Delivering value through partnership and trust Small Business
Delivering value through partnership and trust. Small Business Entity (SBE) Contract Audit Workshop What You Need to Know to Prepare MANAGEMENT AUDIT SERVICES August 12, 2020 1
Opening Remarks Shalonda Baldwin Interim Chief Auditor Management Audit Services (MAS) 2
Mission Statement Provide independent, objective assurance and consulting services designed to add value and improve operations. 3
Agenda § What is a Contract Audit? § FAR Cost Allowability Consideration § Transitional Indirect Cost Rate (TICR) Program § How to Have a Successful Audit § Question and Answer 4
Question and Answer Instructions When asking a question please include: § Full name § Name of your Company 5
Polling Question Have you been audited by Management Audit Services or a CPA before? A. Yes B. No 6
What is Contract Audit? An independent examination or verification of costs to assist the Contracting Officer with financial information to: § Procure goods/services prudently § Prevent or detect improper payments 7
Purpose of a Contract Audit Required by Metro Vendor Contract Management Policy in an effort to: § Provide transparency, accountability and oversight of taxpayers’ money § Compliance with Contract Terms and Provisions § Determine allowability, allocability and reasonableness of proposed and/or billed costs 8
Contract Audit Standards & Criteria Generally Accepted Government Auditing Standards (GAGAS); Contract audits are performed in accordance with: Federal Acquisition Regulation (FAR) Part 31 Cost Principles; and Request for Proposal and/or Contract Terms 9
Definition of Federal Acquisition Regulation Cost Principles A cost is allowable only when the cost complies with all of the following requirements: Reasonableness FAR 31. 201 -3 Allowability FAR 31. 201 -2 Allocability FAR 31. 201 -4 10
Types of Contract Audits Pre-Award Audit Post-Award Audit Incurred Cost Evaluate the proposed costs for allowability, allocability and reasonableness Evaluate project costs billed to date, including; direct labor, overhead/indirect cost rates, subcontractor costs, other direct costs, travel and fee, etc. Indirect Cost Rate Evaluate submitted/billed indirect cost rates for compliance with the cost principles of FAR 31. 2 11
Pre-Award Audit Direct Labor Cost – Evaluate the proposed labor rates to ensure that they are supported by proper documentation (e. g. , payroll register, labor employment agreement). Escalation Cost – Review the methodology of the proposed escalation cost and breakdown of costs (by years and hours) for each proposed individual. 12
Pre-Award Audit Indirect Cost Rates § Compare the two most recent fiscal years of the indirect cost schedules to determine consistent adjustment of unallowable costs. § Select sample expenses from the indirect cost pool to determine if they are allowable, allocable, and reasonable per FAR Part 31. 2. § If any unallowable costs are detected, we then recalculate the indirect cost rate. 13
Polling Question A staff attended a 2 -day conference in Las Vegas. The following expenses were incurred: Registration ($300), Dinner ($50) & Alcoholic Beverages ($20), Hotel & Airfare ($600), and Britney Spears Concert Ticket ($150). How much of these expenses will be disallowed? A. B. C. D. $50 $170 $600 14
Indirect Cost Rate Calculation Example Home Office Rate – Direct and indirect costs of personnel that work out of company provided offices (e. g. Headquarters). Project Office Rate – Direct and indirect costs of personnel that work out of an office provided by Metro (e. g. Integrated Project Office). (See Attachment 1 for Indirect Cost Rate Calculation Example) 15
Pre-Award Audit Other Direct Costs (ODC) § Evaluate the proposed costs in comparison with historical costs, quotes, or market prices Travel § Evaluate the proposed Travel costs in comparison with market prices and/or most recent US General Services Administration rates Fee § Evaluation depends on the type of contract 16
Post-Audit During an Incurred Cost audit the following cost elements are evaluated: § Direct Costs – Labor, materials, travel, or any other costs directly identifiable to the contract. Any costs not related to the contract are non-billable. § Indirect Costs – Cost that is not directly identifiable to the project. Indirect costs are needed to operate the business as a whole. Billed costs are compared with the costs actually incurred. 17
FAR Cost Allowability Considerations Examples of high risk expense accounts that may contain unallowable costs per FAR Part 31. Executive Compensatio n Travel Examples of High Risk Expense Insurance Employee Morale Bonus & Incentives Rent 18
Executive Compensation – Requirements Executive Compensation § It is the Contractor’s responsibility to demonstrate that the costs are reasonable and in compliance with FAR 31. 205 -6. The following should be provided for Auditors to evaluate: § Compensation Analysis with written methodology and supporting documentation on how the analysis was prepared. § Utilization of the National Compensation Matrix (NCM) – recommended by AASHTO Uniform Audit & Accounting Guide 19
Executive Compensation Example – Key Facts Gross Revenue: $1. 5 M CEO Compensation of Company ABC: Regular Wages $150, 000 Vacation & Sick $14, 000 Bonus $20, 000 401 k Contribution $10, 000 Total Compensation $194, 000 20
Executive Compensation Example – NCM National Compensation Matrix (NCM) CEO Compensation $194, 000 NCM Amount $187, 386 Amount in Excess of NCM ($6, 614) 21
Bonus & Incentives – Requirements FAR 31. 205 -6(f)(1) Compensation for personal services are allowable if: § Awards are paid or accrued under an agreement and there is an established plan or policy followed by the Contractor § Basis for the award is supported Bonus payment must be: § Allocable to the contract § Reasonable in amount § Must not be a distribution of profit to owner 22
Bonus & Incentive – How Auditors Test Verify whether the bonus policy includes the following: § Eligibility criteria § Period of bonus plan § Performance criteria (e. g. individual expectation must be measurable & verifiable) § Form of payment to be received § Distribution timeline 23
Rent – Requirements FAR 31. 205 -36 Rental cost are allowable if rental costs under operating leases, to the extent that the rates are reasonable at the time of the lease decision, after considerations of: § Rental costs of comparable property, if any; § Market conditions in the area § Type, life expectancy, condition, and value of the property leased § Other provisions of the agreement Common Control and Cost of Ownership § FAR 31. 205 -36(b)(3), charges in the nature of rent for property between any divisions, subsidiaries, or organizations under common control are allowable to the extent that the charges do not exceed the normal costs of ownership. 24
Rent Calculation Example Computation of Allowable Rent Expense: ABC’s Allowable Cost of Ownership of the Property Total Expense for Building Maintenance Less: Unallowable Interest Expense Total Cost of Ownership Multiplied by: Allocation Factor (12, 750/15, 000 SF) Allowable Cost of Ownership / (Allowable Rent Expense Amount) $350, 000 ($45, 000) $305, 000 85% $259, 250 ABC’s Allowable Cost of Ownership of the Property Total Rent Expense Recorded by the Company Less: Allowable Cost of Ownership Unallowable Cost Required to be Adjusted per FAT 31. 205 -36(b)(3) $400, 000 ($259, 250) $140, 750 25
Employee Morale – Requirements FAR 31. 205 -13 Employee morale, health and welfare allowable if costs incurred are designed to improve working conditions and employer-employee relations. Some examples include: Health Clinics Employee Counseling Services Wellness / Fitness 26
Insurance Costs – Requirements § FAR 31. 205 -19 Insurance and Indemnification § Key-man life insurance premiums are considered an unallowable expense unless: • Insurance is included as additional compensation to the employee and • Employee’s family is listed as beneficiary. 27
Travel Costs – Requirements § FAR 31. 205 -46 – Travel costs incurred by contractor personnel in connection with official company business are allowable. § Transportation may be based on mileage rates or actual costs incurred. § Lodging, meals, and incidental expenses may be based on per diem, actual expenses, or a combination. 28
Travel Costs – Requirements Name of employee Purpose of the trip Date and place of the travel expenses Mileage Reimburseme nt (Rate for 2020 is 57. 5 cents per mile) The Contractor must document all travel costs 29
Transitional Indirect Cost Rate (TICR) § Metro’s program for eligible firms to elect the use of a Transitional Indirect Cost Rate (TICR) of 115% for a conditional period of 12 months for cost reimbursable and firm fixed price contract. § During the conditional period, the firm will establish data with the intent of establishing a final Indirect Cost Rate (ICR). 30
TICR – Eligibility Criteria § The firm does not have relevant cost history to use as a base for developing an Indirect Cost Rate (ICR), or § The firm does not have an ICR previously accepted by a cognizant agency, or an audited/accepted actual ICR within the established period. § Firms will no longer be eligible to participate in this program once a cost history has been developed that allows an ICR to be established in accordance with FAR Part 31. 31
Cost or Pricing Summary (Form 60) 32
Cost or Pricing Summary (Form 60) 33
Cost or Pricing Summary (Form 60) 34
How to Have a Successful Audit Accounting system separates; direct / indirect and allowable / unallowable costs in the GL Written internal control policies and procedures manual Ensure that accounting records are kept on accrual basis in accordance with generally accepted accounting principles Maintain supporting documentation such as payroll registers, personnel action forms for pay rates, timesheets, reports, receipts Provide training for accounting and key management on FAR Part 31 cost principles 35
Common Findings Noted During Contract Audits § Missing timesheet approval (when testing direct labor) § Estimates for personal use of vehicle are not sufficient § Credit card statement is not sufficient to support a purchase or service; Actual receipts should be maintained § Failure to: keep bonus policy that documents eligibility requirements and provides details on how bonus payments are determined § Failure to keep mileage logs to document whether vehicle costs are direct or indirect § Rent paid to related parties 36
Useful Links Federal Acquisition Regulation, Part 31: https: //www. acquisition. gov/content/part-31 -contract-costprinciples-and-procedures#i 1084539 Vendor/Contract Management website link: http: //business. metro. net/Vendor. Portal/ 37
Contact Information of Metro MAS Victor Chee, Auditor cheev@metro. net (213) 922 -4044 38
Questions 39
Thank you 40
- Slides: 40