Value Added Labor (VAL)
Value Added Labor (VAL) is the portion of labor costs that represents the direct effort applied to producing a specific product or delivering a specific service. It includes only the labor that directly contributes measurable value to a contract's required deliverables.
What Is Value Added Labor?
Value Added Labor (VAL) is the portion of labor costs that represents the direct effort applied to producing a specific product or delivering a specific service.
It includes only the labor that directly contributes measurable value to a contract's required deliverables.
Key Characteristics
Directly tied to contract performance
Traceable to a specific product or service
Excludes administrative and indirect support labor
Used in pricing, budgeting, and cost analysis
Subject to audit under federal cost principles
How It Works in Government Contracting
Where It Appears in the Procurement Lifecycle: VAL becomes relevant during proposal cost buildup, negotiation of labor rates, contract performance, invoicing and cost reporting, and audit and closeout reviews. It is especially important in cost-reimbursement and time-and-materials contracts.
Who Uses It: Government cost analysts, contracting officers, Defense Contract Audit Agency auditors, contractor accounting teams, and pricing specialists all work with VAL classifications throughout the contract lifecycle.
Why It Matters: Accurate VAL classification ensures proper pricing, prevents cost misallocation, supports audit compliance, and protects profit margins. Government agencies scrutinize labor categories closely during cost reviews and audits.
Practical Application
Example 1 — Software Development: Software developers coding a system required by a federal contract are performing value added labor directly tied to a contract deliverable.
Example 2 — Defense Manufacturing: Engineers assembling aircraft components under a defense contract are performing VAL traceable to a specific product.
Example 3 — Non-VAL Activity: Time spent in internal company meetings unrelated to the contract is not VAL and should be classified as indirect labor.
Regulatory Framework
VAL accounting is influenced by federal cost principles and audit standards that govern how direct labor must be classified, allocated, and documented:
Federal Acquisition Regulation (FAR) Part 31 — outlines allowability of direct labor costs
Cost Accounting Standards (CAS) — ensures consistency in cost allocation across contracts
Defense Contract Audit Agency guidance
Agency-specific cost policies
Why It Matters for Contractors
Business Implications: VAL affects labor rate calculations, impacts profit margins, and drives competitive pricing strategy in cost proposals and contract negotiations.
Compliance Impact: Contractors must maintain timekeeping accuracy, properly distinguish direct and indirect labor, document labor charges, and support costs during audits. Improper classification may trigger cost disallowance.
Strategic Importance: Understanding VAL helps contractors optimize staffing plans, structure efficient project teams, reduce non-billable labor, and improve overall operational efficiency on federal contracts.
Risk Considerations: Misclassified labor can result in audit findings, cost disallowances, contract disputes, and reduced fee recovery — making accurate VAL tracking a critical risk management priority.
Common Misconceptions About Value Added Labor
All direct labor is automatically value added.
Only labor directly tied to contract deliverables qualifies as VAL.
Administrative labor can be billed as VAL.
Administrative functions are typically indirect costs and must be allocated accordingly.
VAL is only relevant for manufacturing.
It applies equally to services, IT, engineering, and consulting contracts.
Frequently Asked Questions
Is Value Added Labor the same as direct labor?
Most VAL is direct labor, but not all direct labor activities qualify if they do not contribute to specific contract deliverables.
Why is VAL important in cost proposals?
It supports accurate pricing and demonstrates compliance with federal cost principles during evaluation and negotiation.
Can VAL vary by contract type?
Yes. The proportion of value added labor depends on the scope and structure of each individual contract.
How is VAL reviewed during audits?
Auditors examine timekeeping records, labor charging practices, and cost allocation methods to verify proper classification.
Related Government Contracting Topics
Direct Labor Costs: Wages directly attributable to contract performance, of which value added labor is the qualifying subset.
Indirect Labor Costs: Support functions not directly tied to specific deliverables, which must be distinguished from VAL in cost accounting.
Cost Accounting Standards (CAS): Rules governing cost measurement and allocation that ensure consistent VAL classification across contracts.
Federal Acquisition Regulation (FAR) Part 31: Guidelines on the allowability of costs, including the principles governing direct labor and VAL classification.
Timekeeping Compliance: Procedures ensuring accurate labor charging that form the foundation of defensible VAL documentation during audits.