If your architecture or engineering firm is involved in government contracts or collects federal or state funding, it is important to calculate overhead rates and make sure they are compliant with the Federal Acquisition Regulation (FAR). This should be done before you submit a grant proposal or while you are bidding for a contract subject to FAR.
The FAR lists the rules your firm must follow when calculating overhead rates. A&E firms that have government contracts exceeding $500,000 will generally need to have their overhead rates independently audited by a CPA firm. However, some smaller contracts may be exempt from an audit if the Department of Transportation (DOT) performs a risk assessment and ensures FAR compliance.
An overhead rate is the ratio of allowable indirect costs to total allocable direct costs. The end goal is to determine the amount of indirect costs that can be charged to the governmental agency. A CPA firm specializing in FAR audits can help you calculate the overhead rate, sometimes referred to as the indirect cost rate.
What is included in a FAR audit?
The process involves examining your firm’s accounting and internal control systems to ensure FAR compliance. The management team prepares the Schedule of Indirect Costs along with the related footnotes. This schedule is prepared in accordance with the accounting practices outlined in Part 31 of the Federal Acquisition Regulation. The auditing firm will then conduct their audit in accordance with Generally Accepted Auditing Principles, Government Auditing Standards, as well as the applicable Cost Accounting Standards, DCAA guidance, and AICPA guidance. The auditor will issue a report on the Schedule of Indirect Costs as well as reporting on the internal control over the financial reporting.
The auditor and the governmental oversight group (often the DOT) utilize the AASHTO Audit Guide, published by the American Association of State Highway and Transportation Officials, as clarification. This is simply a guide and does not supersede the regulations under FAR 31.
What is the benefit of being FAR compliant?
A FAR audit can ensure your firm is FAR compliant and help you maximize your overhead rate, minimize expenses and secure more government contract work with the best rates possible.
How can you prepare for a FAR audit?
Here are a few steps to follow when preparing for a FAR audit:
- Maintain your firm’s accounting records and financial statements on an accrual basis, subject to Generally Accepted Accounting Principles (GAAP)
- Determine disallowable expenses
- Stay up to date on the latest FAR guidelines
- Make sure your staff is knowledgeable about FAR audits
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If you need help preparing for a FAR audit, we can help. Our Architecture & Engineering team can guide you through the process and ensure your overhead rates are FAR compliant. Contact us today to get started.