Architecture/Engineering Industry Seminar
Wednesday, October 16, 2013
Credit/Collection
Controls for
Professional Design
Firms

A challenge facing design firms is the credit and
collection fun...
10/15/2013

D e f i n i t i o n o f K e y Te r m s

Definition of Key Ter ms
 Extension of Credit:
– Extending credit to ...
10/15/2013

Credit Approval Process

Credit Approval Process
 Purpose: to establish a policy
to provide credit for contra...
10/15/2013

Credit Approval Process

Credit Approval Process
 Fees
– Request retainer?
– How much?

 How to spot a
poten...
10/15/2013

Contract Compliance Procedure

Contract Compliance Procedure
 Contract Compliance Board
– Contract Compliance...
10/15/2013

PM Intervention with Clients

PM Inter vention with Clients
 PM should be in touch with each client at
least ...
10/15/2013

Control & Issuance of A/R
Write-offs
 When and under what circumstances
should A/R write-offs be considered?
...
10/15/2013

Case Study

Case Study
 Outcomes






Made PMs more responsible for their entire projects
from start to f...
AASHTO Update

Presented by:
Tom Yankanich, CPA
Manager, Audit & Accounting

9
10/15/2013

To p i c s


The Statutory and Regulatory Framework



Key Cost Principles



Internal Control Systems



...
10/15/2013

S t a t e S t a t u t e s a n d Wr i t t e n P r o c e d u r e s
In what ways might the application of State
S...
10/15/2013

A l l o wa b i l t y
Five Criteria per FAR 31.202(a):


Reasonableness



Allocability



Standards promulg...
10/15/2013

Allocability
What is meant by Allocability?

FAR 31.201-4 states:



Was the cost incurred specifically for
t...
10/15/2013

Objectives of Internal Controls
Strong A/E Consultant internal controls support:


Proper charging to contrac...
10/15/2013

Importance of Labor Charging


Labor hours are A/E consultant’s core product



Labor charging practices dri...
10/15/2013

Key Areas of Cost (continued)
Compensation:


Unallowable
‒ Compensation tied to changes in value of
corporat...
10/15/2013

The Use of Audit Information (continued)
The Audit should be designed to determine if:


Expense balances are...
10/15/2013

P r e - Awa r d R e v i e w:
C o s t s Typ i c a l l y E x a m i n e d


Direct Labor costs (especially labor...
10/15/2013

Overview of Cognizance and
Reliance of Other Audits


In the course of performing audit and attest functions,...
BENCHMARKING

Presented by:
David E. Shaffer, CPA
Director

20
10/15/2013

Learning Objectives


Learners will become familiar with key ratios of
professional service firms



Learner...
10/15/2013

PSMJ Respondents
Respondents by Total Staff Size

1 to 20 (52)
21 to 50 (80)
51 to 100 (51)
101 to 200 (42)
20...
10/15/2013

Big Picture Results


Recovery is SLOW!!! The net multiplier achieved
decreased from 3.04 to 3.02, and still ...
10/15/2013

Key Ratio Comparisons of 2012 to 2011
2011

2012

Backlog Change

4.0%

Gross Revenues Change

3.0%

8.0%

Sta...
10/15/2013

Key Spending Per Staff
Lower
Quartile

Median
Quartile

Mean
Quartile

Upper
Quartile

Group Insurance Expense...
10/15/2013

Staffing Size

Technical Staff Ratio to:

Lower Median Mean
Upper
Quartile Quartile Quartile Quartile

Non-Tec...
10/15/2013

Weekly Report


Billable hours per director, manager, senior, and staff for
the week, month to date, and year...
10/15/2013

Questions ?

8

28
TAX UPDATE AND
ISSUES

Presented by:
Kevin McGinn, CPA
Tax Manager

29
10/15/2013

Agenda


New tax law- The Fiscal Cliff? What happened?



Domestic Production Activities Deduction Overview
...
10/15/2013

Bonus Depreciation


Eligibility - overview


2012 – 50%



2013 – 50%



2014 -

Section 179


Eligibili...
10/15/2013

Capital Gains

Qualified Dividends


Qualified dividends continue to be taxed at preferential
capital gains r...
10/15/2013

3.8 Percent Medicare Contribution Tax


Starting 2013, the Medicare surtax tax will be imposed on
the “net in...
10/15/2013

3.8 Percent Medicare Contribution Tax (cont’d)


Example 1
A single taxpayer has modified AGI of $230,000, in...
10/15/2013

Domestic Production Activities Deduction (DPAD)


The American Jobs Creation Act of 2004 authorized a
deducti...
10/15/2013

Domestic Production Activities Deduction (DPAD) (Cont’d)



Domestic Production Gross Receipts (DPGR)


Taxp...
10/15/2013

Cash Basis of Accounting


Eligibility – overview



Accrual Basis



Constructive Receipt



Prepaying ex...
10/15/2013

Typical Goals of an ESOP


Shareholder Liquidity



Long-term succession plan



Corporate and personal tax...
10/15/2013

S Corporation ESOP’S


“S” Corporation income attributed to shareholders



ESOP as S Corp shareholder pays ...
10/15/2013

ESOP Loan Repayment
Contributions or
Dividends ($$$)

Company

ESOP

Loan Payments ($$$)
Loan
Payments
($$$)
R...
10/15/2013

ESOP Plan Design Issues


Eligibility



Stock allocations



Vesting



Benefit Distributions



Voting ...
APPENDIX I
Internal Control Questionnaire for
Consulting Engineers

42
Internal Control Questionnaire (ICQ) for Consulting Engineers

Name of Engineering Consultant (―the Company‖):
TIN (Taxpay...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
A.3. Parent/Subsidiary. Is the Company a subsidiary o...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
A.8. Number of Employees. How many employees (includi...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
B.4. Preparing the Indirect Cost Schedule. How freque...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
C. Accounting System(s)
C.1. Accounting Software. Wha...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
C.7. Divisions/Cost Centers. Does the Company have mo...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
C.13. Project-Specific Indirect Cost Rate(s). Does th...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
E. Accounting – Payroll and Timekeeping
E.1. Payroll ...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
F. Labor Cost Accumulation
F.1. Direct & Indirect Lab...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
G. Labor Billings and Project Costing
G.1. Billing Ra...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
H. Expense Accumulation and Billing
H.1. Nonsalary Di...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
d.

Is mileage separated by direct and indirect class...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
H.11. Activities Ineligible for Cost Reimbursement. D...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
J. Related-Party Transactions
J.1. Related Employees....
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Name or ID:

Title/Position:

Wages/Salary:

Bonus:

...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
J.3. Property or Facilities Leased from Related Parti...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
K. Other Questions
K.1. Life Insurance. Does the Comp...
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
I certify that to the best of my knowledge and belief...
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Kreischer Miller Architecture & Engineering Industry Seminar - October 16, 2013

  1. 1. Architecture/Engineering Industry Seminar Wednesday, October 16, 2013
  2. 2. Credit/Collection Controls for Professional Design Firms A challenge facing design firms is the credit and collection function and its impact on the property and financial well-being of their firms. This program will introduce credit and collection procedures, how to deal with difficult clients, in-house training and periodic progress audits. Presented by: Andy Harmelin, AI Consulting LLC 1
  3. 3. 10/15/2013 D e f i n i t i o n o f K e y Te r m s Definition of Key Ter ms  Extension of Credit: – Extending credit to your clients can make the difference between a firm that’s holding on and one that is prospering. – It is always better to chase the dollar, not the sale! D e f i n i t i o n o f K e y Te r m s Definition of Key Ter ms  Cash Flow: – Focuses on operational cash flow from the firm’s core business activities – Measure of a firm’s liquidity or ability to meet payroll and pay vendors – Firm can be profitable but still have trouble remaining liquid or solvent if it does not collect its receivables in a timely manner D e f i n i t i o n o f K e y Te r m s Definition of Key Ter ms  Accounts Receivable: – Accumulation of billing to clients of an organization who have been provided goods or services – Firm’s over-investment in accounts receivable can create significant cash flow problems 1 2
  4. 4. 10/15/2013 Credit Approval Process Credit Approval Process  Purpose: to establish a policy to provide credit for contracts and new client invoicing to protect company Accounts Receivable Credit Approval Process Credit Approval Process  Procedure – Standard Credit Terms  When do you expect to be paid?  What is the business structure? – Corporation/LLC – Partnership Credit Approval Process Credit Approval Process  Procedure – Establishment of Credit        Client Name and Address Dollar value of project Length of project Project address Contact person: phone/Fax Bank references Trade reference – Find out how a company pays its bills 2 3
  5. 5. 10/15/2013 Credit Approval Process Credit Approval Process  Fees – Request retainer? – How much?  How to spot a potentially bad risk. Policy to Review for Contract Compliance  Purpose – Contract compliance review is designed to ensure that all contracts contain the requirements necessary to support financial performance, cash flow and financial systems, and the legal and operational integrity of each project. Policy to Review for Contract Compliance  An Engagement Register Form (ER) is developed by Accounting which includes all pertinent data such as: • • • • Type of contract: lump sum or time and materials Total contract amount Estimated length of job Estimated profitability 3 4
  6. 6. 10/15/2013 Contract Compliance Procedure Contract Compliance Procedure  Contract Compliance Board – Contract Compliance oversight is the responsibility of YOUR OVERSIGHT REVIEW BOARD. Standing board members are as follows:    Office Manager Accounting Manager Senior Project Manager Contract Compliance Procedure Contract Compliance Procedure  Parameters of projects for Board review     Contracts that exceed $50,000 Contracts which include bonding requirements Contracts which include progress payments and/or significant WIP run up before billing Contracts that are lump sum without progress payment provisions  Areas of focus    Estimated profitability Previous experience with client Anticipated profit Out of Scope Work and Contract Over r uns  How to spot a troublesome client – Early haggling over what is covered and what is not – Constant demands for special treatment – Too many “battlefield decisions” on extra services – Hiding from you after the work product has been delivered 4 5
  7. 7. 10/15/2013 PM Intervention with Clients PM Inter vention with Clients  PM should be in touch with each client at least every 2 weeks  Prior to contacting clients, PM should have updated account balance, including WIP, and should match up with contract limits PM Intervention with Clients PM Inter vention with Clients  During contact, PM should – Find out how job is progressing – Determine if billing has been received – Ask if there are any issues with services – Determine if client anticipates additional services for out-of-scope items – Watch client payment habits Possible Courses of Action Possible Courses of Action  Notify firm’s principals and accounting department of problem  Accounting department sends letter to client that payment terms of contract are not being met  Based on client’s response, consider using available leverage: – Stop work letter as of a date certain if open account if not paid up to date – Notify the owner/funding source by a certain date – Place a lien on the project – Place the account with an outside collection agency 5 6
  8. 8. 10/15/2013 Control & Issuance of A/R Write-offs  When and under what circumstances should A/R write-offs be considered? – Common causes     Out of scope services Contract overruns WIP: Work-in-process held for billing on future projects Warehoused hours logged as WIP – How to minimize   Get weekly or daily time records from personnel and crosscheck against contracts Make sure to get contract modifications and/or addenda as needed Case Study Case Study  Medium-sized architectural firm needed help with their aging accounts receivable Case Study Case Study  Solutions – Work with the Project Managers on a two week basis, engaging them in the billing process and making them more aware of client issues that need to be addresses – Manage a year-end collection effort, sending out balance confirmation letters to selected clients, supported by PM assistance – Established routine telephone calling practices to be followed at set intervals 6 7
  9. 9. 10/15/2013 Case Study Case Study  Outcomes    Made PMs more responsible for their entire projects from start to finish, and helped tie their project profitability into year-end company bonuses Made their clients aware of payment responsibilities, and set up a mechanism to deal with slow paying clients Established year-end internal collection program which exceeded expectations 2 consecutive years  Year 1-actual results were 112% of target  Year 2-actual results were 118% of target  Reduced bad debt ratio by 70% QUESTIONS? Questions? For more information about AI Consulting, LLC, please visit www.ai-consultingllc.com. Presented by: Andy Harmelin, AI Consulting LLC 7 8
  10. 10. AASHTO Update Presented by: Tom Yankanich, CPA Manager, Audit & Accounting 9
  11. 11. 10/15/2013 To p i c s  The Statutory and Regulatory Framework  Key Cost Principles  Internal Control Systems  Key Areas of Cost, Including Compensation  The Use of Audit Information  The Risk Management Framework, Oversight and Cognizance www.kmco.com 1 Learning Outcomes  Explain the Federal and State laws, regulations, policies and procedures relating to the procurement of A/E design services and administration of A/E Contracts.  Summarize and differentiate key cost principles.  Demonstrate an understanding of the importance of internal controls.  Explain how to use audit information in the procurement of A/E services and administration of A/E contracts.  Discuss the risk management framework and tools and correlate them to your role in administering A/E contracts. www.kmco.com 2 Federal Statutes and Regulations 23 U.S.C 112(b)(2) Contracting for Engineering and Design Services  23 CFR 172 Administration of Engineering and Design Related  Service Contracts 48 CFR Part 31 (FAR Part 31) Contracts with Commercial Organizations 40 U.S.C Chapter 11 Sections 1101 to 1104 Selections of Architects and Engineers (Brooks Act) 49 CFR 18 Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local  Governments (Common Grant Rule) www.kmco.com 3 1 10
  12. 12. 10/15/2013 S t a t e S t a t u t e s a n d Wr i t t e n P r o c e d u r e s In what ways might the application of State Statutes and procedures differ for the for the following types of contracts?  Contracts using Federal-Aid Highway Program Funds?  Contracts using State and local agency funding? www.kmco.com 4 Accounting and Auditing Principles, Standards, Criteria and Guidance FAR Part 31 Federal Acquisition Regulation GAS or GAGAS Government Auditing Standards(Also known  as "Yellow Book") GAAP Generally Accepted Accounting Principles DCAA CAM Defense Contract Audit Agency Contract  Audit Manual CAS Cost Accounting Standards GAAS and AICPA Guidance Generally Accepted Auditing Standards AASHTO Audit Guide AASHTO Uniform Audit & Accounting Guide www.kmco.com 5 Key Cost Principles  Allowability, FAR 31.201-2  Reasonableness, FAR 31.201-3  Allocability, FAR 31.201-4  Direct and Indirect Costs 6 2 11
  13. 13. 10/15/2013 A l l o wa b i l t y Five Criteria per FAR 31.202(a):  Reasonableness  Allocability  Standards promulgated by the CAS Board, if applicable, otherwise GAAP  Terms of Contract  Any limitations set forth within this subpart www.kmco.com 7 A l l o wa b i l i t y ( c o n t i n u e d ) Must be excluded from claimed costs: www.kmco.com 8 Reasonableness FAR 31.201-3(a) states:  Burden of proof rests with the A/E Consultant  Costs incurred by the A/E Consultant not necessarily reasonable www.kmco.com “No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.” 9 3 12
  14. 14. 10/15/2013 Allocability What is meant by Allocability? FAR 31.201-4 states:  Was the cost incurred specifically for the contract?  Does the cost benefit both the contract and other work, and can it be distributed to them in reasonable proportion to the benefits received?  Is the cost necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown? www.kmco.com “A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship.” 10 Billable/Nonbillable  Whether a cost is billable or nonbillable is based on contract terms.  Often costs are allocable to a project, but are not billable. www.kmco.com 11 Internal Controls Systems, policies and procedures that prevent or detect misstatements. Responsibility of the A/E Consultant to establish and maintain strong internal controls. Strong internal controls are critical to proper contract costing and FAR compliance. www.kmco.com 12 4 13
  15. 15. 10/15/2013 Objectives of Internal Controls Strong A/E Consultant internal controls support:  Proper charging to contracts  Accurate cost estimations  Proper calculation of indirect cost rate  FAR compliance  Consistency in tracking, accumulation and allocation www.kmco.com 13 I n t e r n a l C o n t r o l P yr a m i d www.kmco.com 14 K e y S ys t e m s o f a Typ i c a l A / E D e s i g n F i r m Labor Charging System Estimating System Billing System Compensation System Job Costing System General Ledger/Accounting System Purchasing/Accounts Payable System www.kmco.com Budget/Planning System Financial Reporting System 15 5 14
  16. 16. 10/15/2013 Importance of Labor Charging  Labor hours are A/E consultant’s core product  Labor charging practices drive ‒ Invoicing ‒ Project Costing ‒ Calculation of indirect cost rate  Highest Risk area in most A/E design firms www.kmco.com 16 A A S H TO I n t e r n a l C o n t r o l Q u e s t i o n n a i r e (ICQ)  Assists the auditor in reviewing the internal control structure in place.  Must be completed by the A/E consultant  Developed to help increase consistency and minimize redundancy between State DOTs  Not mandatory unless the State DOT requires it  Other assessment tools: any internal controls and/or process documentation prepared by the A/E consultant or CPA firm auditor www.kmco.com 17 Key Areas of Cost Compensation:  Allowable – Subject to Excess Compensation Analysis ‒ Direct Labor ‒ Bonus (unless based on ownership) ‒ Deferred Compensation ‒ Employer Contributions to Pension Plans www.kmco.com 18 6 15
  17. 17. 10/15/2013 Key Areas of Cost (continued) Compensation:  Unallowable ‒ Compensation tied to changes in value of corporate securities, e.g. Phantom Stock Plan ‒ Payments in the event of a change in ownership ‒ Lobbying/Advertising/Charitable/Client Entertainment Activities Cost  Management responsible for tracking time www.kmco.com 19 Common Unallowable Costs  Advertising  Personal Use of Company Owned Vehicles ‒ ‒ Includes Website Development and Maintenance Daily mileage logs must be kept and separate expense tracking for each vehicle  Lobbying Costs  Golf Outings and Other Entertainment ‒ Rule of Thumb – If it’s fun it’s UNALLOWABLE! www.kmco.com 20 The Use of Audit Information Indirect Cost Rate Audits  Performed to provide reasonable assurance as to the accuracy of the indirect cost rate  Primarily focused on the Income Statement  Involve understanding and testing an A/E consultant’s internal controls  Typically performed annually by a CPA Firm www.kmco.com 21 7 16
  18. 18. 10/15/2013 The Use of Audit Information (continued) The Audit should be designed to determine if:  Expense balances are stated in accordance with GAAP  Direct and indirect costs are properly segregated and reported  Indirect costs are evaluated for allowability  Costs allowable per FAR Part 31 www.kmco.com 22 Indirect Cost Rate Uses  Applying indirect cost rates to work performed in current or prior periods  Establishing provisional or fixed rates to be used prospectively  Improving systems, procedures and internal controls www.kmco.com 23 P r e - Awa r d R e v i e w  Pre-award reviews are typically performed: ‒ On behalf of State DOT procurement or contracting staff ‒ To obtain reasonable assurance that financial information provided by the A/E consultant is materially correct ‒ Occurs during the annual prequalification process and/or during the contract negotiation process  Pre-award audit may also be performed to ensure an A/E Consultant internal controls are adequate to support accurate project costing and invoicing www.kmco.com 24 8 17
  19. 19. 10/15/2013 P r e - Awa r d R e v i e w: C o s t s Typ i c a l l y E x a m i n e d  Direct Labor costs (especially labor rates)  Indirect costs  Direct materials, costs  Subconsultant costs  Other Direct Costs  Profit/Fixed Fee  Overall presentation and mathematical accuracy of the cost proposal www.kmco.com 25 Incurred Cost Audit  Performed: ‒ By state DOT or local agency auditor or by a CPA hired by the contracting agency ‒ During the course of the project or after an A/E consultant completes all scheduled work on the project ‒ To verify invoiced costs for a project, including direct costs, indirect costs and subconsultant costs  Results are used to determine whether project billing was accurate, and/or necessary corrections were made. www.kmco.com 26 T h e R i s k M a n a g e m e n t F r a m e wo r k , Oversight and Cognizance  Risk Analysis Performed by State DOT: Risk Criteria Dollar Thresholds Type and Complexity of the Accounting  System Experience in Working With State DOT  Contracts Experience of the CPA Firm Size, History, and Reputation of the A/E  Consultant Responses to AASHTO ICQ Number of States in Which the A/E  Consultant Does Business Changes in Organizational Structure Date of the Last Audit Other Risk Criteria www.kmco.com 27 9 18
  20. 20. 10/15/2013 Overview of Cognizance and Reliance of Other Audits  In the course of performing audit and attest functions, auditors often rely on the work of other auditors, with appropriate procedures established to do so. Home State DOT - Performs the indirect cost rate audit or reviews the audit performed by a CPA firm www.kmco.com State DOT #2 Cognizant Audit State DOT #3 28 Questions? www.kmco.com 29 10 19
  21. 21. BENCHMARKING Presented by: David E. Shaffer, CPA Director 20
  22. 22. 10/15/2013 Learning Objectives  Learners will become familiar with key ratios of professional service firms  Learners will become familiar with the definition of terms used in the computation of different ratios  Learners will understand the recent trends of A&E firms  Learners will get example reports of key ratios that our managers and directors look at weekly/monthly Contents  Key definitions used in the ratios  Respondent information  What happened to the trends in 2012  History of some key ratios/expenses  Common sized balance sheet  Key reports used by professional service companies - Sample Kreischer Miller Reports Key Definitions Used in the Ratios  Median values: are the midpoint of the values versus the mean which is the average. In most cases, the median values have been used to eliminate the extreme values in the database.  ODC’s: Other direct costs such as mileage, printing, etc.  Net Revenues: Total revenues less subcontractors and ODC’s  Technical Staff: Those charging over 50% of their total time to projects 1 21
  23. 23. 10/15/2013 PSMJ Respondents Respondents by Total Staff Size 1 to 20 (52) 21 to 50 (80) 51 to 100 (51) 101 to 200 (42) 201 to 350 (25) 351 to 750 (15) over 750 (4) PSMJ Respondents By Firm Type Architectural 34 Architectural/Interiors 28 Interior Design 0 Engineering (Prime) 94 Engineering (Subconsultant) 44 Engineering (Survey) 13 Architecture/Engineering (or E/A) 36 Landscape Architecture 7 Enviromental 8 Construction Management 1 PSMJ Respondents Source of Revenue Private Sector Number Percentage 130 48% Government Sector 79 29% Mixed 60 22% 2 22
  24. 24. 10/15/2013 Big Picture Results  Recovery is SLOW!!! The net multiplier achieved decreased from 3.04 to 3.02, and still remains below 2008’s all-time high of 3.09. This indicates that companies were providing additional price concessions to obtain work.  Op’g profits (before incentive/bonuses and taxes) as a percentage of net revenues increased from 9.3% to 11.4%.  Gross revenues increased 8% this year versus 3% growth last year and 7.0% decrease reported in 2010.  Backlogs grew last year, indicating a 7% increase for the median firm. Nearly all firms indicated a shrinking backlog of booked business at the end of 2010.  Balance sheets continue to gain strength – median leverage is less than 1-1 (total liab/equity) Big Picture Results  This year’s results indicate a median 2.7% growth in staff size, a significant improvement from the 7.5% decrease reported in 2010 and the 0% reported in last year’s results.  Overhead rates decreased to 159.56%, 5% below the 2012 report and significantly below the 20-year high established in 2010. It is expected that the economic recovery will result in continued emphasis on reducing overhead costs. Key Ratio Comparisons of 2012 to 2011 Medians Net Revenues per Total Staff Net Revenues per DL Hour 2011 2012 $119,410.00 $125,589.00 % 5.0% $100.32 $101.66 1.0% DL Costs per DL Hour $31.31 $31.90 2.0% Total Costs per DL Hour $88.73 $86.50 -3.0% $22,249.00 $21,666.00 -3.0% 9.31% 11.42% 23.0% 168.42% 159.56% -5.0% 58.40% 59.69% 2.0% Equity per Total Staff Operating Profit (Net Revenues) OH Rate (Before Bonus) Chargeability (Payroll Dollars) 3 23
  25. 25. 10/15/2013 Key Ratio Comparisons of 2012 to 2011 2011 2012 Backlog Change 4.0% Gross Revenues Change 3.0% 8.0% Staff Size Change 0.0% % 2.70% Net Direct Labor Multiplier achieved 7.0% 3.04% 3.02% -1% Average Work-in-Process Days 25.48 25.51 0% Average Collection Dates 70.27 70.12 0% 2013 PSMJ A/E Financial Performance Benchmark Survey Highlight s  Net direct labor multiplier achieved decreased slightly to a reported level of 3.02 (median). The performance ranged from 2.75 (25th percentile) to 3.36 (75th percentile). This indicates that high-performing firms continue to achieve much more profitable project results than some of their counterparts.  Backlog increased by 3% in 2012. Gross revenues increased 5% compared to a 3% increase in 2011 and a reduction in 2010. Increase continues to reflect slow recovery and ongoing uncertainty in the economy.  Companies doing more with less. Net revenues per total staff increased (by 5%) to $125,589. Similarly, net revenues per project manager increased 7% to $555,142. PM’s financial responsibility continue to increase. Highlight s  The turnover rate increased slightly to 12.0%, though it remains significantly below the 15.9% reported in the 2010 survey. This rate, which reflects all types of terminations (resignations, layoffs, retirements, etc.), peaked in 2000 at 18.1%. In times of rapid expansion, turnover rates have increased to well over 20%, due to employee being enticed to move to other firms. Anticipation of the recent economic downturn and forced cutbacks once the full impact of the recession hit the industry may have been influential in pushing turnover rates upward over the past few years. However, with significant decreases for the 2011 and 2012 survey, the rate reached a 25-year low last year and increased only slightly in this year’s results. 4 24
  26. 26. 10/15/2013 Key Spending Per Staff Lower Quartile Median Quartile Mean Quartile Upper Quartile Group Insurance Expenses per Total Staff (no increase for 2011 and 2012) Professional Liability Insurance Expenses per Total Staff (slight decrease) Total Insurance Expenses per Total Staff (slight decrease) Total Taxes per Total Staff (includes payroll, slight increase) $3,786 $5,346 $5,512 $6,946 $860 $1,260 $1,558 $1,911 $4,967 $6,541 $6,439 $8,090 $5,369 $6,486 $7,232 $8,000 Payroll Taxes per Total Staff (flat) $4,990 $5,833 $5,785 $6,753 Business Development Costs per Technical Staff (increase) $2,995 $7,375 $8,460 $12,439 Key Spending Per Staff Lower Quartile Direct Labor Hours Per: Space Expenses per Total Staff (flat) Education Expenses per Total Staff (9% lower – too low???) Registrations & Licenses Expenses per Professional Staff (flat) Local Taxes, Permits & Licenses Expenses per Total Staff IT Operating Expenses per Total Staff (increasing) Windows versus MAC? Median Quartile Mean Quartile Upper Quartile $4,617 $6,583 $7,064 $8,769 $215 $386 $411 $582 $279 600 $1,071 $1,045 $153 $285 $620 $683 $1,195 $2,138 $2,446 $3,032 Direct Labor Hours Direct Labor Hours Per: Technical Staff Lower Median Mean Upper Quartile Quartile Quartile Quartile 1,367 1,554 1,545 1,710 Total Staff 1,116 1,228 1,249 1,365 Project Manager 3,678 5,311 6,479 8,365 Partner/Principal 6,799 10,264 14,050 17,189 5 25
  27. 27. 10/15/2013 Staffing Size Technical Staff Ratio to: Lower Median Mean Upper Quartile Quartile Quartile Quartile Non-Technical Staff Ratio 3.0 4.0 4.5 5.6 Project Managers Ratio 2.5 3.5 5.3 5.3 Partners/Principals Ratio 4.6 6.8 9.1 11.1 Common Sized Balanced Sheet Median Cash Mean 7.8% 11.4% 49.4% 47.6% Work in Process 9.7% 11.1% Other Current Assets 3.6% Accounts Receivable Total Current Assets 4.4% 78.3% Fixed Assets 10.6% Other Assets 3.0% Total Assets 71.8% 15.6% 3.1% 100.0% 100.0% Common Sized Balanced Sheet Liabilities Median Mean Accounts Payable 7.1 9.4 Deferred Taxes 4.7 8.0 Line of Credit Borrowing 5.7 7.5 Current Portion of Long Term Debt 2.3 2.7 Other Current Liabilities 9.2 10.3 Total Current Liabilities 34.4% 33.8% Long-Term Portion of Debt 6.7 8.4 Other Liabilities 2.8 5.4 44.8% 43.1% Total Liabilities Total Equity Total Liabilities and Equity 47.6% 41.8% 100.0% 100.0% 6 26
  28. 28. 10/15/2013 Weekly Report  Billable hours per director, manager, senior, and staff for the week, month to date, and year to date – all compared to prior totals  Total production in $ compared to prior year.  Current billing per director, gross and net.  Gross production per billable hour compared to prior year.  Cash position, including debt, compared to prior year.  Total accounts receivable and work in process compared to prior year. Director reports are available for everyone to see. Monthly Reports  Director performance report:  Gross production compared to prior year  Net production $ and percentage  Aged AR and WIP per director  Total WIP and AR as a percentage of total production  Billable hours compared to prior year  Production per billable hour  3 year realization history per director per client  Have similar reports for each manager Summary 7 27
  29. 29. 10/15/2013 Questions ? 8 28
  30. 30. TAX UPDATE AND ISSUES Presented by: Kevin McGinn, CPA Tax Manager 29
  31. 31. 10/15/2013 Agenda  New tax law- The Fiscal Cliff? What happened?  Domestic Production Activities Deduction Overview  Cash Basis of Accounting  ESOP’S  Questions & Answers Few Tax Quotes We have a tax code that favors those with the best accountants. -- Shane Keats   When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a "break" requires -- now or down the line -- that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. -- Warren Buffett Few Tax Quotes  Where there is an income tax, the just man will pay more and the unjust less on the same income. -- Plato  [The Tax Code] is a monstrosity and there's only one thing to do with it. Scrap it, kill it, drive a stake through its heart, bury it and hope it never rises again to terrorize the American people. -- Steve Forbes  [The Tax Code is] a disgrace to the human race. -- Jimmy Carter 1 30
  32. 32. 10/15/2013 Bonus Depreciation  Eligibility - overview  2012 – 50%  2013 – 50%  2014 - Section 179  Eligibility - overview  2012 - $500,000 - $2,000,000 investment cap  2013 - $500,000 - $2,000,000 investment cap  2014 - $25,000 - $ 200,000 investment cap Income Tax Rates  Taxpayers with taxable income greater than $400,000— $450,000 for couples—have a new 39.6% top marginal income tax rate. 2 31
  33. 33. 10/15/2013 Capital Gains Qualified Dividends  Qualified dividends continue to be taxed at preferential capital gains rates, rather than as ordinary income. Payroll Tax Holiday  The employee share of payroll taxes will return to its 2010 level of 6.2% on the Social Security wage base, ending the 2011 and 2012 2% tax holiday.  This means a return to the 6.2% withholding rate on wages up to $113,700 in 2013. The rate was 4.2% in 2012. So, for a taxpayer with an annual salary of $30,000, the increase in withholding rate means $50 less in take-home pay per month. For someone earning $60,000, take-home pay goes down by $100 per month—and at $90,000, it’s $150 less per month. For earners making $113,700 or more, monthly take-home pay is reduced by $189.50. 3 32
  34. 34. 10/15/2013 3.8 Percent Medicare Contribution Tax  Starting 2013, the Medicare surtax tax will be imposed on the “net investment income” (NII) and will generally apply to passive income.  The Medicare surtax also will apply to capital gains from the disposition of property.  The Medicare surtax will not apply to income derived from a trade or business or from the sale of property used in a trade or business.  For individuals the Medicare surtax will apply to the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income above a specified threshold. 3.8 Percent Medicare Contribution Tax (cont’d)  Thresholds  The Medicare surtax applies to an individual on the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income above certain thresholds. Those AGI thresholds are: • $250,000 for married taxpayers filing jointly or a surviving spouse • $125,000 for married taxpayers filing separately; and • $200,000 for single and head of household taxpayers. 3.8 Percent Medicare Contribution Tax (cont’d)  Net Investment income (NII) Net investment income (NII) for purposes of the 3.8 percent Medicare surtax includes: • Gross income from interest, dividends, annuities, royalties, and rents provided this income is not derived in the ordinary course of an active trade or business; • Gross income from a trade or business that is a passive activity (within the meaning of Code section 469) • Gross income from a trade or business of trading in financial instruments or commodities; and • Net gain (taken into account in computing taxable income) from the disposition of property, other than property held in an active trade or business. 4 33
  35. 35. 10/15/2013 3.8 Percent Medicare Contribution Tax (cont’d)  Example 1 A single taxpayer has modified AGI of $230,000, including NII of $40,000. The Medicare Surtax applies to the lesser of NII($40,000) or the excess of AGI over the applicable threshold ($230,000– $200,000= $30,000). Thus, the Medicare surtax applies to $30,000.  Example 2 A single taxpayer has modified AGI of $175,000, including $70,000 of NII. Because the taxpayer’s income is below the single taxpayer threshold of $200,000, the taxpayer does not owe the Medicare surtax, despite having substantial NII.  Example 3 Married taxpayers have modified AGI of $350,000, including NII of $75,000 and filing jointly. The Medicare surtax applies to the lesser of NII ($75,000) or the excess of AGI over the applicable threshold ($350,000 - $250,000 = $100,000). Thus, the Medicare surtax applies to $75,000. Additional .9 Percent Medicare Tax  Effective January 1, 2013, higher income individuals will be subject to an additional 0.9 percent HI (Medicare) tax. This additional Medicare tax should not be confused with the 3.8 percent Medicare surtax.  The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing a joint return and $125,000 for married couples filing separately) will be subject to a 2.35 percent Medicare tax rate.  The additional Medicare tax also attaches to self-employed individuals. Alternative Minimum Tax (AMT)  The alternative minimum tax (“AMT”) exemption is permanently patched (with inflation adjustments), thereby sparing millions of middle-income Americans from the AMT’s snare. In 2013 the AMT exemption is $51,900 for single filers and $80,800 for joint filers, up from $50,600 for single filers and $78,750 for joint filers in 2012. 5 34
  36. 36. 10/15/2013 Domestic Production Activities Deduction (DPAD)  The American Jobs Creation Act of 2004 authorized a deduction for income attributable to certain manufacturing and domestic production activities conducted in the U.S. (the Domestic Production Activities Deduction, or DPAD). The DPAD is 9% for tax years beginning in 2010 and beyond. It is not limited to any specific entity and is available to sole proprietorships, C and S corporations, and partnerships, among other entities. The DPAD is not allowed in computing self-employment income and the taxpayer can claim the deduction for both regular tax and AMT. Domestic Production Activities Deduction (DPAD) (Cont’d)  The DPAD equals a percentage 9% for 2011 and beyond of the lesser of: 1. Qualified Production Activities income (QPAI) for the year, or 2. Adjusted Gross Income (for an individual taxpayer) determined a. after application of IRC Sec. 86 (Social Security and tier 1 railroad retirement benefits), IRC Sec. 135 (income from U.S. savings bonds used to pay higher education tuition and fees), IRC Sec. 137 (adoption assistance programs), IRC Sec. 219 (retirement savings), IRC Sec. 221 (interest on education loans), IRC Sec. 222 (qualified tuition and related expenses), and IRC Sec. 469 (passive activity losses), and b. without regard to the DPAD. Domestic Production Activities Deduction (DPAD) (Cont’d)  QPAI is defined as the taxpayer's domestic production gross receipts for the year, reduced by the sum of the following items [IRC Sec. 199(c)(1)]: 1. The cost of goods sold allocable to such receipts; and 2. Other deductions, expenses, or losses directly allocable to such receipts. The DPAD itself is not an allocable deduction.  The taxpayer's domestic production gross receipts drive the deduction, but the deduction is limited to 50% of the qualified W-2 reported wages for the year that are allocable to domestic production gross receipts. Thus, for those taxpayers with large production activities but little W-2 wages (because the work is subcontracted out), the benefits of the deduction may be minimal. 6 35
  37. 37. 10/15/2013 Domestic Production Activities Deduction (DPAD) (Cont’d)  Domestic Production Gross Receipts (DPGR)  Taxpayers must have income from qualified production activities to be eligible for the DPAD. In order to compute income from qualified production activities, taxpayers must determine the amount of DPGR that they have for the tax year. The definition of DPGR from qualified production activities is very broad. DPGR includes the taxpayer's gross receipts from the lease, rental, license, sale, exchange, or other disposition of any of the following [IRC Sec. 199(c)(4)]: 1. Qualifying production property (tangible personal property, computer software, and sound recordings), if the property is manufactured, produced, grown, or extracted (see discussion later in this key issue) by the taxpayer in whole or significant part [see Reg. 1.199-3(g) for what constitutes significant part] in the U.S. 2. Motion picture, film, videotape, and sound recording production, renting, and licensing (with exclusions provided in the statute), provided at least 50% of the total compensation relating to the production of the film is compensation for specified production services (such as actors, directors, or producers) performed in the U.S. Domestic Production Activities Deduction (DPAD) (Cont’d) 3. Production of (but not transmission or distribution of) electricity, natural gas, or water in the U.S. 4. Construction or substantial renovation of real property in the U.S., including residential and commercial buildings and infrastructure such as roads, power lines, water systems, and communications facilities. 5. Civil engineering and architectural services performed in the U.S. for construction projects in the U.S. 6. Farming (i.e., growing and selling agricultural products and food). 7. Processing of agricultural products and food (but not the sale of food and beverages prepared by the taxpayer at a retail establishment). Domestic Production Activities Deduction (DPAD) (Cont’d)  The following steps compute the DPAD:  Step 1 Determine DPGR Step 2 Determine QPAI Step 3 Compute the AGI limitation Step 4 Determine the W-2 wage limitation Step 5 Calculate the DPAD Example Mel Myers owns Myers Engineering, a sole proprietorship in the U.S. The company conducts no other activities; therefore, all of its income is qualified production activity income. Mel's adjusted gross income for 2011 is $250,000. During 2011, Myers Manufacturing showed the following income and expense: Gross receipts Costs of Goods sold (including $350,000 of W-2 wages allocable to DPGR) Other allocable expenses Net Income $900,000 (600,000) (100,000) $200,000 Mel's QPAI is $200,000 and his tentative deduction is $18,000 [9% × $200,000; the lesser of QPAI ($200,000) or modified adjusted gross income ($250,000)]. His DPAD is limited to 50% of W-2 wages, which is $175,000 (50% of $350,000). 7 36
  38. 38. 10/15/2013 Cash Basis of Accounting  Eligibility – overview  Accrual Basis  Constructive Receipt  Prepaying expenses  Tax Planning – very powerful tool Cash Basis of Accounting – Accrual to Cash Conversion CASH CONVERSION Client Name: Client Code: ABC Company 3944.205 Year Ended: 12/31/11 3900F.01 Retained Earnings DR (CR) Per Financial Statements (Beginning) Income Add(Subtract) 80,371 (120,964) 613,838 ADD: Beginning Accounts Receivable Beginning Prepaid Expenses Allowance for Doubtful Accounts 1380-000-00Interest Receivable SUBTRACT: Beginning Accounts Payable Workpaper Reference 613,838 611,566 (10,671) 12,943 TB PY PY (548,995) Beginning Accrued Expenses PY (28,217) (70,127) 0 Beginning Accrued Expenses Beginning Accrued Accounts Payable Prior Period Adjustments PY 0 PY PY 0 0 Beginning Retained Earnings per Tax Return (647,339) (647,339) 46,870 SUBTRACT: Ending Accounts Receivable Add: Ending Allowance Ending Prepaid Expenses BOY R/E (1,505,196) 60,187 (22,193) Allowance for Doubtful Accounts (0) (0) ADD: Ending Accounts Payable (1,467,202) 1,330,903 Ending Accrued Expenses Ending Accrued Accounts Payable 37,608 163,800 (0) Income before tax adjustments Cash Contributions (0) 1,532,311 89,356 M-2 Ending Retained Earnings per Tax Return (89,356) Engagement/TR 136,226CY TR What is an ESOP?  ESOP = “Employee Stock Ownership Plan”  Qualified deferred compensation plan under ERISA and Internal Revenue Code  Similar to Profit Sharing and 401(k) Plans  Must invest primarily in company stock  Can be leveraged 8 37
  39. 39. 10/15/2013 Typical Goals of an ESOP  Shareholder Liquidity  Long-term succession plan  Corporate and personal tax planning  Ownership/Partnership incentive for key employees ESOP Tax Preferences  Effective deduction of principal on ESOP loan repayment  Section 1042 Capital Gains Deferral  Deduction of dividends paid on ESOP shares  S Corporation ESOP non-recognition of corporate income Section 1042 Gain Deferral  Permits shareholders selling to an ESOP to defer indefinitely capital gains tax on sale of shares  ESOP must own 30% of value of all company stock after sale  Selling shareholders must purchase qualified replacement property (“QRP”)—stocks or bonds of any domestic operating corporation 9 38
  40. 40. 10/15/2013 S Corporation ESOP’S  “S” Corporation income attributed to shareholders  ESOP as S Corp shareholder pays no taxes on its share of corporate income  No section 1042 Capital Gains Deferral How Does an ESOP Work?  Company establishes an ESOP Trust  ESOP Trust purchases company stock from shareholders or company  Bank or seller provides financing to Company  Company pays contributions or dividends to ESOP that ESOP uses to repay debt  Company or ESOP repurchases shares from employees after termination Initial C Corp ESOP Transaction Bank Company Cash Note & Collateral Pledge of QRP?? Cash Note & Pledge of Stock Cash Shareholders ESOP Company Stock 10 39
  41. 41. 10/15/2013 ESOP Loan Repayment Contributions or Dividends ($$$) Company ESOP Loan Payments ($$$) Loan Payments ($$$) Release of Shares Pledged as Collateral and Share Allocations to Individual ESOP Accounts Bank and/or Shareholder 30 Initial S Corp ESOP Transaction Company Cash Bank Note & Collateral Company Stock Company Stock Shareholders Cash & Sub. Note Note & Pledge of Stock ESOP 31 ESOP Transaction Concerns  Valuation  Financing  Effect of ESOP on overall benefits structure  Legal/fiduciary risk  Cost and complexity 32 11 40
  42. 42. 10/15/2013 ESOP Plan Design Issues  Eligibility  Stock allocations  Vesting  Benefit Distributions  Voting of company stock  Trustee 33 Steps in an ESOP Transaction  Feasibility study  Financing  Appraisal  Plan Design  Legal Documents  Closing  IRS Determination Letter 34 Questions & Answers 12 41
  43. 43. APPENDIX I Internal Control Questionnaire for Consulting Engineers 42
  44. 44. Internal Control Questionnaire (ICQ) for Consulting Engineers Name of Engineering Consultant (―the Company‖): TIN (Taxpayer Identification Number): Headquarters Address: Company Website: Fiscal Year End: This ICQ was prepared for (DOT/agency name): Time Period Covered: Location of Accounting Records: - Please include the following items as attachments to this ICQ:          FAR Part 31 Overhead Audit Report for most recent fiscal year, including audited Statement of Direct Labor, Fringe Benefits, and General Overhead (hereinafter ―Indirect Cost Rate Schedule‖) and related reconciliation to the financial statements. Cognizant audit report or cognizant letter of concurrence from the cognizant Government agency. Check here if not applicable: Post-closing trial balance and financial statements (balance sheet, income statement, and statement of cash flows) for the most recent fiscal year. (Note: If the indirect cost rate schedule does not directly tie to the trial balance, then please provide a supplemental reconciliation schedule.) Current chart of accounts that ties to financial statements and indirect cost rate schedule. Independent Auditor’s Report on financial statements and accompanying management letter. Check here if not applicable: Sample timesheet. The Company’s policies for vacation and sick leave. The Company’s bonus policy. Other written policies, as requested throughout this ICQ. Note: Throughout this ICQ, all references to ―AASHTO Guide‖ pertain to the 2012 Edition of the AASHTO Uniform Audit & Accounting Guide. - Please identify the Company’s primary contact for accounting questions: Name: Title: Phone Number: E-mail Address: Mailing address (if different than headquarters address listed above) : A. Background Information A.1. Year Established. When was the Company formed? A.2. Business Form. What form of business entity is the Company? Sole Proprietorship Partnership C Corporation S Corporation Other Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-2 43
  45. 45. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers A.3. Parent/Subsidiary. Is the Company a subsidiary of any other company? Yes If ―yes,‖ please explain: No A.4. Common Ownership. Does the Company own or control any other company or legal entity (e.g., trust or foundation) through common ownership? (See AASHTO Guide Section 8.23.B for details.) Yes If ―yes,‖ please explain: No A.5. Ownership. Please list the stockholders, partners, or other owners with greater than five percent ownership of the Company and their respective percentages of ownership. Table 1: Company Ownership Name Title Ownership Percentage % % % % % % % % % % % % A.6. Services Provided. What types of services does the Company provide? (e.g., consultant–Architectural and Engineering Design) a. b. c. d. A.7. Locations. How many offices does the Company operate, and where are these offices located? a. Number: b. Locations: Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-3 44
  46. 46. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers A.8. Number of Employees. How many employees (including managers and principals) does the Company currently employ? a. Full time: b. Part time: - Has this number changed in the past one-year period? No Yes. If ―yes,‖ please explain: A.9. Revenue Sources. 1. For most recent fiscal year, what percentage of the Company’s revenue was generated from each of the following? a. State government: % c. Local government: % b. Federal government: % d. Commercial/private: % 2. Please specify all revenues earned as either a prime consultant or subconsultant: a. Revenues from Government Projects: $ b. Revenues Other Customers: $ $ Total Company Gross Revenue: A.10. Contract Mix. What percentage of the Company’s revenue was generated from each of the following contract types? a. Lump sum: % c. Cost plus (time and materials): b. Cost plus fixed fee: % d. Other: % % Please explain ―Other.‖ B. Accounting: General Background B.1. Fiscal Period. Has the Company used the same fiscal reporting period for the past two years? Yes No B.2. Accounting Method/Basis. What basis of accounting does the Company use to prepare general purpose financial statements? Cash Accrual Hybrid. Please explain ―Hybrid.‖ - Was the same basis of accounting also used to prepare the firm’s indirect cost rate schedule? Yes No. Please explain: B.3. Accounting Policies. Does the Company have written accounting policies that address the following topics? (If ―yes,‖ please provide a copy.) a. b. c. d. e. f. g. h. i. j. Yes No Accounting system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost estimating/allowability. . . . . . . . . . . . . . . . . . . . . . . . . . . . Recording time worked/timesheet preparation . . . . . . . . . . . . . Fringe benefits/leave time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recording overtime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compliance with FAR Part 31(†) and applicable CAS . . . . . . . . Recording direct and indirect costs . . . . . . . . . . . . . . . . . . . . . . Overhead/indirect cost rate development . . . . . . . . . . . . . . . . . Billing rate development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (†) FAR Part 31 is codified at 48 CFR Part 31, which is available at https://www.acquisition.gov/far/html/FARTOCP31.html. Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-4 45
  47. 47. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers B.4. Preparing the Indirect Cost Schedule. How frequently does the Company prepare an indirect cost rate schedule to determine costs eligible for reimbursement per FAR Part 31? Annually Other (please specify): - Was the most recent schedule prepared by the Company or by another entity instead (e.g., CPA firm)? Prepared by: Internal staff External party (specify): - Period covered by most recent indirect cost schedule: One-year period ended December 31, 20 Other (please specify): B.5. Fraud, Abuse, and Contract Violations. Is the Company’s management aware of any material instances of fraud, illegal acts, abuse, or violations of contracts provisions or grant agreements? Yes. If ―yes,‖ please explain: No B.6. Knowledge of FAR Part 31. Are appropriate personnel within the Company familiar with FAR Part 31? No. If ―no,‖ please explain: Yes B.7. Audits/Examinations. Within the past three years, has a CPA or governmental agency performed an independent audit, review, attestation, or compilation of the Company’s financial data or any phase of the Company’s operations? No Yes. If ―yes,‖ please complete the following (if applicable): a. Financial Statements: Audit Review Compilation Other (please specify): Name of CPA or Agency: Contact: Period Covered: b. Overhead Rate: Audit Review Compilation Other (please specify): - Was the overhead rate calculated in accordance with FAR Part 31? Yes No Name of CPA or Agency: Contact: Period Covered: c. Project Audits: Audit Review Compilation Other (please specify): Name of CPA or Agency: Contact: Period Covered: Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-5 46
  48. 48. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers C. Accounting System(s) C.1. Accounting Software. What type of accounting software does the Company use? Internally-developed system. Commercial system. Name of vendor: Hybrid system. Please explain: - Please describe any significant manual procedures used outside of the automated accounting system to record transactions: C.2. Job Costing. Does the Company have a job-cost accounting system? Yes No If ―no,‖ please explain what type of system is used to determine project costs: C.3. Integration. Does the accounting general ledger interface with the job-cost ledger? Yes a. N/A (no job-cost ledger used) Are billings prepared from, or reconciled to, reports generated from the Company’s job-cost system? Yes b. No No. Please explain: Describe any manual procedures that occur outside of the automated accounting system to prepare billing packages. C.4. Accounting Records. Which of the following types of records does the Company maintain to support financial transactions? Yes No a. General ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Cash disbursements journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Cash receipts journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Job/Project-cost ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. Labor distribution reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . f. Employee expense reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . g. Payroll registers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C.5. Direct and Indirect Expenses. Does the general ledger contain separate direct and indirect accounts for the following? a. b. Labor costs Non-labor expenses Yes Yes No No If ―no,‖ please explain: C.6. Exclusion of Unallowable Costs. Does the Company have a system in place to identify and remove from the indirect cost pools all unallowable costs, in accordance with per FAR Part 31 and applicable Cost Accounting Standards? (See AASHTO Guide, Sections 2.2, 4.4, 5.2, 5.5, and 6.3.) No. Please explain: Yes. If ―yes,‖ please answer a through c, below. a. Please provide details about the system. b. How are appropriate personnel trained to distinguish between allowable and unallowable costs? c. When does the primary review for allowability occur—at time the transaction is recorded, or later? Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-6 47
  49. 49. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers C.7. Divisions/Cost Centers. Does the Company have more than one division/cost center? No Yes - If ―yes,‖ are separate ledgers maintained for each? Yes No Comment: C.8. Reconciliations. a. Does the Company reconcile the financial accounting system to the job-cost system? N/A (no job-cost ledger used). No. Please explain: Check here if systems are integrated: Yes. If ―yes,‖ how often? (Check all that apply.) Monthly Quarterly Semi-annually Annually Comment: b. How frequently are bank statements reconciled? Who performs this process? C.9. Budgeting. Does the Company use a budgeting system for project planning and oversight? Yes No Comment: - If ―yes,‖ does the Company prepare variance reports to compare budgeted amounts to actual amounts on projects, and are the reports distributed to appropriate management personnel? No. If ―no,‖ please explain: Yes C.10. Cost Allocation. Does the Company use cost allocation methods consistently for all contracts, including commercial contracts as well as for State and Federal government contracts? (See AASHTO Guide, Sections 5.3 and 10.5.) Yes No. If ―no,‖ please explain: C.11. Allocation Base(s). When computing indirect cost rates, the Company uses— a single base for cost allocation. Description of base: multiple bases for cost allocation. Description of bases: (See AASHTO Guide Section 4.7 for a discussion of common allocation bases for indirect costs.) C.12. Field Offices. Does the Company have field offices? (See AASHTO Guide Section 5.6.) No Yes. If ―yes,‖ a. Are separate indirect cost rates used for the home office and field offices? Yes No Please explain: b. If home office and field office indirect cost rates are computed, are they presented consistently to all State DOTs? Yes No. If ―no,‖ please explain: Please check here if not applicable: Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-7 48
  50. 50. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers C.13. Project-Specific Indirect Cost Rate(s). Does the Company have any special, project-specific indirect cost rates negotiated with a State DOT? No Yes. If ―yes,‖ please explain, and list the States that use these rates: D. Information Technology (IT) Systems D.1. IT Policies. Does the firm have written IT system policies concerning the following topics? (If ―yes,‖ please provide a copy.) a. Hardware/Software Yes  Purchasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Use of In-house and off-site . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Addition and removal/retirement/disposition of . . . . . . . . . . . . . . . . . . . b. Business Continuation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Security Protocol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Activation and deactivation of employees upon hiring or termination. . . . . . . . . No D.2. IT Risk Assessment. Has the Company’s management conducted an IT system risk assessment within the past three years? Yes No D.3. IT Security Review. Are system security and application access logs enabled and reviewed periodically? Yes No Comment: D.4. IT Electronic Data Safeguards. If documents are retained in electronic format, are they stored in a format that cannot easily be modified, removed, or replaced, and does a mechanism/audit trail exist to track all such events? Yes No Comment: Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-8 49
  51. 51. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers E. Accounting – Payroll and Timekeeping E.1. Payroll Service. Does the Company use an external payroll service? No Yes. If ―yes,‖ please specify: E.2. Pay Cycle. What is the Company’s standard pay cycle? Bi-weekly Monthly 1st & 15th Other (please specify): If the Company uses more than one pay cycle, please explain: E.3. Payroll Register. Does the payroll register include the following data? Yes No a. Employee Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Employee ID number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Gross pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... d. Payroll deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. Net pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f. Check amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g. Hourly rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h. Pay period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i. Normal hours for pay period . . . . . . . . . . . . . . . . . . . . . . . . . . . j. Overtime hours for pay period . . . . . . . . . . . . . . . . . . . . . . . . . . Comments: E.4. Timekeeping System. a. Does the Company use an electronic timekeeping system? Yes No - If ―yes,‖ please provide an explanation of its operation, or provide system documentation: b. Are all employees, including managers and owners/principals, responsible for signing their own timesheets? Yes No If ―no,‖ please explain: c. Are all employee timesheets approved by supervisors? Yes No If ―no,‖ please explain: d. Is there a certification and approval process required for all time worked by owners and principals? Yes No If ―no,‖ then how is time accounted for and billed to projects? e. How are timesheet coding errors detected and corrected? f. How do timesheets identify work performed outside an agreement’s original scope of services? Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-9 50
  52. 52. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers F. Labor Cost Accumulation F.1. Direct & Indirect Labor. Do the Company’s timesheets include reporting codes for both direct and indirect hours? (See AASHTO Guide, Chapter 6.) Yes No - If ―yes,‖ do all employees, including managers and principals, record direct and indirect time on their timesheets? - If ―no,‖ then please explain the method used to segregate direct and indirect labor hours. F.2. Work Week. Please list the Company’s normal hours of business operation (normal work week): F.3. Uncompensated Overtime (see AASHTO Guide, Section 5.4). Does the Company record all hours worked by all employees, including managers and principals, regardless of whether the employees are exempt from overtime pay or whether all direct labor hours are billed to specific contracts? No. If ―no,‖ please explain: Yes. If ―yes,‖ which of the following methods does the Company use to account for uncompensated overtime—the hours worked without additional compensation in excess of an average of 40 hours per week by direct-charge employees who are exempt from the Fair Labor Standards Act? Effective Rate Method. Please explain: Salary Variance Method. Please explain. (E.g., What was the total dollar amount of the salary/payroll variance for the year?): $ Other. Please explain: F.4. Contract Modifications/Time Tracking. How does the Company segregate work performed under a basic agreement/contract from work performed for contract changes/modifications? Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-10 51
  53. 53. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers G. Labor Billings and Project Costing G.1. Billing Rates. Please describe how billing rates are determined, or attach the Company’s billing-rate policy. Description: Billing-rate policy attached. G.2. Premium Overtime. Does the Company pay overtime at a premium to any employees? Yes No - If ―yes,‖ a. What premium rate is paid, and what categories of employees are eligible for this rate? Time-and-a-half for all non-exempt employees. Other. Please explain: b. How is the overtime premium accounted for and billed? As part of direct labor, and overhead is applied. As an Other Direct Cost (no overhead applied). As an indirect labor cost (included in the indirect cost rate). Other. Please explain: G.3. Allocation of Overtime Costs. Are overtime costs allocated to contracts consistently, regardless of the type of contract (lump sum versus actual cost) or customer (government versus commercial)? No. If ―no,‖ please explain: Yes G.4. Cost Allocation versus Billing. If the Company pays a principal or an employee at a rate in excess of a contract’s maximum hourly labor rate, where will the excess cost be allocated/charged? G.5. Contract/Purchased Labor. Does the Company invoice/bill contract labor directly to any customers? Yes No N/A - If ―yes,‖ please complete the following: Contract labor is billed— As part of direct labor, and overhead is applied. As an Other Direct Cost (no overhead applied). Other. Please explain: Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-11 52
  54. 54. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers H. Expense Accumulation and Billing H.1. Nonsalary Direct Costs (Other Direct Costs). Besides labor, what type of costs does the Company normally bill/invoice as direct expenses? H.2. Credits Associated with Direct Costs. Is the indirect cost pool relieved/reduced for credits/reimbursements received for direct costs? Yes No. If ―no,‖ please explain: H.3. Design/Build Stipends. Has the Company received a stipend from any State DOT in connection with design/build efforts? Yes No - If ―yes,‖ please explain how the Company accounted for the stipend in the accounting system: H.4. Classification of Cost Items. How are the following cost items accounted for and billed? (Check both ―D‖ and ―I,‖ if applicable.) (D = Direct; I = Indirect; N/A = not applicable) D I N/A a. Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Computer Assisted Design and Drafting (CADD) . . . . . . . . . . . . . . . . . c. Computer (non-CADD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. Printing / Reproduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f. Postage g. Lab h. Drilling i. Travel and Subsistence j. GPS and/or Nuclear Density Meters k. Other (list if significant) H.5. Nonbillable Costs. Describe the accounting treatment for direct costs not billable to clients. (Where/how are these costs recorded?) H.6. Authorization. How does the Company ensure that costs are not billed to Government projects prior to proper authorization? H.7. Vehicle Expenses. Does the Company provide vehicles to employees for business purposes? Yes No a. If ―yes,‖ are the vehicles leased or owned? Leased Owned b. Identify the total number of vehicles owned or leased by the company. Leased Owned c. Are mileage logs maintained for all vehicles? If ―no,‖ please explain below. Yes No Explanation: Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-12 53
  55. 55. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers d. Is mileage separated by direct and indirect classifications, and is mileage incurred in connection with unallowable activities tracked? Yes No Explanation: e. What recovery/billing rate is used for Company vehicle mileage reimbursement? $ per mile. Explanation: f. How was the rate developed? H.8. Computer Expenses. Are the Company’s computer expenses incurred as a result of (select one): a. b. Outside Services? Company ownership? Both? Does the Company compute a charge rate for computers? Yes No - If ―yes,‖ what is the rate? - How was the rate developed? c. Is computer usage segregated by direct and indirect classifications? Yes No d. Are computer usage logs maintained and coded by job/project? Yes No H.9. Printing and Reproduction Costs. How are printing and reproduction expenses treated? - In House: Direct cost Indirect cost Combination of direct and indirect - Outside vendor: Direct cost Indirect cost Combination of direct and indirect If you marked “combination of both,” please explain: a. For in-house services, are usage logs maintained and coded by job/project? Yes b. Is usage segregated by direct and indirect classifications? Yes c. No No If these costs are incurred through the use of an outside vendor, are the invoices coded by job/project when received? Yes No H.10. Telephone Costs. How is the expense for telephone service recorded and billed? Direct cost Indirect cost Combination of direct and indirect If you marked “combination of direct and indirect,” please explain below: - Does the Company maintain a telephone log to record toll calls? Yes No - Are the calls job-coded by direct and indirect classifications? Yes No Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-13 54
  56. 56. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers H.11. Activities Ineligible for Cost Reimbursement. Did any of the Company’s employees engage in activities for lobbying, advertising, public relations, charity, and/or entertainment? - If ―yes,‖ please list the employees who engaged in these activities, and describe how the associated costs were tracked and accounted for in relation to the submitted indirect cost rate. Table 2: Unallowable Activities Employee Name or ID & Title/Classification: Activities: Accounting Treatment: I. Compensation for Owners and Employees I.1. Bonuses. a. Did the Company pay, or accrue for, bonuses earned by owners or employees during the period covered by the latest indirect cost rate schedule? Yes No - If ―yes,‖ were the bonuses included in the submitted overhead rate? Yes No N/A - Was any portion of these bonuses excluded from the submitted overhead rate? Yes No N/A Comment: b. Does the Company have a written bonus plan? Yes. Please provide a copy of the plan. No. Please describe how bonuses are determined and how this is communicated to employees. c. Are all employees eligible for the bonuses? Yes No. If ―no,‖ please explain: I.2. Executive Compensation. Has the Company, an independent CPA, or compensation consultant performed an evaluation of executive compensation for reasonableness in accordance with FAR 31.205-6? (See AASHTO Guide Section 7.5.) Yes No - If ―yes,‖ describe the methodology used and how this process has been documented: Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-14 55
  57. 57. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers J. Related-Party Transactions J.1. Related Employees. Please provide the following information for all employees who are related to the parties listed in the Ownership Table (Table 1) shown in A.5: Table 3: Employees Related to Company Owners Name or ID: Title/Position: Wages/Salary: Other Total Compensation: Compensation: $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1 2 3 4 5 6 7 8 Total Hours Worked During Year: Total Hours Worked During Year: Total Hours Worked During Year: Total Hours Worked During Year: Total Hours Worked During Year: Total Hours Worked During Year: Total Hours Worked During Year: Total Hours Worked During Year: Bonus: Job Duties: Related to: How Related (e.g., spouse, parent, child, sibling, in law): Job Duties: Related to: How Related: Job Duties: Related to: How Related: Job Duties: Related to: How Related: Job Duties: Related to: How Related: Job Duties: Related to: How Related: Job Duties: Related to: How Related: Job Duties: Related to: How Related: Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-15 56
  58. 58. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers Name or ID: Title/Position: Wages/Salary: Bonus: Other Total Compensation: Compensation: $ 1 0 Total Hours Worked During Year: Total Hours Worked During Year: $ $ $ 9 $ $ $ $ Job Duties: Related to: How Related: Job Duties: Related to: How Related: J.2. Related Vendors. Please provide the following information for all vendors related to the parties listed in the Ownership Table (Table 1) shown in A.5: Table 4: Vendors Related to Company Owners Name: Contact Information: How Related: Products/Services Provided: Total Payments During Year: $ $ $ $ $ $ $ $ $ $ $ $ Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-16 57
  59. 59. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers J.3. Property or Facilities Leased from Related Parties. Does the Company rent or lease property and/or facilities from another entity (organization or individual)? Yes No - If ―yes,‖ a. Are any of the Company’s owners/stockholders, or members of their immediate family, also owners/stockholders of the other entity? Yes No - If ―yes,‖ please explain: b. Have the rental/lease costs been adjusted to the property owner’s actual costs? Yes No - If ―yes,‖ what basis was used to determine actual cost? (E.g., the property owner’s tax return less interest expense, plus cost of money). Description: J.4. Other Related-Party Transactions. Did the Company engage in any transactions with related parties other than those listed and described in J.1 through J.3? No Yes. If ―yes,‖ please complete Table 5: Table 5: Other Related-Party Transactions Name: Contact Information: How Related: Products/Services Provided: Total Payments During Year: $ $ $ $ $ $ $ $ $ $ $ $ Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-17 58
  60. 60. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers K. Other Questions K.1. Life Insurance. Does the Company pay life insurance for officers/principals? Yes No - If ―yes,‖ (a) Have any costs associated with this life insurance been included on the indirect cost rate schedule? Yes  total amount: No (b) Please identify the beneficiary of the life insurance: Company/surviving partners Officer/principal’s family Other (specify) (c) Please identify the type(s) of the life insurance: Term Whole life Universal life Accidental death Endowments (annuities) Other (please specify): K.2. Suspension or Debarment. Has the Company, its parent, subsidiary, or any owner, stockholder, officer, partner, or employee of the Company been suspended or debarred from doing business by any State or the Federal government? Yes No - If ―yes,‖ please provide complete details: K.3. Updates for Changes to FAR Part 31. Does the Company have an existing process designed to provide timely updates to company policies and procedures to accommodate changes in the FAR Subpart 31.2 cost principles? Yes No - If ―yes,‖ please describe the process: K.4. Risk Assessment. Does the Company have a process for assessing risks that may result from changes in cost accounting systems or processes? Yes No - If ―yes,‖ please describe the process. How are risks identified and addressed? K.5. Communications of FHWA/DOT Requirements. How does information flow from the FHWA/State DOT to appropriate management personnel? (E.g., How are relevant updates to State DOT procedures or Federal Regulations disseminated to project managers and accounting personnel?) Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-18 59
  61. 61. AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers I certify that to the best of my knowledge and belief this ICQ is a complete and accurate representation of the abovenamed Company’s cost accounting and billing practices. Typed or Printed Name ___________________________ Signature Title Date Completed Note: The representations on this ICQ were made by, and are the responsibility of, the Company’s management. Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012) AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-19 60

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