A/E Industry RoundtableFeeley & Driscoll, P.C.200 Portland StreetBoston, MA 02114www.fdcpa.comJacqueline M. Weir | Directo...
Keys to Improving   Overview   Overhead Rates and Pricing Issues   State Regulation Updates   Key Metrics   Systems -...
Successful companies turn ideas into action…   They plan and assess where they are today   Define where they would like ...
I.    OVERHEAD RATES      FAR Parts 30 and 31       1. Overview       2. Allowable Costs          –    Direct vs. Indirect...
III.   Other       A. Overhead Caps & Limitations       B. State Guidelines, Recent Events, Etc.       C. Tips & otherV.  ...
Overview of FAR 31The part of the Federal Acquisition Regulations (FARs) thatcontains cost principles & procedures for:1. ...
   THREE BASIC ELEMENTS OF FAR ALLOWABLE    COSTS:       1.   Direct Labor and Other Direct Expenses       2.   Indirect ...
    A/E companies typical overhead rate is     determined by the ratio of:        INDIRECT COSTS TO DIRECT LABOR COSTS  ...
   Reasonableness - The Burden of Proof is on the Company   Allocable - Costs must be Allocable to Cost Objective    Ass...
   DIRECT COSTS ARE THOSE WHICH CAN BE    INDENTIFIED SPECIFICALLY WITH ONE    PARTICULAR CONTRACT    Examples    – Dire...
   Indirect Costs are those costs identifiable to multiple    contracts or cost objectives. (Such costs are not    subjec...
   Indirect Labor                            Depreciation   Payroll Taxes                             Automobiles   E...
   Unallowable Costs are costs that are not allowed to be    included in billings (on Government Contracts) per the    Fe...
   Certain Travel Costs are Limited            Related Party Rental Transactions   Goodwill                            ...
Visit us on the web: www.fdcpa.com   Or Call: 888-875-9770                                      15
Visit us on the web: www.fdcpa.com   Or Call: 888-875-9770                                      16
   Focus is on internal controls, more than ever.   Must be consistent with internal policies and    procedures.   Syst...
   Consistent treatment between employees, divisions,    offices, etc.   Review costing system, timesheets, billing prac...
   Cost Segregation – Unallowable should be separated   Employee Expense reports – Accuracy, approval,    support   Uns...
1.   General ledger system in place2.   Accounts in chart of accounts are properly     classified3.   Accounting system ha...
   Apply for Written Permission to Exceed    – Overhead CAPS    – This is allowed for specialized services   Hourly Rate...
 MassDOT/MHD Audit –   Currently looking for Audit Director  – Rate change from 135% to 155%  – Strict enforcement of th...
   Massport    –   Limit the ELM to 2.5 (Overhead Rate 127%)    –   Rates over 2.5 (or 127%) subject to field review    –...
.   Mass Port guidelines for audit risk- Rules of Thumb    (% of DL):    – Rent (20%)    – Legal (5%)    – B&P (8%)    – ...
   Mass Port additional documentation    –   Financial statements    –   Reconciliation of payroll to overhead schedule  ...
   Connecticut Dept of Transportation (DOT) Guidelines    – Internal Controls/System Design/Fraud    – Consistency    – A...
   What key metrics are there and how can they be used to    improve performance?   Chargeability/Utilization Rate      ...
ABC Engineering Company, Inc.Utilization / Chargeability                                                                  ...
   What markup am I    achieving on my labor?             Staff Size PSMJ            ZW                                  ...
Effective Labor Multiplier                                Actual        Planned  Net Revenues Earned        $ 25,000,000  ...
   How long does it take me to collect my money?   Compares billings to amounts uncollected at any    point in time     ...
Revenues earned                $ 30,000,000   Accounts receivable                 6,000,000   A/R Turnover                ...
   How much money does the                Staff Size   PSMJ    company have at risk?                                     ...
ABC Engineering Company, Inc.WIP DAYS ANALYSISRevenues earned                         $ 30,000,000Work-in-process         ...
Financial Reporting   Invest money to make money   Close the books within 3-5 days   Monitor monthly performance   Uti...
Financial Reporting   Concentrate on principal chargeability   Monitor overall chargeability     –  Publish time analysi...
Financial Reporting   Bill 100% of time   Collect accounts receivables   Monitor overhead costs   Have daily time repo...
Project review   Without project reporting, firms:      –   Can lose control over current projects      –   Cannot measur...
Project reporting   Your project reporting system should mirror your    bidding/budgeting system   Available on-line for...
Scheduling   Measure, improve or fix      –   By department, by person, by discipline   Rely on software systems      – ...
Visit us on the web: www.fdcpa.com   Or Call: 888-875-9770                                      41
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Overhead Rates, Federal & State Agency Updates, and Best Overhead Management Practices For Engineers

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The experts of Feeley & Driscoll’s Engineering Services Group are hosting a complementary roundtable. Please join us as Jacqueline Weir will lead an interactive discussion, touching upon topics related to Overhead Rates, FAR Regulations, and Pricing Techniques.
Opportunity to Discuss:
How to calculate your overhead rate and cost pools
How to keep rates competitive through overhead management
Federal and state overhead issues:
Use of cognizant agents
Rate caps and limitations - negotiation and classifying costs
Helping your sub-consultants in the pre-qualification process

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Overhead Rates, Federal & State Agency Updates, and Best Overhead Management Practices For Engineers

  1. 1. A/E Industry RoundtableFeeley & Driscoll, P.C.200 Portland StreetBoston, MA 02114www.fdcpa.comJacqueline M. Weir | DirectorNeil Scullion| Director
  2. 2. Keys to Improving Overview Overhead Rates and Pricing Issues State Regulation Updates Key Metrics Systems - Best Practices Visit us on the web: www.fdcpa.com Or2Call: 888-875-9770
  3. 3. 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 Visit us on the web: www.fdcpa.com Or3Call: 888-875-9770
  4. 4. 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 componentsII. How is your internal control system? Important when working with the FAR Visit us on the web: www.fdcpa.com Or4Call: 888-875-9770
  5. 5. III. Other A. Overhead Caps & Limitations B. State Guidelines, Recent Events, Etc. C. Tips & otherV. How Do You Compare? A. Benchmarking B. Industry Statistics (Utilization & Labor Multiplier) Visit us on the web: www.fdcpa.com Or5Call: 888-875-9770
  6. 6. Overview of FAR 31The part of the Federal Acquisition Regulations (FARs) thatcontains 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 Visit us on the web: www.fdcpa.com Or6Call: 888-875-9770
  7. 7.  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. Visit us on the web: www.fdcpa.com Or Call: 888-875-9770
  8. 8.  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 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770
  9. 9.  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 Visit us on the web: www.fdcpa.com Or9Call: 888-875-9770
  10. 10.  DIRECT COSTS ARE THOSE WHICH CAN BE INDENTIFIED SPECIFICALLY WITH ONE PARTICULAR CONTRACT Examples – Direct Labor – Other Direct Costs (ODC’s) – Sub Consultants – Reimbursement CostsNote: Your company should establish a chart of accounts which identifies direct costs, other direct costs, indirect costs and unallowable costs. Visit us on the web: www.fdcpa.com Or Call: 888-875-9770
  11. 11.  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 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 11
  12. 12.  Indirect Labor  Depreciation Payroll Taxes  Automobiles Employee Fringe Benefits  Rents Insurance’s  Repairs and Maintenance Office Expense and  Marketing Costs Supplies  Cost of Facilities Professional Fees  Cost of Capital Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 12
  13. 13.  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). Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 13
  14. 14.  Certain Travel Costs are Limited  Related Party Rental Transactions Goodwill  Entertainment Costs, Including Social Club Dues Alcoholic Beverages Officers’ Life Insurance  Fines & Penalties Losses on contract (other)  Interest Expense Federal Income Taxes  Lobbying Costs Certain Undocumented Pension  Organizational Costs, Including and Bonus Costs Amortization Public Relation and Advertising  Award Ceremonies, Christmas Costs Parties & Company Picnics Bad Debt  Idle Facilities Costs Contingencies  Deferred Taxes Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 14
  15. 15. Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 15
  16. 16. Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 16
  17. 17.  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? Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 17
  18. 18.  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 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 18
  19. 19.  Cost Segregation – Unallowable should be separated Employee Expense reports – Accuracy, approval, support Unsupported costs – Auditor may disallow all Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 19
  20. 20. 1. General ledger system in place2. Accounts in chart of accounts are properly classified3. Accounting system has proper internal controls4. Accounting system is able to produce financial reports regularly and consistently5. Reconciling bank statements6. Using good documentation and audit trails7. Using the accrual basis of accounting Visit us on the web: www.fdcpa.com Or Call: 888-875-9770
  21. 21.  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 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 21
  22. 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 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 22
  23. 23.  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 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 23
  24. 24. . 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. Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 24
  25. 25.  Mass Port additional documentation – Financial statements – Reconciliation of payroll to overhead schedule – Staff size – Legal and insurance fees Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 25
  26. 26.  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. Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 26
  27. 27.  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 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% Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 27
  28. 28. ABC Engineering Company, Inc.Utilization / Chargeability Increased Actual @ 50% Planned @ 60% /BillingsTotal Charge Hours 250,000 300,000Average Bill Rate $ 100 $ 100 $ 25,000,000 $ 30,000,000 $ 5,000,000Total Capacity (Hours) 500,000 500,000Divided by Chargeability 50% 60%Total Charge Hours 250,000 300,000 Chargeability 50% 60% Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 28
  29. 29.  What markup am I achieving on my labor? Staff Size PSMJ ZW 50-99 3.49 3.19 Measures the amount 100-249 3.24 3.39 of direct labor incurred 250-499 to total net revenues 3.27 3.28 500+ 3.28 3.19 Low multipliers indicate a competitive market place and/or project overruns Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 29
  30. 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 3.0Breakdown of ELM:Direct labor 10,000,000 10,000,000Overhead @ 134% 15,000,000 15,000,000Profit - 5,000,000 5,000,000 $ 25,000,000 $ 30,000,000 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 30
  31. 31.  How long does it take me to collect my money? Compares billings to amounts uncollected at any point in time Staff Size PSMJ ZW 50-99 51.9 84 100-249 61.2 86 250-499 54.5 82 500+ 58.8 89 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 31
  32. 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 $ 902,000Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 32
  33. 33.  How much money does the Staff Size PSMJ company have at risk? 50-100 9.5 Compares unbilled time to amounts earned 101-200 9.7 Measures project 201-350 10.7 performance and billing cycle adequately 351-500 20.4 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 33
  34. 34. ABC Engineering Company, Inc.WIP DAYS ANALYSISRevenues earned $ 30,000,000Work-in-process 3,000,000WIP Turnover 10.0Days WIP Outstanding 36.5CASH "GAP"Days WIP Outstanding 36.5Days A/R Outstanding 71.0Less: Payroll Days (7.0)TOTAL DAYS OUT OF POCKET 100.5 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 34
  35. 35. 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) Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 35
  36. 36. Financial Reporting Concentrate on principal chargeability Monitor overall chargeability – Publish time analysis reports Monitor the company’s Effective Labor Multiplier (ELM) Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 36
  37. 37. Financial Reporting Bill 100% of time Collect accounts receivables Monitor overhead costs Have daily time reporting (electronic & automated) Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 37
  38. 38. 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 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 38
  39. 39. 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! Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 39
  40. 40. 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 Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 40
  41. 41. Visit us on the web: www.fdcpa.com Or Call: 888-875-9770 41

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