The American Association of State Highway and Transportation Officials (AASHTO) officially released the 2016 Edition of the Uniform Audit & Accounting Guide (hereinafter referred to as the “Guide”) incorporating several updates, refinements, and clarifications necessary to reflect changes in the statutory and regulatory framework applicable to A/E contracts that have occurred since the publication of the 2012 Edition.
This Guide will affect all architectural, design, and engineering firms that have contracts with federal, state, or other local agencies that require compliance with the Federal Acquisition Regulations (FAR) Subpart 31.2. To aid your review of the updated Guide, below is a summary of the substantive changes made to the latest edition.
Chapter 4 – Selected Areas of Cost
4.2 – STATE AND LOCAL COST PRINCIPLES
New section – emphasizes that contacts with no federal funding from state and local agencies may vary from FAR guidelines and may be more restrictive in certain areas pertaining travel costs, selling costs, and compensation.
Chapter 5 – Cost Accounting
5.4 – ALLOCATED COSTS
F. Internal Labor Costs
2. Uncompensated Overtime for Salaried Employees
Emphasis that materiality plays a role in determining whether or not the indirect cost rate must be adjusted for uncompensated overtime and provides more clear and precise definitions of the methods used to accounting for uncompensated overtime. Highlights that engineering consultants must evaluate and document the effect of uncompensated overtime on their ICR’s.
3. Overtime Premium
Expanded guidance on several alternative methods for allocating overtime premium costs, which include accounting for it as an indirect costs that is equally distributed among all projects, allocating as direct or indirect based on the activity that “caused’ the overtime, or building anticipated overtime premium into established standard charge rates. Additionally, emphasis is placed on ensuring overtime premium is accounted for consistently for all contracts.
5.6 – FIELD OFFICE RATES
Revised calculations for allocating indirect costs between home office and field office rates.
Chapter 7 – Compensation
7.2 – ALLOWABILITY OF COMPENSATION
Further emphasis is placed on the fact that compensation must be evaluated for reasonableness in total, not for reasonableness of individual elements of compensation such as salary, bonus, or other fringe benefits.
7.3 – REASONABLENESS OF COMPENSATION
Greater emphasis is place on engineering consultants ensuring and properly documenting that the compensation for each employee or job class of employees is reasonable for the work performed.
7.4 – STATUTORY COMPENSATION LIMIT: THE BENCHMARK COMPENSATION AMOUNT (BCA)
Incorporated language to cover the requirements laid out in the Bipartisan Budget Act of 2013 which establish a lower limit on compensation for all contractor employees effective for contracts executed on or after June 24, 2014.
7.11 – BONUS AND INCENTIVE PAY PLANS
Added language to cover other incentive based plans like hiring bonuses or recruiting/referral payments stating that they are generally allowable if it is a part of firm’s standard practice and policies and is applied consistently. Greater emphasis is placed on bonuses to owners of closely-held corporations to ensure they are not considered a “distribution of profits”. Also, further emphasis is placed on engineering consultants have clear policies and documentation on what are true bonuses payments based on performance and what are profit distribution payments. Additional guidance is given to auditors on how to get comfortable with the allowability of bonus payments if no written policy is in place.
Chapter 8 – Selected Areas of Cost
A. Directly-Associated Costs
Specific types of costs that can be considered directly associated to unallowable costs are provided, which include, but are not limited to, direct labor, fringe, travel, meals, supplies used, and other similar costs and further guidance allows a percentage of total costs to be used instead of specific identification of actual directly associated costs.
8.23 – RENT/LEASE
C. Sale and Leaseback Transactions
New section on sale and leaseback transactions cover the allowability of rental costs and the treatment of potential gains or losses recognized as a result of these transactions. Generally allowable lease costs are limited to amortization of the net book value of the asset plus other costs of ownership.
8.26 – TRAVEL EXPENSES
Added language that covers non-travel meals allows for such costs if they are properly supported, have a valid business purpose and are reasonable in amount. Also, additional language was added to vehicle costs emphasizing the removable of costs associated with unallowable activities (lobbying and general advertising) and auditor placing more scrutiny on the reasonableness of luxury vehicles.
8.27 – LEGAL COSTS
Legal costs often can be related to very straight forward issue, but also related to very complex issues. This section further highlights the fact that FAR does not cover all legal costs or sceneries and additional analysis must be done to determine if the costs are allowable. This section more broadly covers the types of expressly unallowable legal costs, the factors that should be considered for determining the allowability of legal costs not expressly cover in the FAR, and the appropriate documentation needed to allow an auditor to make an independent determination of the allowability of the claimed cost.
Chapter 10 – Guidance for Developing Audit Procedures
10.3 – TESTING LABOR COSTS
When testing timesheets, auditors should trace all increments of time allocated to direct and indirect project or cost pools.
Chapter 11 – Audit Reports and Minimum Disclosures
11.2 & 11.3 – SAMPLE AUDIT REPORT ON INDIRECT COST RATE SCHEDULE and SAMPLE REPORT ON INTERNAL CONTROL AND COMPLIANCE
Revised auditor report language is provided that complies with the clarified audit standards generally accepted in the United States of America.
Chapter 12 – Cognizance and Oversight
12.4 – WHEN MUST A CONTRACTING AGENCY ACCEPT A COGNIZANT APPROVED INDIRECT COST RATE?
This is a new section that discusses the requirements for acceptance of a Cognizant approved Indirect Cost Rate which establishes that indirect cost rates shall be applicable for a period of one year by a cognizant agency that has either performed an audit of the indirect cost rate schedule or conducted a review of an audit report and related workpapers provided by an independent CPA.
12.6 – DISPUTE BETWEEN ENGINEERING CONSULTANT AND COGNIZANT AGENCY
Acknowledgement is given to the fact that disputes may arise between consulting firms and cognizant agencies during the cognizant review process and guidance is given on how to effectively and efficiently resolve disputes.
12.7 – WHAT IF AN INDIRECT COST RATE APPROVED BY A COGNIZANT AGENCY IS IN DISPUTE?
Indirect cost rates established by a cognizant agency may be in dispute by another contracting agency, which has various options of handling the dispute by performing their own audit or evaluation, or negotiate a provisional rate that can later be adjusted upon an audited final rate.