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Matched Legal Cases: ['art 31', 'art 31', 'art 31', 'art 31', 'art 31', 'art 31', 'art 31', 'art 9900', 'art 9900', 'art 31', 'art 31', 'arts 9900', 'art 31', 'art 31']

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1 CONSULTANT AUDIT GUIDE
2 TABLE OF CONTENTS Preface Page 2 Part I. Introduction Page 4 Part II. Definitions Page 6 Part III. Role of the State External Auditor in Accepting Overhead Audits Performed by Others Page 13 Example of Overhead Audit Report Checklist Page 14 Part IV. Contract Types and Audit Emphasis Page 16 A. Lump Sum (Fixed Price) B. Cost Plus Fixed Fee C. Unit Price (Negotiated Hourly Rate) Part V. Overhead Rate Development and Audit Report Presentation Page 18 A. Audit Standards and Allowable Cost Guidelines B. Contents of the Report Part VI. Consultant Field Offices Page 21 A. General B. Allowable Costs C. Guidelines Sample of Field Office Allocation Page 27 Sample of Overhead Audit Report, Overhead Rate Page 28 Calculation, Notes to Overhead report, Report on Internal Controls, Report on Compliance Acknowledgments Page 37 DCAA Cost Principle Assessment Attachment 1
3 PREFACE Over the last several years, there has been an increased use of consultant firms contracting with State Department of Transportation (SDOT s) to perform engineering and other related services. Correspondingly, there has been a workload increase for SDOT auditors providing financial information to management on the consultant firms. Auditors not only provide an audit function for the SDOT s, but also provide management with financial information on the firm s ability to perform work. A consultant firm, particularly one that is new to the State/Federal contracting process, may not be aware of the Federal Acquisition Regulations and other financial information necessary to support eligible costs. Even though there is more outsourcing of work by SDOT s, there has not been a corresponding increase in the amount of SDOT personnel to review or audit consultant proposals and contracts. SDOT auditors are asked to evaluate consultant agreements, accounting systems and claims often without adequate and effective guidance. Written procedures and processes may be SDOT specific and lack the uniformity to be used in more than one state. Recognizing the above situations, Southeastern State DOT auditors formed a Quality Financial Management Improvement (QFMI) team. The QFMI team developed a uniform guide intended to bring consistency to the consultant audit process. The purpose of the Guide is to provide consultants, independent audit firms and new SDOT auditors a basic understanding and a uniform reference guide for auditing and developing overhead costs. Listed in the back of this guide may be additional information and/or requirements provided by a respective SDOT. This is referred to as the Home Page. The respective SDOT is responsible for the maintenance and content of the Home Page information. Although there was a QFMI team developing the guide, there were contributions from SDOT auditors throughout the nation. Many of the contributors to the manual are listed in the Acknowledgments section at the back of the guide. The specifics in the guide are what the team believes are the BEST PRACTICES for the auditing of consultant firms. The Guide does not constitute a standard, specification, or regulation. 2
4 I. INTRODUCTION This Guide is presented to assist Consultants, Subconsultants, and all audit communities in determining the allowability of costs to be included in the preparation of Cost Proposals, and record-keeping, for State Department of Transportations (SDOT) throughout the United States. These guidelines and policies will also be utilized by the SDOT s Audit & Contract Offices in the performance of pre-award reviews, overhead rate audits, interim reviews/audits, final audits and post audits. Incorporated into these guidelines and policies are the following: The Code of Federal Regulations, Title 48, Chapter 1 - Federal Acquisition Regulations ("FAR"), Part 31--Contract Cost Principles and Procedures, Schedules of Overhead Costs reconciled to the financial statements, adjusted by regulations contained in FAR Subpart Contracts with Commercial Organizations The guidelines and policies set forth in the following pages summarize the Code of Federal Regulations, Title 48, Chapter 1 - Federal Acquisition Regulations, Subpart Contracts with Commercial Organizations, and FAR Subpart Cost Accounting Standards. The attached guidelines and policies are intended as a summary only, and are not to be considered a complete statement of cost principles. Many of the quotations that follow, which were extracted directly from Subpart 31.2, include references to other sections of the FAR. The reader will need to refer to Subpart 31.2 for the complete text. In addition, the FAR is constantly being updated. It is important that revisions be reviewed on a regular basis as such revisions will be implemented as they are made available to the public. 3
5 FOR ENGINEERING AND OTHER FIRMS DOING WORK FOR DOT S, AS CONTRACTORS (CONSULTANTS) OR SUBCONTRACTORS (SUBCONSULTANTS): DOT s rely on the Federal Acquisition Regulations (FAR), Title 48, Chapter 1, Part 31-- Contract Cost Principles and Procedures when negotiating costs and reviewing the proposals. In addition, DOT's rely on financial statements prepared in accordance with GAAP (Generally Accepted Accounting Principles, including full-disclosure notes) and reconciled schedules of overhead costs adjusted by regulations contained in Subpart Contracts with Commercial Organizations in assessing a Consultant or Subconsultant's financial capability and the allowability of Indirect or Overhead Cost Rates. It should be noted that overheads prepared on a basis of accounting practices prescribed by Part 31 of the FAR s are not intended to be a presentation in conformity with GAAP. Overhead audits are conducted in accordance with GAGAS (Generally Accepted Government Auditing Standards), and generally accepted auditing standards. Individuals or firms who prepare schedules of indirect or overhead costs should use full disclosure financial statements, prepared in accordance with GAAP, as a basis for such schedules; these schedules will need to be adjusted for unallowable costs as specified in the most current 48 CFR Part 31, as well as specific DOT guidelines, state regulations, and policies. Consultants or Subconsultants needing advice on these matters should contact professionals familiar with the above. A complete listing of the FAR s can be found on the Internet at 4
6 II. DEFINITIONS The following terms are used throughout this document. Accounting System A set of records (journals, ledger, work sheets, trial balances, and reports) and the procedures and policies regularly used to process business transactions. An effective accounting system should provide for efficient processing of data, ensure a high degree of accuracy, provide for internal controls, and provide for the growth of a business. Accounting System Review An evaluation of an entity s accounting system to determine if the accounting system is capable of properly segregating direct and indirect costs as well as its ability to properly classify job costs. Actual Cost Agreement An agreement between the consultant and the DOT, which specifies that the costs actually incurred by the consultant, during the performance of the project, will be reimbursed, as limited by any contract provisions and state or federal regulations. Actual Costs Amounts determined on the basis of costs incurred and supported by original source documentation, as distinguished from forecasted costs. Advance Agreement An understanding included in an agreement by the contracting officer and the consultant as to the treatment of special or unusual costs not already included in the FAR s. The agreement must be in writing and executed by both the contracting parties. An advance agreement will contain a statement of its applicability and duration. 5
7 Agreement A contract. A binding, legal, document which identifies the deliverable goods and services being provided, under what conditions, and the method of payment for such services. The document may include federal criteria and state requirements which will have to be adhered to by the state and the consultant. The document will usually indicate start and finish dates, record retention requirements, and other pertinent information relative to the actual work to be performed. Allocable A cost that benefits both the contract and other work of the firm, and it can be distributed in reasonable proportion to the benefits of incurring that cost. Allowable (Cost) An item of cost which can be billed directly as a project cost or indirectly as an overhead cost by the consultant and meets the requirements of the applicable FAR's. Audit An examination of accounting and related records, including verification of records, certification of correctness of balances, reviewing the system, assessing risk, testing internal controls, and testing evidence. The objectives of an audit are to express an opinion as to the fair presentation of the schedules being audited, and report on compliance with laws and regulations, and internal controls. Audit Program Outline of the audit procedures the auditor plans to use to gather evidence needed to achieve his objective of expressing an opinion, as to the fair presentation of the schedule/statements being audited. Audit Resolution Process The process DOT management and the auditee go through in resolving audit findings and questioned costs. Audit Trail The auditable record left by a transaction in a firm's accounting records from original source documents into subsidiary ledgers through the general ledger and into financial statements. 6
8 Billing Rate The hourly rate being charged for work on an agreement. Common Control Exists in related party transactions when business is conducted between businesses and/or persons that have a family or business relationship. The possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an enterprise through ownership, by contract, or otherwise. To have significant influence over business matters. Corporation A business structure where stock is made available for purchase. The firm may have a president, vice president, treasurer, and secretary. In theory, the liabilities of the individual stock owners are limited in this type of business structure. Cost Center Collection of cost data in an organized manner, such as through a system of accounts. Cost Objective A function, organizational subdivision, contract or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost of processes, products, jobs, capitalized projects, etc. Cost Principles The underlying basis for determining how costs should be recorded when they are allowable or unallowable, and the specific basis for treating various costs as either allowable or unallowable. The applicable cost principles for architectural and engineering contracts are 48 CFR Chapter 1 Subpart 31, as well as DOT s guidelines and policies. Direct Cost Any cost that can be identified specifically with a particular final cost objective, i.e., a project related cost. Direct costs would include labor, materials, and reimbursables incurred specifically for an agreement. 7
9 Entrance Conference A meeting between the auditor and the auditee, at which time the purpose and scope of the audit are discussed. Exit Conference A meeting held after the auditor completes field work. Topics of discussion are preliminary findings of the audit, which are subject to change and revision during the supervisory work paper review process, and/or a formal request for the auditee's response. Field Office Any office which the consultant or contractor specifically establishes or has furnished to them at or near the project site to be used exclusively for project purposes. The office may be a trailer, building, room or series of rooms established for consultant personnel. Neither the number of personnel nor their mix by work classifications will have any bearing on this definition. General and Administrative Expenses Any management, financial, and other expense which is incurred by or allocated to a business unit, and which is for the general management and administration of the business as a whole. Typically, these costs are presented as overhead components. Indirect Cost Any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. Consultants recover their indirect costs in their overhead rate. Ineligible Costs A firm's expenditures for labor, materials, equipment, equipment rental rates, or any other cost found to be unallowable for overhead or direct costing purposes. Interim Audit An audit, which may be of limited scope, during the life of an agreement, and before the completion of the project. The purpose is to determine the actual allowable costs to date. This audit follows a standard audit plan. 8
10 Internal Control A process effected by an agency s management and other personnel, designed to provide reasonable assurance that the objectives of the agency are being achieved in the following categories: C Effectiveness and efficiency of operations including the use of entities resources. C Reliability of financial reporting, financial statements, and other reports for internal and external use. C Compliance with applicable laws and regulations. Lump Sum Agreement An agreement where the method of payment for delivery of goods and services is one set amount that includes salaries, overhead, profit and direct expenses with no adjustments (unless there is a change in the scope of work). The states vary on this definition: see Home Page for a specific state for the components of a lump sum agreement. Negotiated Hourly Rate For a few sole proprietors and partnerships, it may be difficult to determine an actual hourly payroll rate for principals due to fluctuations in draws and profits. It may be in the best interest of the contracting parties to negotiate an hourly rate based upon the consultant's actual work assignment and reasonableness, rather than based on historical cost data. Overhead Expenses Allowable general administrative expenses and all other indirect costs including fringe benefits (sometimes called payroll additives). Overhead Rate A computed rate developed by adding all of a firm's general and administrative costs, and all other indirect costs, then dividing by a base value, usually direct labor dollars to get a percentage. This rate is normally compiled based on the consultant s applicable fiscal year. Overhead Rate Audit A verification of the allowableness of overhead expenses. May be performed prior to preaward review, during contract progress, or after contract completion. 9
11 Partnership A business with two or more co-owners, who may or may not have established salaries. The liabilities of the firm are their responsibility. Owners may be treated the same as sole proprietors by the Department regarding the establishment of a salary rate. Post/Final Audit An audit performed after the completion of all work by a consultant. The scope may include all billed costs by the prime consultant and/or any subconsultants providing services. This audit follows a standard audit plan. Pre-award Review A review conducted on behalf of DOT management for the purpose of validating financial information supplied by a consultant in a cost proposal. It includes a preliminary assessment of the adequacy of the consultant s internal control policies and accounting procedures for supporting costs, direct or indirect, billed under cost reimbursement types of contracts. Pre-award procedures can be done in-house through desk reviews or through actual field audits or pre-award audits. Reasonable Cost A cost, if in its nature and amount, does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Review A review is substantially less in scope than an audit and does not contemplate an evaluation of internal accounting control, tests of original accounting records, tests of submitted records traced to the original source, verification of responses to inquiries by obtaining corroborating evidential matter, and certain other procedures ordinarily performed during an audit. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. Sole Proprietorship An unincorporated business with one owner. From an audit standpoint, this person may or may not have an established salary, but instead may rely on draws from the profits of the firm to obtain their payment for services. The liabilities of the firm are the owner's responsibility. 10
12 Source Documentation Original documents, including but not limited to time sheets, invoices, payroll records, rental slips, gasoline tickets, canceled checks, tax returns, insurance policies, minutes of corporate meetings, etc., which support the costs recorded in the firm's accounting ledgers and which may be used for billing purposes to the government or for income tax purposes. Unallowable (Cost) An item of cost which cannot be billed directly or indirectly by a consultant. These type of costs will be deducted from the costs billed directly, or from those billed indirectly via an overhead rate or cost center. When an unallowable cost is incurred, its directly associated costs are also unallowable. 11
13 III. Role of the State External Auditor in Accepting Overhead Audits Performed by Others The overhead audit will be performed by an independent Certified Public Accountant, an agency of the Federal government, a state transportation agency or similar independent audit organization. Auditors must meet the Yellow Book s (Government Auditing Standards) requirement of 24 hours of continuing professional education in governmental subjects every two years. The SDOT auditors have the right to review the CPA work papers before an overhead audit report is accepted. The auditor may perform a review of the CPA work papers as part of Quality Assurance Review in accepting the CPA Overhead Audit. As a minimum, SDOT auditors should review overhead audit reports. An example of a checklist to review audit reports follows this section. 12
14 Example of Overhead Audit Report Checklist Overhead Audit Report Checklist Consultant: Date Reviewed: Auditors Initials: Circle each number which is not in compliance. 1. The report indicates what Governmental Agency or CPA issued the report. 2. The consultant submitted an audit or if a newly organized company a projected Revenue and Expense for their first fiscal Year. 3. Is there a overhead for the latest fiscal year? 4. Is there an opinion given on the burden, fringe, and overhead costs? 5. Is there a detailed analysis of fringe benefits? 6. Does the overhead report appear to have the FAR s applied to the account balances in accordance with the Department s requirements? 7. Is the field office overhead rate computed in accordance with Department guidelines? 8. Does the overhead audit report include a statement by the auditor that the audit was conducted in accordance with applicable Generally Accepted Government Auditing Standards for financial and compliance audits, applicable requirements of Subpart 9900 and 31 of the FAR s, and other procedures required by the Department? 9. Does the report contain a statement on the existence of a job cost system for recording and accumulating costs incurred under its contracts, that is reconciled to the general ledger? 13
15 10. Does the audit include a statement explaining the Consultant s estimating system and whether estimates are prepared in accordance with the accounting system? 11. Does the report include a list of expenses the Consultant normally bills directly to projects? 12. Is the overhead calculated on a direct labor basis? 13. Does the submittal include a report or statement on internal accounting controls and s required? 14
16 IV. CONTRACT TYPES AND AUDIT EMPHASIS Following are the primary types of contracts that are mainly entered into by the DOT s and consultants, and the area where emphasis is placed during the audit. A. Lump Sum (Fixed Price)- A lump sum contract has one set amount for reimbursement, which includes all salaries, overhead, profit, and other direct expenses. Once the lump sum amount is agreed upon, the goods or services must be provided regardless of the actual cost for the consultant. The audit emphasis is placed on the proposal, during the pre-award stage. Because the amount cannot be changed once the contract is signed, unless there is a change in the scope of work, whereby a supplemental agreement may be executed, the auditors must verify that the rates included in the proposal are reasonable and supported by historical records. As such, the auditors will perform a thorough review of all proposed costs, including salary rates, overhead, and other direct expense amounts, and the auditors will review the accounting system, to verify that it segregates direct and indirect costs. B. Cost Plus Fixed Fee- A cost plus fixed fee contract is based on the actual costs incurred by the consultant, including salaries, overhead, and other direct expenses, with a fixed amount of fee to be paid upon completion of the project. The costs are reimbursed based on supported records and limited to any contract provisions and state or federal regulations. The audit emphasis is placed more at the end of the project, although a pre-award review is performed to verify the reasonableness of the proposed costs, which the contract is based upon. In addition, the accounting system of the consultant is reviewed to determine if it can adequately segregate and accumulate direct and indirect expenses, and if it has job costing capabilities. A final audit/review performed on the project would verify the actual hours and rates for personnel on the project. Overhead may be adjusted to the actual supported overhead rate for each year of the contract life. Direct expenses would be verified to actual support documentation, including invoices, travel expense forms, receipts, etc. C. Unit Price (Negotiated Hourly Rate)- A unit price contract consists of a set rate to be charged on the project for each hour worked on the job. The negotiated rate typically consists of an hourly rate, overhead, and a profit. There may be different rates for each 15
17 type of job classification that would be charging on the project. The audit emphasis is placed on the proposal, during the pre-award stage, so that the negotiated hourly rate will be based on a fair and reasonable rate. A final audit/review performed on the project would verify the actual hours worked, but would apply the negotiated hourly rate to each hour billed on the project. Any direct expenses would also be verified to support documentation. 16
18 V. Overhead Rate Development and Audit Report Presentation A. Audit Standards and Allowable Cost Guidelines The audit will be performed in accordance with Generally Accepted Government Auditing Standards (1994 Revision) and will include such tests of the accounting records and such other auditing procedures as considered necessary to determine allowability of costs in accordance with: i. Federal Acquisition Regulations, Subpart 9900 Cost Accounting Standards. ii. Applicable contract cost principles and procedures as set forth in the Federal Acquisition Regulations (FAR), Title 48, Part 31. iii. State Department Guidelines, and information on the Home Page (The Home Page is the State specific requirements located at the back of this Guide). B. Contents of the Report i. Overhead Rates Normally, fringe benefits and general overhead rates are determined on an annual basis. Subpart of the FAR s f (1) (2) recognizes cases where the consultant has undergone such extensive reorganization that the overhead rate for the most recently completed year does not reflect a current valid overhead rate, the consultant has only recently established an acceptable accounting system or a change in fiscal years has occurred. The fringe benefits and general overhead rates will be determined by removing those costs considered not allowable in accordance with the criteria listed above from the fringe benefits and general overhead pools and dividing the remainder by the direct labor dollars. If the consultant s normal accounting practice provides rates on a basis other than direct labor or includes other overhead rates (i.e., general and administrative), the overhead audit should provide a conversion to a 17
19 direct labor dollar basis. The conversion to direct labor basis is necessary to assure consistency. A copy of a sample audit report is included in the guide for informational purposes. ii. Evaluation of Accounting System The overhead audit must include an evaluation as to the adequacy of the consultant s accounting system. iii. Estimating System The auditor must provide a statement in the audit report regarding the consultant s method of estimating costs for pricing purposes. The statement must indicate whether or not the consultant s method of estimating costs is consistent with the accumulation and reporting of costs under its accounting system. iv. Direct Costs Billing Rates The overhead audit report must include billing rates and the methodology used for establishing such rates for Computer Aided Drafting and Design (CADD), computers, plotters or other similar costs which the consultant charges to clients on a direct basis. If the consultant consistently charges printing, copying or other in-house produced services to clients on the basis of an established schedule, a copy of the schedule, with assurance from the auditor that the fees are consistently charged to all clients, must be attached to the audit report. These costs must be accounted for this way in the accounting system. The audit report must provide assurance that such costs are not also included in the overhead pools. Such costs will not be allowed as direct charges in subsequent negotiations unless the billing rates are a pass through expense and may not include profit or interest. v. Facilities Capital Cost of Money In addition to a consultant s overhead rate, DOT can reimburse firms for Facilities Capital Cost of Money (FCCM). The audit report must include a statement on how the rate was calculated. 18
20 VI. Consultant Field Offices A. General: The Department generally allows its consultants to perform contracted services from their established home or branch offices. However, on certain projects such as construction engineering and inspection (CEI), the consultant will be required to establish a field office at or near the job site. The establishment of the field office, its staffing and its operational costs will be determined by project needs and negotiated with the consultant. In most cases, the field office operations and staffing will be held to a minimum and the consultant s home or branch office will be expected to provide essential support services. B. Allowable Costs: The allowability of costs will be determined in accordance with criteria contained in the Code of Federal Regulations, Title 48, and other applicable Federal and State regulations. The decision on whether a cost should be allowed as direct or indirect depends largely on the consultant s normal and customary practices for estimating and accounting. These practices should be outlined in the consultant s annual overhead audit and must be followed during contract pricing and negotiations. C. Guidelines: (1) Direct Costs a. The scope of services required by the Department contract may vary from routine projects of short duration to complex projects which last for several years. The complexity of the project, its duration and location and the consultant s general accounting practices will be considered during the determination of which direct costs will be allowed on individual projects. 19
21 b. The Department will allow direct labor costs required for field office operations as well as home or branch office direct labor costs which are specifically identified and approved. The job classifications, man-hours, wage rates, etc., which are allowable will be determined during contract negotiations between the Department and the consultant. As a general rule, the home or branch office direct labor will be limited to those essential services which must be provided from the home or branch office and can be provided from there more effectively or economically. c. As a general rule, the Department expects the consultant to provide the necessary equipment to handle projects which require a field office and operations associated with it. Should the consultant not own or have access to the required equipment items, whether the items should be leased, purchased, or allowed in some other manner as a direct cost or indirect cost, will be decided during contract negotiations. Consistency with the consultant s normal accounting practices and the Department s normal contracting practices will be considered. Other costs will also be evaluated during contact negotiations and their allowability as a direct or indirect cost will be established. On occasion, the Department s construction contractor may be required to provide the field office and its related equipment and operating costs. However, the CEI consultant will remain responsible for providing all other equipment, supplies, etc. necessary for the project. d. Following is a sample of the direct costs normally associated with the operations of a field office. The list is not all inclusive, but it provides the general types of costs which are expected in a field office operation. Each state allows different items of costs in a field office -- please see the Home Page for specifics. 1. Office Facility (rent/lease/purchase) - The direct cost of office space is allowable provided the office is established specifically for the DOT project and will be used solely for the project. 2. Office Equipment (rent/lease/purchase) - Costs necessary to equip the office facility to DOT standards are allowable. 20
22 3. Operational Costs (utilities, water, electricity, maintenance, repairs, janitorial, etc.) - Costs are allowable. 4. Insurance - The cost is allowable if project specific. 5. Office operations (supplies, reproduction, printing, postage, telephone, etc.) - Costs are allowable. 6. Autos, Trucks, Other Vehicles (rent/lease/purchase) - Costs are allowable if the items were specifically acquired for the project. Only those costs which are directly related to project use are allowable. 7. Vehicle Operating Costs (gas, oil, repairs, maintenance, insurance, etc.) - Costs which are directly related to project use are allowable. 8. Field/Testing Equipment and Supplies (survey instruments, nuclear density equipment, binoculars, hammers, ladders, diving equipment, protective clothing, hard hats, boots, etc.) - Field/Testing equipment and supply costs which are considered necessary by the project manager are allowable. 9. Communication Equipment (radios, beepers, etc.) - The costs of specifically required items are allowable. 10. Computers - Direct cost may be allowable on an hourly rate basis, provided the consultant can support the basis for the hourly rate and such cost is routinely charged as direct cost in the consultant s accounting system. The purchase or lease of computer equipment as a direct cost will not be allowed unless specifically required by the project and approved by the Department. 11. Travel/Relocation - Project related costs, not exceeding the limitations will be allowed. 12. Subconsultants/subcontractors (including Surveyors, Outside 21
23 Geotechnical, etc.) - Costs are allowable if project related and specifically approved. e. Approved costs which are directly identified with the project and consistently treated as direct costs in the consultant s accounting records will be allowed as direct project costs. If a cost is not specifically incurred for a project and identified with that project, it may not be claimed as a direct cost. However, it may be allowed as part of the indirect costs which are allocated to the field office indirect cost pool. f. As a general rule, the method of acquisition for any capital asset (item costing $500 or more and having a life expectancy of 1 year or more) will be determined through a lease versus purchase analysis. The type of asset, its value, life expectancy, time of use on the project, residual value, etc. will be considered in the determination of whether to lease, purchase, pay use charges, or use other methods of compensation for capital assets. Should the acquisition of capital assets as a direct cost be required for a particular project, the ownership and disposition of the assets will be determined during contract negotiations. The Department will not normally take ownership of acquired assets, but will require either the consultant to provide a residual value for the unused life of the asset, or the consultant will be provided with specific instructions regarding disposition of the asset. In either case, the Department requires that an equitable credit be obtained from the consultant. PROFESSIONAL LIABILITY INSURANCE WILL NOT BE ALLOWED AS A DIRECT COST ON DEPARTMENT PROJECTS UNLESS THE INSURANCE IS PURCHASED SPECIFICALLY FOR THE DEPARTMENT PROJECT. (2) Indirect Costs a. As a general rule, the Department does not require extensive staffing of its consultants field offices. Most administrative and management functions will be performed in the home or branch office. Therefore, an equitable 22
24 portion of these office s indirect costs should be allocated to the field office. The costs which are allocated and the basis for the allocation depends largely on the results of the contract negotiations as well as the consultants customary accounting practices. b. Fringe Benefits - The fringe benefits applicable to the field office direct labor costs should be allocated to the field office overhead pool. If the consultant s accounting records do not maintain separate identity for field office fringe benefits, the fringe benefits may be allocated on a direct labor basis (e.g., field office direct labor divided by total direct labor). c. Indirect Labor - Indirect salaries (accounting, legal, purchasing, personnel, management, etc.) will be allocated to the field office overhead pool on a direct labor basis (field office direct labor divided by total direct labor). d. Indirect Expenses - As a general rule, home or branch office indirect expenses will be allocated to the field office overhead pool on a percentage basis which is determined by dividing the allocated indirect labor by the total home or branch labor (direct and indirect). Certain indirect expenses such as depreciation, repairs and maintenance and field supplies which directly benefit only the field offices and which can be specifically identified may be allocated entirely to the field office overhead pool. e. When allocating indirect costs, it must be understood that the title of a particular cost account is not reason enough to determine whether the costs contained therein are allowable and allocable. A review of internal controls, compliance requirements and an independent audit of the overhead is necessary to make that determination. f. An example of a field office allocation in accordance with this guideline follows this page, although each state will have its own recommended allocation method. See each state s Home Page for the specific method recommended. 23
25 EXAMPLE OF ALLOCATING OVERHEAD TO A FIELD OFFICE FIELD OFFICE OVERHEAD DIRECT LABOR: FRINGE BENEFITS Insurance-Group Insurance-Life Payroll-Bonus Payroll-Jury Duty Payroll-Holiday Payroll-Sick Payroll-Vacation Payroll-Taxes Home Field ALLOCABLE EXPENSES $111,354 $4,197 $164,650 $925 $83,722 $22,343 $90,838 $240,003 $718,032 $1,343,665 $948,220 $2,291,885 UNALLOWABLE EXPENSES ($670) ($670) ALLOWABLE EXPENSES $111,354 $3,527 $164,650 $925 $83,722 $22,343 $90,838 $240,003 $717,362 ALLOCATION FIELD HOME OFFICE OFFICE $46,067 $65,287 $1,459 $2,068 $68,116 $96,534 $383 $542 $34,636 $49,086 $9,243 $13,100 $37,580 $53,258 $99,289 $140,714 $296,773 $420,589 ALLOCATED TO FIELD 41.37% 41.37% 41.37% 41.37% 41.37% 41.37% 41.37% 41.37% GENERAL OVERHEAD Accounting & Legal Advertising & promotion Auto Expense Bank charges Computer Service Continuing Education Convention & Seminars Depreciation & Amortization Dues, memberships, licenses Employees welfare Equipment Rental Insurance - Auto & trucks Insurance-general Insurance-workers comp Miscellaneous expenses Office supplies & expenses Indirect labor Postage & delivery Professional Fees Rent-Building Repairs & Maintenance Subscriptions Survey Supplies Taxes Telephone Travel Travel-Meals Utilities State Income Tax Gain on Sale of assets Contributions Entertainment $9,357 $3,362 $60,665 $213 $6,288 $7,407 $5,144 $138,625 $4,590 $11,197 $23,481 $29,683 $204,035 $17,584 $5,189 $79,429 $621,191 $15,557 $32,259 $100,173 $42,831 $6,178 $24,318 $11,923 $38,299 $15,476 $2,344 $20,732 $9,400 $0 $698 $9,851 $1,557,479 ($3,413) ($972) ($320) ($1,622) ($2,908) ($49,973) ($5,455) ($65) $500 ($698) ($9,851) ($74,777) $9,357 $3,362 $57,252 $213 $6,288 $6,435 $5,144 $138,625 $4,270 $11,197 $21,859 $26,775 $154,062 $12,129 $5,189 $79,429 $621,191 $15,557 $32,259 $100,173 $42,831 $6,178 $24,318 $11,923 $38,299 $15,411 $2,344 $20,732 $9,400 $500 $0 $0 $1,482,702 $1,224 $440 $7,489 $28 $822 $842 $673 $18,132 $559 $1,465 $2,859 $3,502 $20,151 $1,586 $679 $10,389 $256,987 $2,035 $4,219 $13,103 $5,603 $808 $3,181 $1,559 $5,010 $2,016 $307 $2,712 $1,230 ($65) $0 $0 $369,545 $8,133 $2,922 $49,763 $185 $5,466 $5,593 $4,471 $120,493 $3,711 $9,732 $19,000 $23,273 $133,911 $10,543 $4,510 $69,040 $364,204 $13,522 $28,040 $87,070 $37,228 $5,370 $21,137 $10,364 $33,289 $13,395 $2,037 $18,020 $8,170 $565 $0 $0 $1,113, % 0.00% 0.00% FRINGE BENEFITS Field 296,773/948,220 = 31.30% Home 420,589/1,343,665 = 31.30% GENERAL OVERHEAD Field 369,545/948,220 = 38.97% Home 1,113,157/1,343,665 = 82.77% Indirect salaries were allocated to field office on the basis of field office direct labor divided by total direct labor (948,220/2,291,885 = 41.37%) Indirect expenses supporting field office were allocated to the field office on the basis of the allocated indirect salaries divided by total home office salaries 256,987/ (1,343,665/621,191) = 24
26 Sample of Overhead Audit Report INDEPENDENT AUDITOR S REPORT ON STATEMENT OF DIRECT LABOR, FRINGE BENEFITS AND GENERAL OVERHEAD The Board of Directors Consultants, Inc. We have audited the Statement of Direct Labor, Fringe Benefits and General Overhead of Consultant s, Inc. (the Company) for the year ended, 19. This statement is the responsibility of the Company s management. Our responsibility is to express an opinion on this statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards and the financial audit standards contained in the Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Statement of Direct Labor, Fringe Benefits and General Overhead. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement was prepared on a basis of accounting practices prescribed in Part 31 of Federal Acquisition Regulations and certain other federal and state regulations as discussed in Note 2, and is not intended to be a presentation in conformity with generally accepted accounting principles. In our opinion, the Statement of Direct Labor, Fringe Benefits and General Overhead for the year ended, 19 presents fairly, in all material respects, the direct labor, fringe benefits and general overhead of the Company for the year ended, 19 on the basis of accounting described in Note 2. 25
27 In accordance with the Government Auditing Standards, we have issued a report dated, 19 on our consideration of the Company s internal control over financial reporting and its compliance with laws and regulations. This report is intended solely for the use and information of the of Consultant, Inc. and Government Agencies or other customers related to contracts employing the cost principles of the Federal Acquisition Regulations and should not be used for any other purpose. This restriction is not intended to limit the distribution of this report, which is a matter of public record., 19 26
28 OVERHEAD EXAMPLE - CONSULTANTS, INC. Statement of Direct Labor, Fringe Benefits and General Overhead For the Fiscal Year Ended December 31, 1997 Description Direct Labor Total Cost Per General Ledger/Income Statement $11,542,664 DOT Adjustments Notes DOT Adjusted Balances $11,542,664 Percent of Account To Total Pool Allowable Costs Allocated to Field Home Office Office $154,094 $11,388,570 FRINGE BENEFITS Paid Leave Payroll Taxes Group Insurance Workman's Compensation TOTAL FRINGE BENEFITS $718, , ,337 39,837 $1,915,924 $718,660 $619,090 $538,337 $39,837 $1,915, % 5.72% 4.98% 0.37% 17.72% 9,594 8,265 7, $25, , , ,150 39,305 $1,890,346 GENERAL OVERHEAD Indirect Labor Rental Maintenance & Repairs Travel Insurance Telephone Printing Utilities Taxes Depreciation Dues & Subscriptions Marketing Employee Training, Recruitment Professional Fees Interest Bad Debt Expense Computer Automotive Expense Supplies & Miscellaneous Totals $4,340, , , , , , , , , , , , , , , , , , ,085 $10,557,930 ($60,555) (6,592) (9,779) (3,612) (51,392) (86,565) (41,421) (96,438) (29,099) (19,539) (872,145) (326,495) (55,567) ($1,659,199) $4,340,250 $420,985 $233,908 $226,109 $424,921 $324,212 $218,641 $302,054 $246,071 $323,092 $113,292 $393,648 $367,645 $202,232 $0 $0 $358,873 $189,280 $213,518 $8,898, % 3.89% 2.16% 2.09% 3.93% 3.00% 2.02% 2.79% 2.28% 2.99% 1.05% 3.64% 3.40% 1.87% 0.00% 0.00% 3.32% 1.75% 1.97% 82.28% $57,942 1, ,565 1, , , ,450 1, , $74,733 $4,282, , , , , , , , , , , , , , , , ,731 $8,823,998 OVERHEAD RATE 93.69% 65.10% 94.08% Note References: 1 - Assets acquired by means of capital leases may not be expensed per FAR ; additional costs were questioned as a result of common ownership per FAR Travel costs attributable to the collection of bad debts are unallowable per FAR Officer's life insurance premiums were questioned per FAR Assets acquired by means of capital leases may not be expensed per FAR Federal income taxes are unallowable per FAR Depreciation expense attributable to the personal use of vehicles is unallowable per FAR Unallowable dues were questioned per FAR Marketing costs were questioned per FAR (f). 9 - Unallowable entertainment costs were questioned per FAR Corporate reorganizational costs are unallowable per FAR Interest expense is unallowable per FAR Bad debt expense is unallowable per FAR Direct costs are unallowable per FAR
29 CONSULTANT, INC. Notes to Statement of Direct Labor, Fringe Benefits and General Overhead, For the Year Ended, 19. (1) The Company Consultants, Inc. (the Company) is a professional design and engineering firm providing consultation in the area of planning, engineering and design. The Company s projects are diverse, including industrial and public facilities, transportation and infrastructure. The Company was founded in 1962, and its clients include private sector businesses, public utilities, architect-engineers/contractors, and all level of government. Revenues are derived from billings for services, equipment and reimbursable expenses. The Company has approximately 50% governmental and 50% commercial contracts. Revenues are recognized on these contracts as costs are incurred. (2) Basis of Accounting and Description of Accounting Systems The Company s policy is to prepare its overhead schedules, which support the statement of direct labor, fringe benefits and general overhead, on the basis of accounting practices prescribed by Subparts 9900 and Part 31 of the Federal Acquisition Regulations (FAR). Accordingly, the above mentioned statement is not intended to present the results of operation of the Company in conformity with Generally Accepted Accounting Principles. The Company maintains a job-order cost accounting system for recording and accumulating of costs incurred under its contracts. Each project is assigned a job number so that costs may be segregated and accumulated in the Company s job-order cost accounting system. The Company s method of estimating costs for pricing purposes during the proposal process is consistent with the accumulation and reporting of costs under its job-order cost account system. 28
30 (3) Field Office In calculating the field office pool, the allocation to indirect labor and fringe benefits is based upon the ratio of field office direct labor to total direct labor. The remaining field office pool allocation will be based upon the ratio of field indirect labor allocation to total home office labor. The direct labor dollars for the field office represent the 1996 wages of the individuals specifically identified by the Company as physically working at the field office site. (4) CADD Machine Costs Effective January 1, 1994 the Company began to account for CADD machine costs as direct reimbursable costs. Prior to that date, CADD machine costs were accounted for as overhead. This rate does not include any profit margin. The audited CADD rate for the year ended, 19 is $19.21 per hour. Some states do not allow CADD to be billed directly; therefore, if a firm charges CADD directly, this paragraph must show the dollar amount of CADD expenses that would be added back to the overhead computation. (5) Facilities Capital Cost of Money The Company s audited facilities capital cost of money for the year ended, 19 is %. 29
31 1 Computation of FCCM rate. CONSULTANTS, INC. Facilities Capital Cost of Money For the Fiscal Year Ended December 31, 1997 Balance Balance January 1, 1997 December 31, 1997 Capital Assets $ 6,125,310 $ 6,423,980 Average Net Book Value $ 6,274,645 Average US Treasury Rate % Facilities Capital Cost (Average X Rate) $ 411,774 Direct Labor Base $ 11,542,664 Facilities Capital Cost of Money Factor % (Cost/Direct Labor Base) (6) Allocation of Expenses The Company consistently bills its clients for the following direct costs: Travel, Graphics, outside reproduction, telephone, subconsultants 1 Current Treasury rate may be obtained at: 30
32 (7) Summary The following tabulations summarize the allowable overhead rates incurred by the Company for the year ended, 19 : Home Field Description Office Office Fringe Benefit Rate % % General Overhead Rate % % Combined Rate % % 31
33 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE AND INTERNAL CONTROLS The Board of Directors Consultants, Inc. We have audited the Statement of Direct Labor, Fringe Benefits and General Overhead of Consultants, Inc. (the Company) for the year ended, 19 and have issued our report thereon dated, 19. We conducted our audit in accordance with generally accepted auditing standards and the financial audit standards contained in the Government Auditing Standards issued by the Comptroller General of the United States. Compliance As part of obtaining reasonable assurance about whether Consultants, Inc. s schedule is free from material misstatement, we performed tests of the Company s compliance with certain provisions of laws, regulations and contracts, including the provisions of the applicable sections of Part 31 of the Federal Acquisition Regulation, noncompliance with which could have a direct and material effect on the determination of the schedule amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing our audit, we considered Consultant s Inc. s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the schedule and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all 32
34 matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. This report is intended solely for the use and information of the Consultant, Inc. and government agencies or other customers related to contracts employing the cost principles of the Federal Acquisition Regulation. This restriction is not intended to limit the distribution of this report, which is a matter of public record. NOTE: Please submit the letter that you sent to management when you have weaknesses in the internal control, but the weaknesses are not considered material enough to include in the report. 33