Key Risk Areas in A/E Firm Indirect Cost Rates Presented by Dan Purvine, A/E Clarity Consulting and Training, LLC

Topics Overview of key risk areas – Labor charging – Compensation – Non-labor costs Audit testing of key risks Copyright 2015 A/E Clarity Consulting and Training, LLC

Learning Outcomes After completing this session, you should be able to: Summarize key risk areas in A/E firm indirect cost rates Describe testing performed of key risk areas Copyright 2015 A/E Clarity Consulting and Training, LLC

Key Risk Areas Labor costs – Allocation of labor cost – Allowability – Valuation – Overtime premium, uncompensated overtime Compensation – Bonuses – Executive compensation Copyright 2015 A/E Clarity Consulting and Training, LLC

Key Risk Areas (Cont.) Allowability of specific types of costs – Travel costs – Meals – Selling costs – Vehicles Copyright 2015 A/E Clarity Consulting and Training, LLC

Key Risk Areas – Labor Costs Proper allocation to direct and indirect is highest risk Relies on: – Strong control environment – Policies and procedures – Communication from management – Monitoring Copyright 2015 A/E Clarity Consulting and Training, LLC

Key Risk Areas – Labor Costs (Cont.) Allowability: – FAR-unallowable labor costs incurred for activities such as entertainment, lobbying, etc. Valuation: – Overtime premium – Uncompensated overtime Copyright 2015 A/E Clarity Consulting and Training, LLC

Overtime Premium Methods to account for overtime premium: – Treat as overhead cost – Assign to projects / overhead based on the activity causing the overtime Copyright 2015 A/E Clarity Consulting and Training, LLC

Uncompensated Overtime Costs Expectation is that A/E firms will record all hours worked for all employees Two methods described in Audit Guide: – Salary variance method – Effective rate method DCAM describes other methods and materiality Copyright 2015 A/E Clarity Consulting and Training, LLC

Testing of Labor Costs Evaluate labor charging policies and procedures: Timekeeping controls Proper allocation of direct and indirect time Recording of all hours worked Proper treatment of uncompensated overtime Policy for recording of paid overtime and overtime premium Copyright 2015 A/E Clarity Consulting and Training, LLC

Testing of Labor Costs (Cont.) Internal control and substantive testing: Timesheet testing – Should be risk-focused – Test allocation and valuation of cost Labor reconciliations – Payroll to G/L to job costing system – G/L to Form 941’s Copyright 2015 A/E Clarity Consulting and Training, LLC

Key Risk Areas – Compensation Allowability Bonuses Executive compensation / reasonableness Copyright 2015 A/E Clarity Consulting and Training, LLC

Compensation Allowability – FAR General Criteria FAR (a) requires: 1)Work performed in current year 2)Total comp reasonable for work performed 3)Established plan or practice 4)New compensation plans or major revisions 5)Cost not otherwise unallowable 6)Compensation for certain individuals requires special consideration Copyright 2015 A/E Clarity Consulting and Training, LLC

Bonus Allowability FAR requirements DCAA guidance AASHTO Audit Guide Copyright 2015 A/E Clarity Consulting and Training, LLC

Bonus Allowability (Cont.) FAR states the following: (1) Bonuses and incentive compensation are allowable provided the- (i) Awards are paid or accrued under an agreement entered into in good faith between the contractor and the employees before the services are rendered or pursuant to an established plan or policy followed by the contractor so consistently as to imply, in effect, an agreement to make such payment; and (ii) Basis for the award is supported. Copyright 2015 A/E Clarity Consulting and Training, LLC

Bonus Plans Best practices for a written bonus plan: Eligibility criteria Period of plan Performance factors evaluated to determine bonus awards to employees Form of payment Timing of payment Copyright 2015 A/E Clarity Consulting and Training, LLC

Compensation Reasonableness FAR (b)(2) states: “Compensation for each employee or job class of employees must be reasonable for the work performed. Compensation is reasonable if the aggregate of each measurable and allowable element sums to a reasonable total.” Copyright 2015 A/E Clarity Consulting and Training, LLC

Compensation Reasonableness (Cont.) Executive compensation analysis – National Compensation Matrix – Compensation surveys See section 7.5 of Audit Guide Documentation Copyright 2015 A/E Clarity Consulting and Training, LLC

Testing of Compensation Review A/E firm’s compensation policies, including any bonus plans Evaluate allowability of bonuses and incentive compensation Examine A/E firm executive compensation analysis Copyright 2015 A/E Clarity Consulting and Training, LLC

Non-Labor Costs – Risk Assessment Factors influencing risk determination: Nature of transactions Types of risk affecting the account – – Allocability – Allowability – Reasonableness Dollar value of account Probability and type of errors Copyright 2015 A/E Clarity Consulting and Training, LLC

Allowability of Specific Costs Travel costs Meals Selling costs Vehicles Copyright 2015 A/E Clarity Consulting and Training, LLC

Travel Costs Business purpose must be documented Costs for lodging, meals, and incidentals must be within Federal Travel Regulation limits available at Airfare costs Copyright 2015 A/E Clarity Consulting and Training, LLC

Meals Most common issue affecting allowability is lack of documented business purpose Examine meals costs for proper documentation Evaluate controls for costs on company credit cards Copyright 2015 A/E Clarity Consulting and Training, LLC

Selling Costs FAR Part 31 describes these types of selling costs: Advertising and public relations (unallowable) Bid and proposal (allowable) Direct selling (allowable) Market planning (allowable) Proper identification and segregation is critical! Copyright 2015 A/E Clarity Consulting and Training, LLC

Vehicle Costs Expectation is that A/E firms will track usage of all company vehicles Identify personal vs. business use, and direct vs. indirect use mileage Apply those mileage percentages to total costs of company vehicles to determine allowable costs to be included in overhead Copyright 2015 A/E Clarity Consulting and Training, LLC

Questions and Answers What questions do you have about the topics we have covered, or any other related topics? If you have questions after the conference, please contact me: – – – Phone – (919) Copyright 2015 A/E Clarity Consulting and Training, LLC