key risk areas in a/e firm indirect cost rates presented by dan purvine, a/e clarity consulting and...

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


Key Risk Areas

• Labor costs– Allocation of labor cost– Allowability– Valuation – Overtime premium, uncompensated

overtime• Compensation – Bonuses– Executive compensation


Key Risk Areas (Cont.)

• Allowability of specific types of costs– Travel costs– Meals– Selling costs– Vehicles


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


Key Risk Areas – Labor Costs (Cont.)

• Allowability:– FAR-unallowable labor costs incurred for activities

such as entertainment, lobbying, etc.• Valuation:– Overtime premium– Uncompensated overtime


Overtime Premium

• Methods to account for overtime premium:– Treat as overhead cost– Assign to projects / overhead based on the activity

causing the overtime


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


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


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


Key Risk Areas – Compensation

• Allowability• Bonuses• Executive compensation / reasonableness


Compensation Allowability – FAR General Criteria

FAR 31.205-6(a) requires:1) Work performed in current year2) Total comp reasonable for work performed3) Established plan or practice4) New compensation plans or major revisions5) Cost not otherwise unallowable6) Compensation for certain individuals requires

special considerationCopyright 2015 A/E Clarity Consulting and

Training, LLC

Bonus Allowability

• FAR requirements• DCAA guidance• AASHTO Audit Guide


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.


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


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.”


Compensation Reasonableness (Cont.)

• Executive compensation analysis– National Compensation Matrix– Compensation surveys

• See section 7.5 of Audit Guide• Documentation


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


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


Allowability of Specific Costs

• Travel costs• Meals• Selling costs• Vehicles


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


http://www.gsa.gov/

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


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!


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


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

mailto:[email protected]

key risk areas in a/e firm indirect cost rates presented by dan purvine, a/e clarity consulting and...

Documents

ae clarity consulting

key risk areas copyright

testing of labor costs

premium copyright

ae firms

costs vehicles copyright

unallowable labor costs

materiality copyright