2017 Hampton Roads District LAP Day VDOT Assurance

2017 Hampton Roads District LAP Day VDOT Assurance & Compliance Office (ACO) Pre-Award Audit Requirements Dave Kelly Simba Mandizvidza

Agenda This section will cover… • Federal & State Pre-Award Requirements • The ACO process & requirements • Stakeholder responsibilities • Common deficiencies • Suggestions to improve 2

Pre-Award Requirements-Federal • Public Law 92 -582 (Brooks Act) and 40 USC Chap 11 • • Section 904 (a) –the requirement for fair & reasonable compensation 23 CFR Part 172 http: //www. ecfr. gov/cgi-bin/text idx? rgn=div 5&node=23: 1. 0. 1. 2. 3 • Requirements for procurement of engineering and design related services under 23 U. S. C. 112 & as supplemented by Uniform Administrative Requirements, Cost Principles (48 CFR Part 31) and Audit Requirements for Federal awards Rule (2 CFR 200). • Qualifications-based selection 3

Pre-Award Requirements-Federal • 48 CFR 31 http: //www. ecfr. gov/cgi-bin/textidx? tpl=/ecfrbrowse/Title 48/48 tab_02. tpl § This part contains cost principles and procedures for— (a) The pricing of contracts, subcontracts, and modifications to contracts and subcontracts whenever cost analysis is performed (see 15. 404 -1(c)); and (b) The determination, negotiation, or allowance of costs when required by a contract clause. • FHWA’s Engineering & Design Service s website https: //www. fhwa. dot. gov/programadmin/consultant. cfm • Provides the statutory and regulatory framework, Federal Highway Administration (FHWA) policies, and supporting guidance and resources. 4

Determining Reasonableness FAR 31. 201 -3 • “A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business…. ” “…The burden of proof shall be on the contractor to establish that such cost is reasonable” 5

Determining Allowability FAR 31. 201 -2 To be allowable for cost reimbursement, a cost must comply with all of the following requirements: • Reasonable • Allocable • Conforms to applicable CAS standards, if applicable, otherwise GAAP • Terms of the contract • Limitations set forth in this subpart 6

FHWA Website • Question 2. • “Are pre-negotiation/pre-award audits or reviews allowed for FAHP funded engineering and design related services contracts? (Updated 08. 01. 2016)” • “Yes, contracting agencies may perform pre-negotiation/preaward audits or reviews and the costs to perform those audits or reviews are eligible for Federal-aid participation. ” 7

Federal Requirements - Contractor Responsibility • FAR Part 9 • 9. 103 Policy. § (a) Purchases shall be made from, and contracts shall be awarded to, responsible prospective contractors • 9. 105 -1 Obtaining information. § “(a) Before making a determination of responsibility, the contracting officer shall possess or obtain information sufficient to be satisfied that a prospective contractor currently meets the applicable standards in 9. 104. 8

Pre-Award Requirements- State • VDOT Manual for Procurement and Management of Professional Services https: //insidevdot. cov. virginia. gov/div/CPO/5 ZAC 7/Site. Pages/Home. aspx § Primary reference for the procurement of professional services of federal-aid projects administered by the LPA. • VDOT Locally Administered Projects (LAP) Manual http: //www. virginiadot. org/business/locally_administered_projects_manual. asp § LAP Manual Section 11. 2. 8 Consultant Negotiations & Pre-Award Audit 9

Pre-Award Requirements - State • Virginia Public Procurement Act (VA code Title 2. 2 -4302) § § 2. 2 -4302. 2. Process for competitive negotiation. § Fair and Reasonable price § Use of qualifications based procedures • The AASHTO Audit & Accounting Guide https: //bookstore. transportation. org/item_details. aspx? ID=2625 § Focus is on auditing and reporting on indirect costs and resultant overhead rates. § “Contract pre-awards are performed to evaluate the reasonableness and accuracy of a cost proposal for a specific contract. ” 10

The ACO Pre-Award Review Process • Threshold for Pre-Award review • Pre-Award objectives • 20 business days for ACO review per LAP manual. • • Timeline depends on completeness of submittals & follow up documentation. Pre-award evaluation memo 11

Pre-Award Audit Threshold Cost Proposal Value Responsibility • > $200, 000 VDOT-ACO • < $200, 000 LPA 12

Pre-Award Review Objectives • A review of contractor’s: • Financial capability • Adequacy of accounting system design • Cost proposal • To assist in the award & administration of the proposed contract by advising on contractor’s ability to perform, reasonableness of cost proposal and compliance with Fed and State procurement regulations • ACO currently focuses on cost proposal 13

Right-of Way (ROW) • No Pre-Award requirement on ROW transportation Alternative projects 14

Pre-Award Evaluation Stakeholders • Local Participating Agency • VDOT § Project Coordinator (PC) § Civil Rights § ACO • Consultant 15

Stakeholder Responsibilities • LPA submits Award package to PC • PC verifies completeness & submits it to ACO • ACO performs Pre-Award review & submits PA memo to PC. The memo emphasizes the contracting officer’s responsibility. • PC resolves ACO comments & provide written notification of approval to LPA • LPA verifies contract language & may execute MOA (contract) 16

Compensation Methods Allowable • Cost Plus Net (fixed)- Fee (CPNF) • Fixed Billable rates (Specific rates of compensation) • Lump Sum Unallowable • % of construction method is prohibited by VA & Fed procurement regulations. 17

ACO Review Stages • Deficiency Form (Triage) # 1 - Incomplete submittal • Deficiency Form (Triage) # 2 - Incomplete & inadequate submittal • Final memo • LPA to ensure resolution of issues prior to award 18

Common Deficiencies • Incomplete/delayed submittals • Delayed review by ACO • Departure from approved procurement process • Pre-Award requested after contract award/or after work has been performed without proper authority • Math Errors • Evidence of unallowable items in proposal. 19

Common Deficiencies • Administrative mark ups on direct costs etc. • Incorrect /combined excel format used for proposal • VDOT accepted overhead rate not available • Overhead type costs proposed as direct • Delayed or poor communication • Required certifications not provided 20

Deficiencies Per ACO database PRE-AWARD DEFICIENCIES BY TYPE-HAMPTON ROADS DISTRICT # Description Count Auditor did not have access to 1 Share. Point 1 2 CCC not submitted or incorrect 14 VDOT project Manager did not sign PA 3 Checklists 5 Excel templates provided without 4 passwords 5 5 Payroll registers not provided/incorrect 12 6 Missing FAR approval letter 8 7 Request Far review with Pre-Award 2 PA documents not in one easy to find 8 site 3 9 PA template incorrectly completed 12 Insufficient Non-salary direct cost 10 documentation 15 11 CEI "Capped Rates" not used correctly 2 12 Other 17 Total 96 21

Fee Proposal Estimate • Sufficient documentation to support the basis of costs • Consultant to certify that costs are proposed in accordance with consultant’s accounting system & must state that costs proposed as direct expenses are not included in their overhead • Excel templates with breakdown of Cost elements § Direct labor § Non-salary (other) direct costs § Escalation § Contingency § Net Fee • Scope of work and proposed schedule 22

Direct Labor-requirements • Average hourly rates -Labor Category schedules • Man-hours by personnel classification-labor summary • Actual pay registers for each employee proposed • Note the restriction on Principals, Partners & executives 23

Common Issues- Direct Labor • Hourly rates not supported by pay register • Overtime incorrectly calculated • Highest hourly rate > than 150% of lowest hourly rate Proposed man hours not provided • 24

Overhead Rate requirements • VDOT FAR Acceptance (approval) letter required http: //www. virginiadot. org/business/indirect_cost_rate _audit_home_page. asp • Rate must be no older than 18 months • Safe Harbor rates (provisional) 110% Home & 75%Field • Submit signed Contractor Cost Certification (CCC) form to obtain Safe Harbor Acceptance letter. 25

Common Issues- Overhead rates • Overhead rate older than 18 months • Incorrect overhead rate • Use of combined rate where field office is established & Home & Field Rates are available • Proposed rate based on weighted subsidiary company VDOT accepted rates using expected proportion of work 26

Common unallowable costs Source: AASHTO Guide (2016 Edition) FAR Reference 31. 205 -1 and 31. 205 -38(b)(1) 31. 205 -1(f)(2) 31. 205 -1(f)(5) 31. 205 -1(d)(2) 31. 205 -1(f)(7) 31. 205 -3 31. 205 -6(m)(2) 31. 205 -8 and 31. 205 -1(e)(3) 31. 205 -13(b) 31. 205 -14 31. 205 -15(a) 31. 205 -19(e)(2)(v) Unallowable Costs Advertising Trade Show Expenses Trade Show Labor Brochures and Other Promotional Material Souvenirs/Imprinted Clothing Provided to Public Membership in Civic and Community Organizations Bad Debts Collection Costs Personal Use of Company Vehicles Contributions or Donations Employee Gifts and Recreation Membership in Social, Dining, and Country Clubs Social Activities Fines, Penalties, and Mischarging Costs Related to Violation of Laws Life Insurance on Key Employees 27

Common Unallowable costs FAR Reference 31. 205 -19 31. 205 -20 31. 205 -22 31. 205 -27 31. 205 -30(c) 31. 205 -33(e) 31. 205 -35 31. 205 -46 31. 205 -49 31. 205 -51 Unallowable Costs to Correct Defects in Materials and Workmanship Interest Expense Lobbying and Political Activity Costs. Organization/Reorganization Legal Fees Organization/Reorganization Accounting Fees Organization/Reorganization Incorporation Fees Organization/Reorganization Labor Capital Raising (Equity or Long-Term Debt) Legal Fees Capital Raising (Equity or Long-Term Debt) Accounting Fees Capital Raising (Equity or Long-Term Debt) Lender Fees Patent Costs Retainer Agreements (unless properly supported) Relocation Costs (in certain circumstances) Travel Costs in Excess of FTR Rates Goodwill Alcoholic Beverages 28

Facilities Cost of Capital (FCOC) • An imputed cost of fixed assets used in contract • Derived as part of the FAR audit but shown as a separate line item on overhead schedule • Not included in the fee base to determine net fee 29

Common FCOC Issues • Facilities rate • • Combined with overhead rate Incorrectly computed 30

Direct Costs-requirements • Requirement for total estimated direct costs • Vehicle/Equipment leases/rentals • Rental/Master lease agreement • Lease schedules/quotes • Travel expenses per VDOT travel Policy • Unit price items-Standard fee schedule & Attestation letter 31

Direct Costs-requirements • Items > $5 K<$50 K need 4 quotes from DMBE certified firms • IT proposals reviewed by VDOT Information Technology Division • POV & Lease mileage rates per VDOT approval memos • Caps on cell phones and CADD equipment 32

Direct Costs-requirements • Travel expenses per VDOT travel Policy • Unit price items-Standard fee schedule & Attestation letter 33

Direct Costs-Common Issues • Direct billing of tools of the trade/necessary equipment • Mobile device costs exceed the VDOT cap ($45 for cell phones) • Unit price proposals not supported by Standard Fee Schedule & Attestation letter. • Attestation letter used to support all direct expenses! 34

Direct Costs-Common Issues • Prices proposed “at cost. ” Quantities “TBD” • Mileage rates other than per VDOT policy • Leases • No documentation to support classification • Not supported by a master agreement and schedules • Not properly classified as capital or operating 35

Escalation rate • VDOT allows escalation of direct salaries for multiyear contracts • Limited Services Term Contracts- a separate for each year • Not to exceed 3% per year or the rate established by the CPO Division, whichever is less. • Half of the annual escalation rate for first year 36

Common Issues With Escalation • Incorrect escalation proposed • Escalation exceeds VDOT cap of 3% 37

Excel Templates Fixed Billable Rates vs Cost Plus • Fixed Billable Rate • Rate schedules • Use Fixed Billable Rates on Labor summary • Cost Plus • Use average hourly rates on labor summary • Lump Sum • Use Cost Plus Net Fee template 38

Contingency on CPNF contracts • VDOT permission required for use • Usually 5% on • • Direct labor Plus overhead Non Salary Direct Costs • Calculated on fee base • Not allowed on Lump sum contract • Prime cannot get contingency on sub consultant services 39

Common Contingency Issues • Contingency applied to: • Lump sum contracts • Fixed billable rates 40

Sub Consultants-issues • Administrative add-ons (Mark –ups) on sub consultants NOT allowed • Subcontractor not allowed to sub contract per General terms of VDOT MOA 41

Negotiated Net Fee • Net fee covers profit etc. • Net fee of 8% -12% of direct labor plus overhead only as a test for prudence, otherwise net fee negotiated and fixed. • • • Overhead not to exceed 156% when determining net fee Cost plus % of the cost contracts prohibited Written justification for net fee > 10% 42

Common Net Fee Deficiencies • Overhead >156% used to determine net fee • Net fee outside the VDOT range of 8%-12% 43

Steps To Improve • • Complete documentation submittals aid in timely review Deliberate communication Consistency in processes (VDOT & LPA) Improved • • • excel templates Risk assessment Collaboration to improve knowledge of • • Federal & State Procurement requirements VDOT Procurement process ACO Pre-Award requirements Contractor cost proposal consistency 44

SUMMARY • Pre-Award requirements • • Risk of Non-compliance • • Federal State Local Compromise efficiency & effectiveness of process May reduce participation Avoid the common failures Continuous collaboration & improvement 45

QUESTIONS? 46