Let me start by wishing all of you a happy New Year! And of course, what follows the New Year better than that special time that we have all come to know and love – year-end! Most of you probably operate on a calendar year, so you are probably buried in year-end closing, journal entries, and preparing for upcoming audits.
One of the things you focus on this time of year maybe more than any other is compliance. This includes tax compliance, compliance with financial accounting standards, and in the world of government contracting that we live in, FAR compliance. You know that it is important to develop accurate overhead rates in compliance with FAR Part 31 to support the preparation of cost proposals, acceptance of your rates, and your ability to pursue and win work with state, local, and federal agencies.
But what is the cost of compliance with these requirements?
The cost of FAR compliance generally falls into two categories – hours spent by internal staff and dollars paid to external consultants and CPA firms. Let’s talk about some of the activities that A/E firms should perform as part of these compliance efforts:
Developing policies and procedures – there are a number of policies and procedures that A/E firms should put in writing to support FAR compliance. State DOTs will expect to see these, and not having written policies and procedures may cause certain costs to be questioned, and create an uphill battle to achieve approval of your overhead rate. We’ll discuss recommended policies and procedures in a future article.
Monthly reconciliations – A/E firms should reconcile labor costs recorded in the job costing system, general ledger, and payroll system on a monthly basis. Some states will want to examine these reconciliations as part of the overhead approval process, and the reconciliations are a critical internal control to help ensure accurate labor costing.
Review of costs as they are incurred – your finance and accounting staff should be examining costs as they are incurred, to determine whether the costs are FAR allowable or unallowable, and recording the unallowable costs in general ledger accounts specifically designated for that purpose. This includes reviewing travel costs against the Federal Travel Regulation limits (“GSA per diem rates”) to determine allowable and unallowable portions.
Monthly, quarterly and year-end review of costs – in addition to the review at the time costs are incurred, it is important to examine certain accounts either monthly, quarterly, or at year-end to identify unallowable costs. Often referred to as “scrubbing” the accounts, this is an important activity to perform BEFORE preparing your overhead schedule or having your CPA firm start the overhead audit.
Compensation analysis – preparing an analysis of executive compensation is a required part of the development of your overhead rate. Many firms now use the National Compensation Matrix, or NCM, but A/E firms are still free to develop their compensation analysis using external compensation surveys if they choose to do so. We have a recorded webinar that covers the details of how to perform this analysis using the NCM.
In our next article, we’ll talk about preparing for an overhead audit by a CPA firm, and some of the activities that CPA firms perform during the audit. These topics are covered in more depth in a number of our recorded webinars – on each page of our website you will see a link for Recorded Webinars where you can find out more.
We help many A/E firms to prepare their overhead schedules, review and implement policies and procedures, and prepare for audits – please let us know if we can help, and best wishes for a successful year-end!