Is your architectural and engineering (A&E) firm considering proposals for work on governmental contracts? If so, you may have been asked to provide overhead rates prepared in accordance with the Federal Acquisition Regulation (FAR) Part 31. The FAR Part 31 is the main authoritative source for the acquisition of supplies and services with federal funds and establishes the framework that A&E firms must follow when calculating their overhead rates.
Many government agencies, including state department of transportation offices, require FAR-compliant overhead audits depending on multiple factors, such as the size of the contract or the size of the A&E firm. An overhead audit assesses whether overhead rates comply with the FAR guidelines. An overhead audit includes an examination and tests of the firm’s accounting and internal control systems, and the time needed to review compliance will depend on the accuracy of the accounting records and number of company employees.
The FAR guidelines can be very complex with specific rules and procedures that A&E firms must follow. However, obtaining an overhead audit will help you receive the best possible rate for governmental work. An A&E firm may enter into a governmental contract without an audited rate; however, the agreed-upon rate will typically be capped with a provisional rate or the unaudited internal rate will be capped with a conservative rate that will most likely favor the governmental agency. If your company’s overhead rate exceeds that capped rate, you won’t be able to recover all your costs without an overhead audit. Therefore, even if the governmental agency doesn’t require an audit, it’s always a good idea to be prepared, and there are several steps you can take to prepare your company for FAR compliance.
The American Association of State Highway and Transportation Officials (AASHTO) publishes the AASHTO Uniform Audit & Accounting Guide (A&A Guide) to help implement the FAR guidelines. The A&A Guide is an excellent resource to familiarize yourself with. Appendix B of the AASHTO A&A Guide contains an internal control questionnaire and is a great place to start. The most recent version published is the 2016 edition. In addition, companies can attend training seminars for FAR compliance as well as provide necessary FAR training for accounting staff and management to help complete the audit in a timely manner. However, the most critical part of preparing for an overhead audit is ensuring the job cost accounting system can capture charge time and costs to a specific job. It’s also important for the company to have a timekeeping system in place to separate indirect and direct costs, as well as have a chart of accounts to isolate unallowable costs under FAR.
Two of the most common audit deficiencies identified during overhead audits include:
- Unallowable costs commingled with allowable costs and management’s failure to identify and remove those costs from the overhead rate
- An inadequate job cost system’s ability to identify and separate direct and indirect labor
Also, as a best practice, if purchases are made through a corporate credit card, always make sure the detailed receipt is provided along with the credit card statement. This will provide more information to the accounting department as well as the third-party reviewer to determine what the costs relate to and if the costs are allowable. Some common disallowed expenditures include:
- Charitable contributions or donations
- Life insurance costs for key employees
- Legal settlement expenditures
- Fines and penalties
- Interest expense
- Bad debt expense
- Alcoholic beverages
- Personal use of company vehicles
- Certain memberships
- Employee gifts and recreation
By obtaining an overhead audit, your firm will be able to participate in larger governmental contracts to help grow your business. An overhead audit can help assess the accuracy of your firm’s information and provide insight into the adequacy of internal controls. This will allow your company to better manage its job cost profitability and provide more accurate data for future job estimates. In addition, the audit costs are recoverable by the company.
Since an incorrect overhead calculation can lead to lost revenue not billed or overbilling the government, which would need to be repaid, you should consider hiring a CPA and advisory firm that has performed numerous overhead audits, has industry expertise, and is compliant with all continuing professional education requirements in accordance with Government Auditing Standards. The CPA firm should have specific knowledge of government procurement with several types of contracts and contract payment terms affecting the development and/or application of an allowable overhead rate.
For more information about how BKD can assist with your firm’s FAR compliance or overhead audit needs, please contact your BKD Trusted Advisor™ or fill out the Contact Us form below.