Supporting a Successful Overhead Rate Audit in 2018

Year-End Planning

Year-end is fast approaching!  Now is the time to focus on planning, as many of the decisions you make now can affect your FAR-allowable overhead rate.  There are also a number of actions you can take that will support a more effective and efficient audit.  If you need assistance with your year-end planning or your overhead rate audit, please reach out and let us know what we can do to help.

Here are a few decisions that may affect your current year FAR-allowable overhead rate:

Bonus Awards – your year-end bonus awards are allowable expenses if they meet the applicable FAR criteria and your bonus plan and process are well-documented.  Now is a great time to examine your plan to see if any clarification is needed.  Section 7.11 of the AASHTO Audit Guide is a good place to start for bonus plan best practices.  Also, you should review the supporting documentation you maintain such as employee performance reviews, spreadsheets showing performance measures by employee, and notes of compensation committee meetings to see if they are adequate to meet the expectations of the state DOTs with whom you do business.

Changes in Policies / Procedures – most new policies and procedures should be implemented effective at the beginning of your fiscal year.  A number of policies have a significant effect on your overhead rate.  For example, treatment of overtime premiums and uncompensated overtime, documentation of vehicle mileage, and policies to support proper documentation of expenses are just a few.  Don’t forget to put those policies and procedures in writing!

Retirement, Profit Sharing, and ESOP Contributions – these costs are generally allowable, subject to certain FAR criteria.  Remember, profit sharing contributions under a qualified retirement plan are allowable, and are NOT considered distributions of profit.  There are a few states still misinterpreting this, so if you work with a state that is proposing to disallow those contributions, please let us know.

In addition to these year-end decisions, consider taking the following steps to support a more successful audit:

Review Higher Risk Accounts for Unallowable Costs – the more of these costs you find in advance, the less we’ll find in our audit, reducing the effect of any extrapolated errors.  You should establish separate accounts for unallowable costs and prepare the necessary journal entries to reclassifying any such costs you find.

Examine the Overall State of Your Supporting Documentation – make sure you have documented the Who, What, When, Where, and Why of each cost.  Remember, the most common issue we find is a lack of documentation for the business purpose of costs, which is critical to supporting FAR allowability.

Review and Prepare Necessary Reconciliations – these include reconciliations of the general ledger, job costing system, and payroll system.  We can provide copies and examples as needed.

Prepare the Executive Compensation Analysis – this is often an item that results in disallowed cost.  Note that the 2018 National Compensation Matrix (NCM) to be used in evaluating 2017 compensation won’t be out until at least February.  We won’t have any idea of the results until then, as this is a year where new survey data will be used in preparing the NCM.  But you can prepare the rest of the analysis showing actual compensation for your executives.  And don’t forget to pull together the supporting documentation such as W-2s.

Examine Marketing and Business Development Costs – this includes both labor and non-labor costs.  These should be segregated by account into bid and proposal, direct selling, and advertising activities, as defined in FAR Part 31.205-1 and 31.205-38.  Be sure to establish separate labor charge codes in your timekeeping system to properly classify the hours incurred for these activities.

As we approach year-end, be sure to set aside some time to examine the effects of the decisions listed here, and others that may affect your overhead rate.  And be sure to spend time on these items that will help to support allowability of your costs, while getting you better prepared for a smooth and efficient overhead rate audit.

Let us know how we can help to make your year-end more successful!