Government Contracting & Engineering Industry Alert: Mysteries of the FAR Revealed

The U.S. Department of Transportation and the Federal Highway Administration, through the National Highway Institute, just provided a week-long training in Harrisburg for those using the AASHTO Audit Guide for the Procurement and Administration of Architectural and Engineering (A&E) Contracts. Kreischer Miller was the only public accounting firm that had participants at the conference for the entire week.

Most of the attendees were from the larger engineering firms in Pennsylvania, but there were also attendees from Florida and Michigan firms. Pennsylvania state representatives were also present for the conference, including the head of budget, the head of audit, and one of the senior auditors from the audit division.

Below are some of the highlights from the conference. PennDOT will be looking for the adjustments below on the overhead rate submissions.

1) Overhead Rate Calculation: The Federal Acquisition Regulations (FAR) require that all unallowable costs and all relating costs be removed from the overhead rate calculation. As such, they expect all salary and related costs for entertainment, advertising, bad debt collection, acquisition costs, and lobbying (along with any other expressly unallowable costs) to be removed from the overhead rate calculation and the AASHTO audit. The suggested compliance worksheet now has a column (Column L) for such unallowable salary. A client just sent us information from PennDOT that suggests PennDOT will be using this worksheet going forward (versus the current Executive Compensation Worksheet).

Suggested action: Set up billing codes for the above activities so employees can bill these codes when performing unallowable activities and set up separate general ledger codes to track these salary costs. Also, consider setting up separate salary bill codes for bid and proposal activities since these are supposed to be segregated in accordance with the FAR (they will have no impact on the rate calculation since these are allowable costs). Consider updating any time recording policies, if applicable, and perform training to reinforce the importance of accurate time keeping and accounting for all hours worked.

Make sure all related costs for unallowable activities are removed from the overhead. For example, if an employee takes a prospect to a ball game (i.e. entertainment), the following would be unallowable: salary and related payroll taxes for the time, travel costs, parking, out-of-pocket costs at the game, and the ticket costs.

Consider setting up a separate general ledger account for direct selling costs, which are allowable.

2) National Compensation Matrix: PennDOT representatives said they were accepting the National Compensation Matrix for 2012 (even though an earlier strike off letter suggested they would not be accepted). This should simplify the calculation for unallowable compensation for most of our clients and will most benefit those that have revenues in excess of $5M. At our 2012 seminar for A&E firms, we provided a schedule comparing the NCM Matrix to the ERI salary surveys for the different executive levels. If you would like a copy of that information, please do not hesitate to e-mail us (addresses below).

It appears that PennDOT is beginning to follow the AASHTO audit guide in its entirety, so firms may also elect to perform their own salary survey if they believe the Matrix is not accurate or you would like to argue for superior performance. There are specific steps you need to follow so please call or e-mail us if you need guidance on how to apply these steps.

3) Job Costing System: The FAR requires all firms to maintain an adequate job costing system. As such, the representatives leading the training suggested that all firms periodically reconcile direct labor and other direct costs to their general ledger system.

Suggested action: We recommend completing this at least quarterly and we will be adding this step to our standard audit programs to review as part of our year-end audit procedures. If these steps are not being performed, it could be considered a deficiency in the internal control system.

4) Company-Owned Vehicles: If your company maintains company-owned vehicles and bills customers for any direct mileage, the auditors will be reviewing the expense information for each vehicle to ensure that the same percentage of the otherwise allowable costs has been removed from the overhead rate. Historically, most clients have just removed the billings and any non-billable direct mileage from their overhead rates.

Personal use mileage must be tracked (this includes commuting). If you are not already keeping a daily mileage log, you should start immediately. For those companies that have company-owned vehicles, we will be reviewing these logs as part of our standard audit procedures to verify that personal usage is excluded from calculations. Again, if your company has multiple vehicles, costs will need to be tracked by vehicle or you will need to develop a reasonable cost allocation, by vehicle, to properly exclude the percentage of personal use. This includes gas, insurance, maintenance, and any other direct costs of maintaining the vehicle fleet.

Suggested action: Consider establishing a policy that any company-owned vehicle used directly on a contract will not be billed as a direct cost or consider eliminating company-owned vehicles. This is an area that auditors will examine very closely, so proper documentation will be imperative.

5) Website Development: Most website development and maintenance costs will probably be considered advertising (unallowable), unless management can demonstrate that costs are being incurred for allowable activities (i.e. employee portals, customer portals, etc.). If companies are incurring website development costs, it will be important for those vendors to allocate their invoices between allowable and unallowable activities, if applicable.

6) Deferred Compensation Plans: Plans must be in compliance with CAS 415-30 and one of the requirements is that the amounts must be awarded in the current year. If amounts are not determined until the following year, they will be unallowable costs.

You can access the comprehensive NCM workbook here. 

If you have any questions or comments about this topic, please don't hesitate to reach out to David Shaffer, Director, Audit & Accounting, at Email or 215-441-4600, or Craig Evans, Director, Audit & Accounting at Email or 215-441-4600.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.