Maintaining FAR Compliance of Overhead Rates for Engineering Firms
By Amos Gibello
For accounting departments of engineering firms that regularly seek government contracts, there are unique accounting practices that must be followed. One challenge is found in submitting overhead rates that are in compliance with Federal Acquisition Regulations (FAR). For firms unfamiliar with the process, this is unexplored territory; even the vast majority of CPAs are unaware of this area of accounting that’s not particularly complex but is highly specialized.
Engineering firms working government contracts should expect an annual audit of overhead rates by the agency they are doing work for, or you’ll have to hire an accounting firm to provide the audit. Drawing on our experience working with engineering firms that have done business with the Department of Transportation in multiple states, here are some of the leading areas of scrutiny when preparing for a FAR overhead rate audit.
- Compliant accounting software. Some accounting systems are too antiquated to properly account for government contracts and related costs, but it’s likelier that the system just hasn’t been prepared to generate the information required for FAR audits. It can take a lot of time and effort to set up a compliant system to handle this, but it’s necessary. Your accounting firm can provide software implementation services to get your accounting system up to speed.
- Job costing. To minimize the risk of double billing, government contracts require implementation of a job costing system. Your accounting system should segregate your costs so that you only submit for government billing those that are allowable. This requires the breakout of actual employee costs — the hours worked billed not at your hourly rate, as you most likely bill other jobs, but at the actual pay rate each worker earns. This includes salaried employees, whose time contribution to the project must be translated into hourly rates. The way to know that a job costing system is working properly is that it should reconcile back to the general ledger’s direct costs.
- Breakout of direct and indirect costs. Be prepared to segregate overhead costs assumed as a result of the government contract from the pool of your firm’s general overhead expenses.
- Exclusion of unallowable costs. You must be able to capture and segregate unallowable time and expenses so you don’t accidentally bill them. Such costs include, but are not limited to, marketing, advertising and public relations, personal use of company cars, PAC donations, and meal, lodging and daily incidental expenses above established per diem rates.
Helpful hint: Make sure you have a copy of (and read) the American Association of State Highway and Transportation Officials Uniform Audit and Accounting Guide, as it will provide comprehensive and user-friendly guidance when preparing for FAR audits.