Overhead Rates, Federal & State Agency Updates, and Best Overhead Management Practices For Engineers

Feeley & Driscoll, P.C.

200 Portland Street

Boston, MA 02114

www.fdcpa.com

Jacqueline M. Weir | Director

Neil Scullion| Director

A/E Industry Roundtable

Keys to Improving

Overview

Overhead Rates and Pricing Issues

State Regulation Updates

Key Metrics

Systems - Best Practices

2 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770

http://www.fdcpa.com

Successful companies turn ideas into action…

They plan and assess where they are today

Define where they would like to be in 3 to 5 years

Articulate how they will get there

Measure, execute, accountability



I. OVERHEAD RATES

FAR Parts 30 and 31

1. Overview

2. Allowable Costs

– Direct vs. Indirect Costs

3. Unallowable Costs

4. A/E Services - costs components

II. How is your internal control system?Important when working with the FAR



III. Other

A. Overhead Caps & Limitations

B. State Guidelines, Recent Events, Etc.

C. Tips & other

V. How Do You Compare?

A. Benchmarking

B. Industry Statistics (Utilization & Labor Multiplier)



6

Overview of FAR 31

The part of the Federal Acquisition Regulations (FARs) that

contains cost principles & procedures for:

1. The pricing of contracts, subcontracts and contract

modifications, whenever cost analysis is performed.

2. The determination, negotiation, or allowances of costs when

required by a contract clause.

FAR 31.2 specifically deals with commercial organizations

contracting with the government

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THREE BASIC ELEMENTS OF FAR ALLOWABLE

COSTS:

1. Direct Labor and Other Direct Expenses

2. Indirect Costs or Overhead

3. Profit

A companies overhead represents the sum of its indirect

costs.



A/E companies typical overhead rate is

determined by the ratio of:

INDIRECT COSTS TO DIRECT LABOR COSTS

As a company contracts with various government

agencies and grows they become more sophisticated

and have different overhead pools and indirect cost

allocation methods. The goal is to reduce the G&A

rate and appear more competitive. Examples

include: Fringe rates

G&A rates

F&A rates



Reasonableness - The Burden of Proof is on the Company

Allocable - Costs must be Allocable to Cost Objective Associated with the Contract

Cost Accounting Standards (CAS) and/or Generally Accepted Accounting Principles (GAAP)

Within Contract Terms

Other Limitations Set Forth in FAR Subpart 31.201-2



DIRECT COSTS ARE THOSE WHICH CAN BE INDENTIFIED SPECIFICALLY WITH ONEPARTICULAR CONTRACT

Examples

– Direct Labor

– Other Direct Costs (ODC’s)

– Sub Consultants

– Reimbursement Costs

Note: Your company should establish a chart of accounts which identifies direct costs, other direct costs, indirect costs and unallowable costs.



Indirect Costs are those costs identifiable to multiple

contracts or cost objectives. (Such costs are not

subject to treatment as a direct cost.)

Indirect Costs Become Part of Your Overhead Pool

Indirect Costs include a Company’s Selling, General

& Administrative Expenses



Indirect Labor

Payroll Taxes

Employee Fringe Benefits

Insurance’s

Office Expense and

Supplies

Professional Fees

Depreciation

Automobiles

Rents

Repairs and Maintenance

Marketing Costs

Cost of Facilities

Cost of Capital



Unallowable Costs are costs that are not allowed to be

included in billings (on Government Contracts) per the

Federal Acquisition Regulations (FARs).

Costs that cannot be distributed to the contract in

proportion to the benefits received (allocable).

Cost that is excessive of what would be incurred by a

prudent person in normal business (reasonable).


Certain Travel Costs are Limited

Goodwill

Social Club Dues

Officers’ Life Insurance

Losses on contract (other)

Federal Income Taxes

Certain Undocumented Pension

and Bonus Costs

Public Relation and Advertising Costs

Bad Debt

Contingencies

14

Related Party Rental Transactions

Entertainment Costs, Including

Alcoholic Beverages

Fines & Penalties

Interest Expense

Lobbying Costs

Organizational Costs, Including

Amortization

Award Ceremonies, Christmas

Parties & Company Picnics

Idle Facilities Costs

Deferred Taxes







Focus is on internal controls, more than ever.

Must be consistent with internal policies and

procedures.

System documentation is key – focus/improve

written policies. Are they being followed?



Consistent treatment between employees, divisions, offices, etc.

Review costing system, timesheets, billing practices

Electronic timekeeping – FAR’s still requires approval process

Transferring time – Must be documented and approved



Cost Segregation – Unallowable should be separated

Employee Expense reports – Accuracy, approval,

support

Unsupported costs – Auditor may disallow all



1. General ledger system in place

2. Accounts in chart of accounts are properly

classified

3. Accounting system has proper internal controls

4. Accounting system is able to produce financial

reports regularly and consistently

5. Reconciling bank statements

6. Using good documentation and audit trails

7. Using the accrual basis of accounting



Apply for Written Permission to Exceed

– Overhead CAPS

– This is allowed for specialized services

Hourly Rate Limitations

– Increased rates are allowed

– Use of contract labor

Written Permission should be Sought After in the Proposal Stage of Your Project

Bill Supplemental and Reimbursable (I.e., CADD, Telephone, Travel, Faxes, Copies etc.) as a Direct Cost

Many states have specific caps & limitations



22

MassDOT/MHD Audit –

Currently looking for Audit Director

– Rate change from 135% to 155%

– Strict enforcement of the prequalification guidelines

Submitted on a timely basis (5 months after year-end)

Need all required records

Untimely or incomplete submissions will result in falling of the

prequalification list

Looking at salaries closely

– http://www.mhd.state.ma.us/default.asp?pgid=content/prequal01&s

id=about

– If you are not up-to-date with audits proposals won’t be accepted

nor can you work on any new projects


http://www.mhd.state.ma.us/default.asp?pgid=content/prequal01&sid=about

http://www.mhd.state.ma.us/default.asp?pgid=content/prequal01&sid=about


Massport

– Limit the ELM to 2.5 (Overhead Rate 127%)

– Rates over 2.5 (or 127%) subject to field review

– Indirect salaries & Fringe limited to Zweig White

industry standards

– Project specific insurance = unallowable

– Cost of money unallowable



Mass Port guidelines for audit risk- Rules of Thumb

(% of DL):

– Rent (20%)

– Legal (5%)

– B&P (8%)

– Travel & Entertainment (8%)

– Depreciation - Bonus depreciation and section 179 (8%)

Auditor will require additional documentation.

24

.



Mass Port additional documentation

– Financial statements

– Reconciliation of payroll to overhead schedule

– Staff size

– Legal and insurance fees



Connecticut Dept of Transportation (DOT) Guidelines

– Internal Controls/System Design/Fraud

– Consistency

– Areas of Focus:

▪ Principle compensation

State funded – no change, limit of $35 per hour

Federally funded – reasonableness test using PSMJ as a guide

▪ Uncompensated overtime for salaried employees

▪ Employees bonuses not > 15% of salary

▪ Related party rent, employee morale, holiday parties, etc.



What key metrics are there and how can they be used to

improve performance?

Chargeability/Utilization Rate– Measures the percentage of direct labor in dollars per hour

(i.e. staff time) that is charged to projects to total hours

27

Staff Size PSMJ ZW

50-99 66.9% 67.6%

100-249 64.6% 65.6%

250-499 63.4% 62.7%

500+ 64.5% 64.0%



28

ABC Engineering Company, Inc.

Utilization / Chargeability

Increased

Actual @ 50% Planned @ 60% /Billings

Total Charge Hours 250,000 300,000

Average Bill Rate 100$ 100$

25,000,000$ 30,000,000$ 5,000,000$

Total Capacity (Hours) 500,000 500,000

Divided by Chargeability 50% 60%

Total Charge Hours 250,000 300,000

Chargeability 50% 60%



What markup am I

achieving on my labor?

Measures the amount

of direct labor incurred

to total net revenues

Low multipliers indicate

a competitive market

place and/or project

overruns29

Staff Size PSMJ ZW

50-99 3.49 3.19

100-249 3.24 3.39

250-499 3.27 3.28

500+ 3.28 3.19



30

Effective Labor Multiplier

Actual Planned

Net Revenues Earned 25,000,000$ 30,000,000$

Direct labor 10,000,000 10,000,000

Labor Multiplier 2.5 3.0

Breakdown of ELM:

Direct labor 10,000,000 10,000,000

Overhead @ 134% 15,000,000 15,000,000

Profit - 5,000,000 5,000,000

25,000,000$ 30,000,000$



How long does it take me to collect my money?

Compares billings to amounts uncollected at any

point in time

31

Staff Size PSMJ ZW

50-99 51.9 84

100-249 61.2 86

250-499 54.5 82

500+ 58.8 89



32

Revenues earned 30,000,000$

Accounts receivable 6,000,000

A/R Turnover 5.0

Days Sales Outstanding (DSO) 71

Cash Per Day:

Revenues earned 30,000,000

# Days 365

Cash per Day 82,000$

Decreasing A/R Days Impact:

Actual 71

Planned 60

11 Days

82,000$

Additional Cash 902,000$



How much money does the

company have at risk?

Compares unbilled time to

amounts earned

Measures project

performance and billing

cycle adequately

Staff Size PSMJ

50-100 9.5

101-200 9.7

201-350 10.7

351-500 20.4



34

ABC Engineering Company, Inc.

WIP DAYS ANALYSIS

Revenues earned 30,000,000$

Work-in-process 3,000,000

WIP Turnover 10.0

Days WIP Outstanding 36.5

CASH "GAP"

Days WIP Outstanding 36.5

Days A/R Outstanding 71.0

Less: Payroll Days (7.0)

TOTAL DAYS OUT OF POCKET 100.5



Financial Reporting

Invest money to make money

Close the books within 3-5 days

Monitor monthly performance

Utilize billing and closing calendars

Utilize technology and have integrated operating systems

(marketing, project management and accounting)



Financial Reporting

Concentrate on principal chargeability

Monitor overall chargeability

– Publish time analysis reports

Monitor the company’s Effective Labor Multiplier

(ELM)



Financial Reporting

Bill 100% of time

Collect accounts receivables

Monitor overhead costs

Have daily time reporting (electronic & automated)



Project review

Without project reporting, firms:– Can lose control over current projects

– Cannot measure standing against budgeted amounts

– Will not build historical cost information

– Cannot monitor employee performance accurately

– Cannot analyze problem areas

▪ Labor overruns

▪ Sub-consultants

▪ Unapproved amendments



Project reporting

Your project reporting system should mirror your

bidding/budgeting system

Available on-line for all project managers to review

Project financials, reviewed monthly (at a minimum)

- Finance department should drive the process!



Scheduling

Measure, improve or fix

– By department, by person, by discipline

Rely on software systems

– Go out as far as possible

Attack seasonality and look at utilization during busy times

Automate scheduling resources

Track non-chargeable time

– ROI

Helps properly utilize “A” players

– Protect the talent





Business

Overhead Rates, Federal & State Agency Updates, and Best Overhead Management Practices For Engineers