Contractor certification of cost is growing in intensity. Federal and state governments have stepped up reviews of overhead cost. BQE Software is proud to have T. Wayne Owens, CPA share his insights and recommendations. Wayne is a national expert who has been at the heart of this issue for years.
The first week of November brought news that Louis Berger’s overbilling case settled for $69.3 million and two company executives pleaded guilty to conspiring to defraud the United States and face 30 -37 months in prison. Combine that with the October 27, 2010 implementation of FHWA Order 4470.1A and it is clear that A/E/C firms must become ever more diligent with overhead rate practices.
The penalty for knowingly including unallowable costs in the overhead rate include suspension, debarment and potential prosecution under the False Claims Act, which is criminal fraud. Additionally, states can enact their own civil and criminal penalties. This intensified scrutiny is a result of changes resulting from the USDOT Office of Inspector General (OIG) report on Oversight of Design and Engineering Firms’ Indirect Costs Claimed on Federal-Aid Grants. The recommendations contained in the report included the update of the AASHTO Uniform Audit and Accounting Guide and increased oversight by the Federal Highway Administration (FHWA) and state Departments of Transportation (DOT).
FHWA Order 4470.1A FHWA Policy for Contractor Certification of Costs in Accordance with Federal Acquisition Regulations (FAR) to Establish Indirect Cost Rates on Engineering and Design-related Services Contracts was issued based on the first recommendation in the OIG report. It requires DOTs “to develop contractor cost certification language, forms and implementation procedures” for contractor certification of costs. This is not new to firms who regularly contract directly with a federal agency since there is a “reps and certs” requirement on certain contracts.
This certification must be included with all submissions that contain an indirect cost rate. These include the annual overhead rate submission, contract proposals, and contract amendments. This order applies to prime contractors and all subcontractors. It also requires certification to be included in local contracts for projects that contain federal funds. Since FHWA has announced they will be paying close attention to Local Public Agencies and their use of federal funds, consultants should be particularly diligent when contracting with these entities. There is heightened risk since these entities typically do not understand federal contracting requirements.
The suggested wording of the certification includes “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…” and “this proposal does not include any costs which are expressly unallowable under the cost principles of the FAR.”
Now, more than ever, firms need to be proactive with their accounting systems and FAR knowledge is critical. Larger firms should consider sending key people to FAR training, as compliance is not just an accounting issue. Principals in charge of government clients should attend, as well as financial staff. For smaller firms, principals and accounting staff need to read and understand the AASHTO Uniform Audit and Accounting Guide. Regardless of the firm size, it is advisable to have a consultant who has an intimate understanding of the FAR.
Accounting systems should be re-evaluated. The tools necessary to protect your firm are a compliant accounting system set up to capture unallowable costs at the time of recording. It is critical that all firms have a dedicated job cost system that is integrated with their general ledger. The supporting processes needed to accomplish compliance are detailed account classifications and accounting procedures that clearly define and segregate unallowable costs. Since labor is the major component of overhead, employee manuals should include definitions of unallowable labor and clear instructions on how to record. More importantly, any labor category that could be suspect should have clear documentation as to the purpose of the time.
State DOTs will be under similar pressures to train their staff. Since the adoption of the AASHTO Uniform Audit and Accounting Guide, many states have been forced to abandon policies in place for many years. In many cases DOT auditors depended on these policies in their evaluation of firms’ overhead rates thus creating significant differences between rates established by different states.
We believe this Order will be the hammer that forces both firms and states to be truly FAR compliant. Even with our level of positive experience with the state DOTs, we continue to see inconsistencies in very significant areas. With the tools available to the states we hope to see the use of a single set of rules that everyone follows. Practicing in multiple states should increase the level of communication with your home state to address inconsistencies.
This is just another step on the path that began when the OIG started looking at A/E firms in 2005. For the proactive, the certification of costs will result in better management and a more profitable firm. If the firm is just reactive, the process will be more painful, but should yield similar positive results.
T. Wayne Owens, CPA, is a nationally recognized expert who focuses on the success of A/E/C firms. In addition to authoring numerous articles, Wayne presents programs on behalf of ACEC, AASHTO, PSMJ and other professional organizations throughout the United States and Canada. Wayne’s firm, T. Wayne Owens & Associates, is located Lawrenceville, GA. He can contacted via email at WOwens@twocpa.com or by calling (678) 261.8566.