How the New Certification of Overhead Rates Will Impact Your Firm

T. Wayne Owens, CPA

T. Wayne Owens & Associates, PC

800.637.2727

© Copyright Jerry Laiserin 2010. All rights reserved.

T. Wayne Owens & Associates, PC

Built for A/E/C

We are a CPA firm that provides a full range of accounting and financial management solutions, including audits, FAR audits and tax services tailored for the design industry. Our services are specifically geared toward boosting the effectiveness, well-being and profitability of your A/E/C firm. Our relationship with you is the driver –consider us a partner on your success team, providing experienced guidance and advice for your situation and spotting opportunities to position your company for the future.

New Certifications

• What’s New?

• Is This Really Serious?

• Where is my Risk?

• What can We do to Protect Our Firm?

• Conclusion

What’s New?

Is it not business as usual?

FHWA Order 4470.1A

• Another step in the implementation of recommendations made by the Office of Inspector General’s Audit Report entitled, “Oversight of Design and Engineering Firms’ Indirect Costs Claimed on Federal-aid Grants.”

• Expected to:

• Increase audit quality and consistency

• Increase compliance with FAR cost principles

• Reduce risk of payment of unallowable costs and waste in the consultant services program

• Reinforce the responsibility and accountability of consultants to comply with Federal laws and regulations

State DOT Contractors Certification

• Effective for 2011

• Contractors must certify cost submissions for overhead rates annually and with proposals

• Contractors who knowingly charge unallowable costs to overhead could face:

Suspension

Debarment

Proscuition for making a false

statement

Imprisoned not more than 5 years

• Subject to False Claims Act

The False Claims Act

• Knowingly presents a false or fraudulent claim for payment

imposes liability on any person who submits a claim to the federal government that he/she knows or should know is false

• Civil penalty of not less than $5,500 and not more than $11,000, plus 3 times the amount of damages which the Government sustains because of the act of that person

• Whistleblower provisions

Example of Cost Certification

I, the undersigned, certify that I have reviewed the proposal to establish final indirect cost rates for the fiscal period as specified above and to the best of my knowledge and belief:

1) All costs included in this proposal to establish final indirect cost rates are allowable in accordance with the cost principles of the Federal Acquisition Regulations (FAR) of title 48, Code of Federal Regulations (CFR), part 31.

2) This proposal does not include any costs which are expressly unallowable under the cost principles of the FAR of 48 CFR 31.

All known material transactions or events that have occurred affecting the firm’s ownership, organization and indirect cost rates have been disclosed.

Is This Really Serious?

12

U.S. Settles Case Against Berger Group for $69 Mil

11/05/2010

By Richard Korman

Louis Berger Group has agreed to pay $69 million to settle civil charges by the Dept. of Justice that the company systematically inflated its overhead charges in cost-plus work for the federal government from 1999 to 2007.

Separately, Berger Group’s former chief financial officer, Salvatore Pepe, 58, and its former controller, Precy Pellettieri, 54, pleaded guilty in federal court in Newark, N.J., to conspiring to defraud the U.S. government.

In its descriptions of the fraud, the U.S. attorney claimed that Berger Group charged overhead for home office employees as if they only worked on federal contracts when those employees actually only spent part of their time working on federal contracts.

The investigation began when a former Berger employee who worked in the company’s accounting department filed a whistleblower lawsuit in federal court in Maryland. The employee is entitled to a portion of the settlement.

Where is My Risk?

The big risk is in the little things

Labor

• Single largest item of overhead

• Can be direct, indirect, allowable, unallowable

• Example of potential problems:

• Principle regularly attends Rotary meetings and charges time to general overhead

• Project has run out of fee and project manager tells staff to charge project time to training

• Reducing direct labor costs for contract limitations and charging difference to overhead

• Paying child an unsubstantiated high salary and including in overhead rate

Direct Project Costs

• Not all costs are reimbursable on all contracts. Regardless, a costs always maintains its character as direct or indirect

• Firm regularly charges in-house printing to jobs. Contract does not allow this so charges are not costed to project.

• Firm has out of town project meeting that is not included in contract as reimbursable. In order to keep the job under budget the principle charges costs to selling expense.

• Project exceeds allowable reimbursable so project manager codes all additional costs to overhead supplies.

General Overhead

• Inconsistent application of Generally Accepted Accounting Principles does not seem like it can cause problems, however it can.

• Firm records a capital lease as an operating lease in order to write the cost off faster.

• Many firm owners view the firm checkbook as theirs thus they “expense” certain personal expenses.

• Personal yard maintenance

• Personal maid service

• Vehicles for family members

• Personal vacations

General Overhead (continued)

• There are certain costs that are expressly unallowable by the FARs. “Burying” these costs in overhead can lead to big trouble.

• Dining club memberships

• Country club memberships

• Sporting events

• Holiday parties

• Alcohol

• Political contributions

What can we Do to Protect Our Firm?

Education

• Not knowing the rules is not a defense

• All principles and project managers who propose and manage government jobs should have a general understanding of government contracting and overhead

• Firm accounting personnel should be well versed in government contracting

• Discuss with state DOT

• Discuss with ACEC

Policies

• All firms should have written policies and procedures

• Firms who contract with the government MUST have written policies and procedures

• Policies should at least cover time reporting and costing, treatment of contract costs including in-house costs, personnel, expense reports, unallowable costs

• Separate accounts for unallowable amounts are required

• Seek a qualified consultant for assistance

Recommended Policies

• Total time reporting – all hours worked must be recorded, regardless if they are billable, non-billable, allowable or unallowable

• Expense report receipts – specify a minimum dollar amount that receipts are necessary. Require all alcohol to be separately recorded.

• Timesheets – indirect codes for unallowable labor with detailed explanations for staff.

• Subconsultant qualification process.

• DOCUMENTATION

Conclusion

• Rules must be taken seriously

• Government rules are typically good business practices

• Government compliant firms tend to be much better managed

• Slow reacting firms could be in for some serious pain

• Now is the time to review firm policies

Questions

T. Wayne Owens, CPA

T. Wayne Owens & Associates, PC

O: 678.261.8566

C: 404.358.2390

wowens@twocpa.com

www.twocpa.com (coming VERY soon)