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

A/E Industry Roundtable

Feeley & Driscoll, P.C.
200 Portland Street
Boston, MA 02114

www.fdcpa.com

Jacqueline M. Weir | Director
Neil Scullion| Director

Keys to Improving

 Overview

 Overhead Rates and Pricing Issues

 State Regulation Updates

 Key Metrics

 Systems - Best Practices
Visit us on the web: www.fdcpa.com Or2Call: 888-875-9770

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)


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


 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.

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

 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 ONE
PARTICULAR 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

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 Indirect Labor  Depreciation
 Payroll Taxes  Automobiles
 Employee Fringe Benefits  Rents
 Insurance’s  Repairs and Maintenance
 Office Expense and  Marketing Costs
Supplies  Cost of Facilities
 Professional Fees  Cost of Capital

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 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).

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 Certain Travel Costs are Limited  Related Party Rental Transactions
 Goodwill  Entertainment Costs, Including
 Social Club Dues Alcoholic Beverages
 Officers’ Life Insurance  Fines & Penalties
 Losses on contract (other)  Interest Expense
 Federal Income Taxes  Lobbying Costs
 Certain Undocumented Pension  Organizational Costs, Including
and Bonus Costs Amortization
 Public Relation and Advertising  Award Ceremonies, Christmas
Costs Parties & Company Picnics
 Bad Debt  Idle Facilities Costs
 Contingencies  Deferred Taxes

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15

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 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?

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 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

18

 Cost Segregation – Unallowable should be separated

 Employee Expense reports – Accuracy, approval,
support

 Unsupported costs – Auditor may disallow all

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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

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 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

22

 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

23

.

 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

25

 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.

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 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

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%

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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%

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 What markup am I
achieving on my labor? Staff Size PSMJ ZW
50-99
3.49 3.19
 Measures the amount 100-249
3.24 3.39
of direct labor incurred
250-499
to total net revenues 3.27 3.28
500+
3.28 3.19
 Low multipliers indicate
a competitive market
place and/or project
overruns
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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

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 How long does it take me to collect my money?
 Compares billings to amounts uncollected at any
point in time

Staff Size PSMJ ZW
50-99 51.9 84
100-249 61.2 86
250-499 54.5 82
500+ 58.8 89

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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

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 How much money does the Staff Size PSMJ
company have at risk?
50-100 9.5
 Compares unbilled time to
amounts earned 101-200 9.7

 Measures project 201-350 10.7
performance and billing
cycle adequately
351-500 20.4

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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

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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)
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Financial Reporting

 Concentrate on principal chargeability

 Monitor overall chargeability
– Publish time analysis reports

 Monitor the company’s Effective Labor Multiplier
(ELM)

36

Financial Reporting

 Bill 100% of time

 Collect accounts receivables

 Monitor overhead costs

 Have daily time reporting (electronic & automated)

37

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

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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!

39

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
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