Engineering, architectural and consulting firms that contract with a State’s Department of Transportation (DOT) are required to have an audited overhead rate for indirect costs in accordance with the Federal Acquisition Regulations (FAR) if they bid on government projects. The purpose of an overhead audit is to provide assurance that the indirect overhead rate is accurately computed. Two key concepts in developing an accurate overhead rate include the proper allocation of direct and indirect costs, and properly determining what costs included in the in the indirect cost pool are allowed and what costs must be
While the focus of FAR audits is on overhead expenses and disallowances, an engineering, architectural, or consulting firm is also required to have project-costing and labor-charging systems that properly account for direct and indirect labor costs. These systems will be tested in a FAR audit as direct labor is the basis for a firm’s overhead rate. In order to determine an accurate overhead rate, payroll costs must be correctly and consistently allocated between direct and indirect labor.
The CPA firm providing the FAR audit is also required to prepare a separate report on the firm’s compliance with Government regulations, including FAR Part 31 and related laws, internal controls related to payroll, cash disbursements, and other transactions impacting the FAR overhead statement.
The FAR audit also includes testing of the individual indirect cost accounts for a determination of allowable and unallowable expenses. The determination of allowable costs is determined by FAR regulations that are found in Part 31Contract Cost Principles and Procedures. Some, but not all, of the excluded cost items include: bad debts, contributions, interest, fines and penalties, excess owner compensation, lobbying, and alcoholic beverages.
The services provided by our firm include:
- FAR audited overhead rate presented as a Statement of Direct Labor, Fringe Benefits, and General Overhead.
- Upfront planning to effectively manage your overhead rate.