Overhead Rates, Federal & State Agency Updates, and Best Overhead Management Practices For Engineers
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Transcript of 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
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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
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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
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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)
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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.
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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
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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
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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.
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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
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
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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
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
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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
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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
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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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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
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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
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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
.
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Mass Port additional documentation
– Financial statements
– Reconciliation of payroll to overhead schedule
– Staff size
– Legal and insurance fees
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Connecticut Dept of Transportation (DOT) Guidelines
– Internal Controls/System Design/Fraud
– Consistency
– Areas of Focus:
▪ Principle compensation
State funded – no change, limit of $35 per hour
Federally funded – reasonableness test using PSMJ as a guide
▪ Uncompensated overtime for salaried employees
▪ Employees bonuses not > 15% of salary
▪ Related party rent, employee morale, holiday parties, etc.
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What key metrics are there and how can they be used to
improve performance?
Chargeability/Utilization Rate– Measures the percentage of direct labor in dollars per hour
(i.e. staff time) that is charged to projects to total hours
27
Staff Size PSMJ ZW
50-99 66.9% 67.6%
100-249 64.6% 65.6%
250-499 63.4% 62.7%
500+ 64.5% 64.0%
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28
ABC Engineering Company, Inc.
Utilization / Chargeability
Increased
Actual @ 50% Planned @ 60% /Billings
Total Charge Hours 250,000 300,000
Average Bill Rate 100$ 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%
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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
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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$
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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
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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$
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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
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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
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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)
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Financial Reporting
Bill 100% of time
Collect accounts receivables
Monitor overhead costs
Have daily time reporting (electronic & automated)
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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!
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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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