Transcript Dan Purvine – ASHTO 2015 Key Risk Areas in AE Firm Indirect Cost Rates​

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
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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
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Training, LLC
Key Risk Areas
• Labor costs
– Allocation of labor cost
– Allowability
– Valuation – Overtime premium, uncompensated
overtime
• Compensation
– Bonuses
– Executive compensation
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Training, LLC
Key Risk Areas (Cont.)
• Allowability of specific types of costs
– Travel costs
– Meals
– Selling costs
– Vehicles
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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
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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
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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
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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
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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
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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
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Training, LLC
Key Risk Areas – Compensation
• Allowability
• Bonuses
• Executive compensation / reasonableness
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Training, LLC
Compensation Allowability – FAR
General Criteria
FAR 31.205-6(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
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Training, LLC
Bonus Allowability
• FAR requirements
• DCAA guidance
• AASHTO Audit Guide
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Training, LLC
Bonus Allowability (Cont.)
FAR 31.205-6 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.
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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
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Training, LLC
Compensation Reasonableness
FAR 31.205-6(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.”
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Training, LLC
Compensation Reasonableness
(Cont.)
• Executive compensation analysis
– National Compensation Matrix
– Compensation surveys
• See section 7.5 of Audit Guide
• Documentation
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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
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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
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Training, LLC
Allowability of Specific Costs
•
•
•
•
Travel costs
Meals
Selling costs
Vehicles
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Training, LLC
Travel Costs
• Business purpose must be documented
• Costs for lodging, meals, and incidentals must be
within Federal Travel Regulation limits available
at www.GSA.gov
• Airfare costs
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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
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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!
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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
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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:
– Email – [email protected]
– Phone – (919) 215-7708
Copyright 2015 A/E Clarity Consulting and
Training, LLC