value-added" by the contractor, but whose value is being questioned by the government.

Definition

VALVALUEADDED (Labor) becomes a critical point of contention during contract audits and price negotiations. The DCAA, responsible for auditing defense contractors, assesses whether labor costs are reasonable, allocable, and allowable under the Federal Acquisition Regulation (FAR) Part 31, which governs contract cost principles. Contractors must meticulously document and justify all labor costs, especially when exceeding historical rates or industry benchmarks. Failure to provide adequate justification for VALVALUEADDED (Labor) can lead to cost disallowances, impacting the contractor's profitability and potentially leading to legal disputes. This term is not specifically defined in the FAR but arises in practice during cost analysis and audit reviews.

Key Points

• Justification is Crucial: Contractors must provide clear and compelling justifications for any labor costs categorized as VALVALUEADDED, demonstrating the tangible benefit and value provided to the government.
• Documentation is Key: Maintaining meticulous timekeeping records, labor distribution reports, and justifications for pay increases is vital in supporting VALVALUEADDED (Labor) claims.
• DCAA Scrutiny: Be prepared for in-depth scrutiny from the DCAA, who will assess whether the labor costs are reasonable, allocable, and allowable under FAR Part 31.
• Impact on Profitability: Cost disallowances due to unjustified VALVALUEADDED (Labor) can significantly impact a contractor's profitability and overall financial performance.

Practical Examples

1. Unjustified Salary Increase: A contractor significantly increases an employee's salary mid-contract without demonstrable improvements in performance or added responsibilities directly benefiting the government project. The DCAA might question the reasonableness of this salary increase, deeming the incremental labor cost as VALVALUEADDED and potentially disallowing it.
2. Overstaffing: A contractor assigns an excessive number of personnel to a task beyond what is reasonably required. The DCAA could identify a portion of the labor hours as VALVALUEADDED, arguing the work could have been completed with fewer resources, thereby questioning the necessity of all labor charged.
3. Lack of Skill Matching: A contractor bills highly specialized (and expensive) labor hours for tasks that could be performed by individuals with lower skill levels and rates. The DCAA may view the differential between the billed rate and the rate of a suitably skilled employee as VALVALUEADDED.