DEPARTMENT OF TRANSPORTATION AUDITS & INVESTIGATIONS. Overview of A&E Related Audit Issues

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1 DEPARTMENT OF TRANSPORTATION AUDITS & INVESTIGATIONS Overview of A&E Related Audit Issues 1

2 INTRODUCTION Overview of Audit Related Issues At the conclusion of this session, you will understand: - Basic A&E related financial information, - Key A&E requirements, - Important A&E resources available, and - Future changes from Lean Six Sigma effort 2

3 AGENDA The following subjects will be hi-lighted today: Direct & Indirect Costs Indirect Cost Rates Interpretive Guidance Documents Common Audit Issues Safe Harbor Rate Lean Six Sigma 3

4 DIRECT & INDIRECT COST DEFINITIONS (FAR & FAR ) Direct Cost: Any cost that is identified specifically with a particular final cost objective (i.e.. Project or Contract) Examples: Labor, Travel, Vehicles, Equipment, Printing/Copying, etc. Indirect Cost: Any cost that is not identified specifically with a particular final cost objective Examples: Indirect Labor, Fringe Benefits, Depreciation, Rent, etc. For more information, refer to the AASHTO Uniform Audit & Accounting Guide, 2012 Edition (AASHTO Audit Guide) & 48 CFR Chapter 1 Part 31 4

5 DIRECT & INDIRECT COST PRINCIPLES (FAR & FAR ) Imperative that costs treated as direct costs in cost proposals are recorded as such in the accounting records Direct costs may be allocable to a project, but not billable. Must be recorded as direct project costs in the accounting records Costs identified as direct or indirect must be allocable, allowable and reasonable (FAR ; ; , respectively) Success in Government Contracting: Establish adequate Accounting & Labor Charging Systems Perform Self Evaluation using Table 6-1: Labor Charging Checklist in AASHTO Audit Guide Develop and follow written Policies & Procedures and Internal Controls 5

6 DIRECT & INDIRECT COST PRINCIPLES (FAR & FAR ) Success in Government Contracting - Continued: Understand the Federal and State Laws, Rules & Regulations applicable to contracts Submit completed paperwork & documents to your Prime, or if you are the Prime, ensure your Subs paperwork is complete Establish procedures to identify unallowable indirect costs prior to posting costs to the accounting system 6

7 DIRECT & INDIRECT COST PRINCIPLES (FAR & FAR ) Success in Government Contracting - Continued: Account for unallowable indirect costs in Unallowable Accounts and do not include these costs in the ICR Schedule Reduce the indirect cost pool for items charged directly to contracts Maintain adequate documentation for your costs Consistency is key 7

8 INDIRECT COSTS (FAR ) Key High Risk Cost Areas: Employee Morale Travel Meals Selling costs (marketing) Vehicle costs Related party rent Executive Compensation For more information, refer to the AASHTO Audit Guide, Chapters 7 and 8 8

9 INDIRECT COST RATE (ICR) Accrual Basis Direct Labor is preferred allocation base FAR (c) 12 months base period FAR (g)(2) Tables 5-5 & 5-6, AASHTO Audit Guide - In-House ICR Schedule COMING SOON: Link to Indirect Cost Rate and Timekeeping webinars on A&I s website: 9

10 INTERPRETIVE GUIDANCE DOCUMENTS Why & Benefits Labor Costs Uncompensated Overtime A&I s website: Draft Meals Interpretive Guidance is under review Future - Prevailing Wages and Vehicles 10

11 COMMON AUDIT ISSUES Inadequate Accounting Systems. Required, but not limited to: Segregate direct, indirect, and unallowable costs Identify & accumulate direct costs by cost objective Accumulate costs under General Ledger control Periodically reconcile costs charged to contracts (every 30-days is best practice) Exclude unallowable costs to contracts Important to Note: Firms must track and disallow labor costs incurred in connection with unallowable activities. This is a major deficiency in most firms (lack of tracking), and CPA s generally do not test for this. Table 8-1, Common Unallowable Costs, p84, 2012 AASHTO Guide 11

12 Example COMMON AUDIT ISSUES Inadequate (project) job cost system No separate G/L Account for direct, indirect, and unallowable costs Cannot identify direct costs by cost objective Inability to identify unallowable costs Table 6-1, Labor Charging Checklist, p52, 2012 AASHTO Guide 12

13 COMMON AUDIT ISSUES Inadequate procedures over labor charging system: ALL employees must record ALL hours worked Accounting for uncompensated OT Ensure proper distribution of labor costs Reconcile Job Cost System to the GL (every 30- days is best practice) 13

14 Example COMMON AUDIT ISSUES No/Inadequate procedures over the labor charging system Salaried employees do not record all hours worked in excess of 8hrs/day or 40hrs/wk. unless they work directly on a project Even if OT is not paid, all time worked over 8hrs/day or 40hrs/wk. (indirect & direct) must be recorded on time sheets 14

15 COMMON AUDIT ISSUES No/Inadequate documented Executive Compensation Analysis Salary Surveys with Benchmarks Or National Compensation Matrix Allowability of compensation must be performed for all employees FAR (a) is criteria for allowability FAR identifies unallowable compensation and activities 15

16 COMMON AUDIT ISSUES Documentation for Other Direct Costs (ODCs) should include: Identification and accumulation by cost objective Actual cost without mark-up or profit Support ODCs are treated consistently Support ODCs are excluded from indirect expense pool Like-cost categories consistently allocated in accounting system 16

17 COMMON AUDIT ISSUES Classifying Employee Morale when costs are actually Entertainment in nature Examples of Employee Morale Painting, new carpet to improve workplace In-house health and wellness publications Employee counseling services Examples of Entertainment Gifts or prizes not tied to performance based on formal policies Gifts to the public Parties/Social Events, Shows/Sports Events, etc. Example: Costs associated with mandatory Off-Site Staff Meetings. 17

18 COMMON AUDIT ISSUES FAR allowability Business purpose Documentation Requirements Who, what, when, where, why Detailed/itemized receipts in English Expense reports, company credit cards, and vendor invoices 18

19 SAFE HARBOR RATE (SHR) Background & Policy June 2013, FHWA approved the Safe Harbor Indirect Cost Rate (SHR) Test and Evaluation Project Work Plan. Test period - July 1, 2013 to June 30, SHR is 110% for new A&E contracts using federal aidhighway funds. Use of SHR is voluntary for eligible firms. Use of SHR after June 30, 2016 not permitted unless FHWA makes the SHR rate permanent. 19

20 SAFE HARBOR RATE (SHR) Eligibility & Requirements Firms must not have a previously accepted or audited ICR. Firms must not have relevant contract cost history to use as a base for developing its own indirect cost rate. SHR is not adjustable for the term of the contract. Retroactive adjustment to indirect costs not allowed for contracts utilizing the SHR 20

21 SAFE HARBOR RATE (SHR) Eligibility & Requirements All firms must have a project/cost accounting system capable of accumulating and tracking direct labor and other direct costs by contract, segregating indirect costs, and removing unallowable costs. Refer to Table 6-1: Labor-Charging Checklist and Evaluation of Accounting System. Fixed hourly labor rates may need to be established for calculation of the direct labor portion of contracts. 21

22 SAFE HARBOR RATE (SHR) What Eligible Firms Need To Do Consultant Certification of Eligibility and Contract Costs & Financial Management System. Questionnaire for Evaluating Consultant s Financial Management System. Upon satisfactory review, Caltrans A&I issues an acceptance/approval letter. A rejection letter will be issued by Caltrans A&I if the consultant cannot use the SHR. 22

23 LEAN SIX SIGMA Proposal to reduce contract procurement timeline A&I s role during the contract negotiation phase Expectations for Primes & Subconsultants Non-Responsive Bids 23

24 STANDARDS THAT APPLY 23 Code of Federal Regulation (CFR) Part 172 Procurement, Management, and Administration of Engineering and Design Related Services 48 CFR, Federal Acquisitions Regulation (FAR) Systems, Chapter 1 FAR Part 31- Contract Cost Principles and Procedures 48 CFR Chapter 99 Cost Accounting Standards, Subpart CFR Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards 24

25 STANDARDS THAT APPLY 23 U.S.C. Letting of Contracts Caltrans Local Assistance Procedures Manual (LAPM) Project Program Supplemental Agreements Contract terms and conditions Caltrans Contract Requirements and Specifications Federal Highway Administration, Safe Harbor Indirect Cost Rate Test & Evaluation Project Work Plan 25

26 RESOURCES AVAILABLE AASHTO Uniform Audit & Accounting Guide DCAA (Defense Contract Audit Agency) Contract Audit Manual Independent CPA or Consultants FHWA Procurement, Management, and Administration of Engineering and Design Related Services - Questions and Answers - National Compensation Matrix 26

27 RESOURCES AVAILABLE National Highway Institute (NHI) Training Using the AASHTO Audit Guide for the Procurement and Administration of A/E Contracts (FHWA-NHI ) Using the AASHTO Audit Guide for the Development of A/E Consultant Indirect Cost Rates (FHWA-NHI ) Using the AASHTO Audit Guide for the Auditing and Oversight of A/E Consultant Indirect Cost Rates (FHWA-NHI ) Audits & Investigations Interpretive Guidance Documents 27

28 CONCLUSION An Overview of Direct & Indirect Costs, Indirect Cost Rates, Interpretive Guidance Documents, Common Audit Issues, Safe Harbor Rates and Lean Six Sigma changes were discussed You learned basic A&E related financial information, key A&E requirements, important A&E resources available to you, and an idea of future changes in A&E contracting process 28

29 Questions???? 29

30 Contact Information Linda Laubinger, Audit Manager Department A/E Unit Caltrans A&I Laurine Bohamera, Audit Chief Caltrans A&I

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