ODOT Draft Utility Circulars. Marc A. Travis Division of Finance and Forecasting Office of Audits

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1 ODOT Draft Utility Circulars Marc A. Travis Division of Finance and Forecasting Office of Audits

2 Agenda Introductions Background Circular Development Process Overview of each Circular The Comment Period The Post-Comment Period/Implementation Utility Audits Wrap-Up

3 Important Note The ODOT Utility Audit Circulars, commonly referred to as The Circulars, are currently in draft format and do not represent official ODOT policy. Implementation will be discussed later in the presentation. However, please note that all required laws, rules, regulations and policies must be followed at all times, including prior to implementation as official ODOT policy.

4 Background In recent years, the ODOT Office of Audits has provided minimal oversight and support to the Utilities Section. At the request of ODOT Utilities, the Office of Audits has dedicated additional resources to assist Utilities in an effort to evaluate costs claimed by utilities on relocations, and ultimately, conduct project and overhead audits.

5 Background ODOT Auditors began conducting extensive reviews of project costs claimed by utilities on relocations. As part of this review, ODOT met with numerous large utilities to discuss: Accounting systems, Cost structures, Indirect (overhead) costs, and Specific Project Costs.

6 Background As a result of this due diligence, ODOT Auditors identified several major concerns, such as: Substantial inconsistencies in billing practices from one utility to another, Non-compliance with reimbursement regulations and policies established at the Federal and Agency level, and A general lack of awareness of reimbursement guidelines.

7 Background Accordingly, ODOT began the process of developing 7 Utility Audit Circulars. The Audit Circulars are designed to be a one stop shop for a multitude of rules, regulations, and standards with respect to how utilities are reimbursed on ODOT relocations. The Circulars do not address every possible reimbursement scenario, but provide guidance on common themes.

8 A One-Stop Shop Utilities -FERC -PUCO -GAAP -Others ODOT -23 CFR CFR 31 -ORC -Others ODOT Utility Audit Circulars

9 The Development Process Extensive review of numerous relocation projects to gain a feel for the reimbursement environment. Discussion with various major utilities to gain an understanding of accounting systems, overhead, etc. Utility reimbursement survey of other States DOTs. Utility reimbursement survey of utilities. Review of utility audit programs from other State DOTs. Correspondence with experienced utility auditors at other State DOTs.

10 The Development Process Discussion with ODOT Utilities Personnel at Central Office and District Utility Coordinators. Extensive review of all applicable laws, regulations, policies, guidelines, and Circulars already in effect in other ODOT programs. ODOT Audits began drafting the Circulars in July 2008, and several revisions have been made on a continuous basis for the past 16 months.

11 Major Applicable Regulations 23 CFR 645A: Utilities 48 CFR 31 ( FAR Part 31 incorporated by reference in 23 CFR (d)) The Federal Travel Regulation (incorporated by reference in 48 CFR ) Cost Accounting Standards (incorporated into FAR Part 31) ORC 5501: Department of Transportation

12 Other Applicable Guidance ODOT Utility Manual ODOT Construction and Material Specifications Manual Federal Utility Relocation Program Guide Defense Contract Audit Agency Contract Audit Manual (DCAA CAM) DCAAP : Information for Contractors

13 Authority to Create Policy ORC (B): The director of transportation may establish and enforce such rules and procedures as he may determine to be necessary to assure consistency governing any and all aspects of the cost of utility relocations.

14 Authority to Conduct Audits ORC (A): The utility shall present evidence satisfactory to the state substantiating the cost of relocation. The director may audit all financial records which the director determines necessary to verify such actual costs. 23 CFR (i)(3) : All utility records and accounts relating to the project are subject to audit by representatives of the State and Federal Government for a period of 3 years from date of final payment has been received by the utility.

15 The Draft Circulars

16 The Circulars No. 1: Definitions, Audit Authority, and Guidance on Computing Overhead Rates No. 2: Travel, Meal, and Lodging Costs No. 3: Labor Costs No. 4: Subcontracted Costs No. 5: Final Invoicing Procedures No. 6: Equipment No. 7: Materials

17 Circular No. 1 Definitions, Audit Authority, and Guidance on Computing Overhead Rates Provides general definitions used in all Circulars Establishes audit authority (Federal and State) Provides guidance on overhead/indirect costs Compliance with FAR Part 31 Actual Cost Preparation of overhead schedule Sample schedule provided

18 Circular No. 1 Key Elements Reimbursement of relocations are at actual cost. Use of estimates are not permitted. Overhead/indirect costs must comply with the cost principles in FAR Part 31 (23 CFR (d)). It is very unlikely that all indirect/overhead costs charged to internal projects are eligible for Federal-Aid. Adjustments necessary for FAR Part 31.

19 Circular No. 1 Key Elements Overhead Calculation/Application Utilities use many different cost drivers to allocate indirect costs to overhead. ODOT is advocating that utilities use direct labor cost as the cost driver, which is supported by Cost Accounting Standards and DCAA CAM (h)(1). Although use of direct labor cost is not required, use of other cost drivers must be pre-approved by ODOT. Generally, a total cost input base is not appropriate for Federal-Aid, because utilities subcontract work.

20 Circular No. 1 Key Elements Overhead an example. Recently, a utility company submitted a final bill in the amount of ~$2.1MM for reimbursement. Under this scenario (based upon rates known to ODOT), the following amounts would be added to the bill to recover overhead in the following amounts.

21 Circular No. 1 Key Elements For each of the following publicly traded utilities, the amount of overhead charged would be: Utility A: $0.00 Utility B: $0.00 Utility C: $126, Utility D: $164, Utility E: $233, Utility F: $795,520.03

22 Circular No. 2 Meals, Lodging, and Transportation Provides general outline on allowability and limitations on travel costs, and documentation required to meet the burden of proof. Provides some latitude in certain circumstances if travel costs exceed the limitations set forth in the Federal Travel Regulation.

23 Circular No. 2 Key Points Airfare costs are limited to coach class. Mileage is limited to the maximum allowable by the U.S. General Services Administration. GSA rates and IRS rates may not be the same. Written company policies with explicit meal and lodging limitations is recommended. Costs must be reasonable and meet the intent of the regulation. Costs should be documented by receipts and signed and approved expense reports.

24 Circular No. 3 - Labor Observations by Audits of substantial amounts of overtime on projects which were not explicitly disclosed in the estimate. Increased audit scrutiny with respect to overtime, labor paid-but-not-worked (such as standby), and other upcharges. Guidance on proper timekeeping in order to meet audit scrutiny. Discusses alternative methods of labor costing, such as man-day rates, effective hourly rating, and loaded labor rates.

25 Circular No. 3 Key Elements ODOT cannot accept direct labor charges without signed, approved timesheets. Recommend criteria in DCAAP , Chapter Overtime must be assigned equitably to time charges within the pay period. Effective hourly rating Assignment of OT to the project(s) which caused the overtime. Assignment of OT to projects at the end of the week after 40 hours worked is unacceptable.

26 Circular No. 3 Key Elements Employees are eligible for reimbursement for time actually worked on the project. If an employee is eligible for a full day s pay if less than a full day s work, the time actually worked is a direct cost. Unworked labor cannot be directly charged and must be classified as overhead. Use of alternative labor charging methods is acceptable provided that those rates are based on actual cost and are supportable by company records. Use of overtime, pay rates, etc., must be equitable for government and non-government work.

27 Circular 4 Subcontracted Costs Amplifies Federal requirements for procuring engineering and construction contractors Selection and approval of engineers State approval Construction Low bid Continuing contract Minor dollar amounts

28 Circular 4 Subcontracted Costs Contract Terms, Rates, and Markups Loaded labor rates Overhead Multipliers Markups on non-labor/ pass-through costs ODOT Requirements for low bid and continuing contracts.

29 Circular 4 Key Elements Continuing contracts may be requested an kept on file at Central Office Needed to verify rates, establish reasonableness, and ensure that contract terms ineligible for reimbursement are not claimed on relocations. Low bids must be lump sum Bid documents may be requested Needed to verify that the lowest bidder was selected, no ineligible costs were included in the bid package, and the amount charged matches the amount of the bid.

30 Circular No. 5 Invoicing Procedures All projects are subject to audit. Requires utilities to submit an audit packet directly to ODOT Audits upon completion of the project, if the claimed costs on the project exceed $500,000. Threshold based on materiality, staffing resources, and volume of projects.

31 Circular No. 5 Invoicing Procedures Establishes criteria for acceptable documentation for various types of claimed costs. Based upon standard audit guidelines used by State DOTs. Consistent with the documentation requirements of other audit programs at ODOT.

32 Circular No. 6 Equipment Established allowability and procurement guidelines for use of company-owned and rented/leased equipment. Strictly adheres to 23 CFR 645.

33 Circular No. 6 Key Elements Rented/leased equipment costs should be charged to the project in a rational, systematic manner that allocates costs to multiple projects equitably. Company-owned equipment charges must be supported by reliable actual cost data. Rental Rate Blue Book rates may be used in lieu of actual cost to the utility.

34 Circular No. 6 Key Elements Equipment purchased and used on the project cannot be fully charged to the project unless the equipment is placed in service on the project or has no useful life once the project is completed, and the item is scrapped. The utility may depreciate the purchase price of the equipment consistent with the time used on the project and its expected useful life. Rental Rate Blue Book rates are acceptable.

35 Circular No. 6 Key Elements Equipment repairs and regular maintenance cannot be charged directly to a project because the derived benefit of the expense cannot be identified with a single project. Equipment rental rates must be reasonable.

36 Circular No. 7 - Materials Procurement Pricing Temporary use materials Salvage, scrap and betterments Handling costs Accrued Depreciation Inter-company profits Gas loss

37 Circular No. 7 Key Elements Materials pulled from company stock must be at actual costs to the utility Inter-company profits are prohibited Materials purchased under low bid or continuing contract are acceptable, provided that the costs are reasonable and at actual cost to the utility

38 Circular No. 7 Key Elements Material handling charges must be based on actual costs incurred during the accounting period or 5%. Accrued depreciation is required on replaced facilities, such as buildings, pumping stations, filtration plants, power plants, substations, etc. Amounts claimed for gas loss must be adequately supported and at the cost to the utility to acquire the gas. Market rates are prohibited.

39 Major Circular Themes Actual costs Compliance with 23 CFR 645 and FAR Part 31 Timesheets Consistent, equitable treatment of costs Reasonableness Document, document, document!

40 The Draft Utility Audit Circular Comment Period

41 Comment Period As of today, November 13, 2009, the Draft Utility Audit Circular Comment Period is now open. The Circulars are available online for download and review at: /AUDITING/Pages/RailUtilities.aspx.aspx

42 Comment Period You are encourage to provide the circulars to your constituents/individuals within your utility who may provide constructive feedback. We are requesting that comments be sent directly to Marc Travis at ODOT (contact info on slide at end of presentation). Please limit comment submissions to one per utility.

43 Comment Period Any questions may be directed to Marc Travis, External Audit Supervisor Utilities (contact information to follow). The comment period ends on Thursday, December 31, Please provide all comments in writing no later than the deadline date.

44 The Next Steps in the Audit Circular Process

45 Post-Comment Period Comments from the utilities will undergo an internal review. Revisions will be made. Prior to implementation, the internal review period may also include: Further discussion with associations/utilities A second and final comment period Final approval by ODOT Executive Management Implementation Full-day training session held at Central Office

46 Implementation The planned implementation date of the Circulars is July 1, The circulars will be effective for all projects authorized on or after July 1. Prior to implementation, all applicable utility reimbursement regulations will be in effect, including 23 CFR 645, FAR Part 31, and the ODOT Utility Manual.

47 Current Audit News ODOT is currently conducting desk projects audits of utility relocations. Beginning in 2010, ODOT will start expanding the scope of utility audits to include detailed audits of indirect costs rates (fringe benefits, storage handling, and general & administrative overhead). Current audits only include cursory reviews of overhead rates. May include site audits

48 Questions, Comments, Concerns? Please direct all correspondence, including comments on the circulars to: Marc Travis, Office of Audits (w) (efax)

49 Thank You!