Kreischer Miller Architecture & Engineering Industry Seminar

Architecture/Engineering Industry Seminar

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

Definition of Key Terms
 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!
2

 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
3

 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
4

Credit Approval Process
 Purpose: to establish a policy
to provide credit for contracts
and new client invoicing to
protect company
Accounts Receivable
5

 Procedure
 Standard Credit Terms
 When do you expect to be paid?
 What is the business structure?
 Corporation/LLC
 Partnership
6

 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
7

 Fees
 Request retainer?
 How much?
 How to spot a
potentially bad risk.
8

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.
9

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
10

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
11

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
12

Out of Scope Work
and Contract Overruns
 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
13

PM Intervention 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
14

PM Intervention 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
15

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 16

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
17

Case Study
 Medium-sized
architectural firm needed
help with their aging
accounts receivable
18

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
19

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%
20

QUESTIONS?
For more information about
AI Consulting, LLC,
please visit
www.ai-consultingllc.com.
Presented by: Andy Harmelin, AI Consulting LLC
21

AASHTO Update October 16, 2013
P r e s e n t e d b y :
Tom Ya n k a n i c h , CPA
Manager, A u d i t & A c c o u n t i n g
www.kmco.com 22

Topics
 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
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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.
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Federal Statutes and Regulations
23 U.S.C 112(b)(2) 23 CFR 172
Contracting for Engineering and Design Services Administration of Engineering and Design Related
Service Contracts
48 CFR Part 31 (FAR Part 31) 40 U.S.C Chapter 11 Sections 1101 to 1104
Contracts with Commercial Organizations 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)
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25

State Statutes and Written Procedures
In what ways might the application of State
Statutes and procedures differ for the
following types of contracts?
 Contracts using Federal-Aid Highway Program Funds?
 Contracts using State and local agency funding?
www.kmco.com 26
26

Accounting and Auditing Principles,
Standards, Criteria and Guidance
FAR Part 31 GAS or GAGAS
Federal Acquisition Regulation Government Auditing Standards(Also known
as "Yellow Book")
GAAP DCAA CAM
Generally Accepted Accounting Principles Defense Contract Audit Agency Contract
Audit Manual
CAS GAAS and AICPA Guidance
Cost Accounting Standards Generally Accepted Auditing Standards
AASHTO Audit Guide
AASHTO Uniform Audit & Accounting Guide
www.kmco.com 27
27

Key Cost Principles
 Allowability, FAR 31.201-2
 Reasonableness, FAR 31.201-3
 Allocability, FAR 31.201-4
 Direct and Indirect Costs
28 28

Allowabilty
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
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29

Allowability (continued)
Must be excluded from
claimed costs:
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30

Reasonableness
 Burden of proof rests
with the A/E Consultant
 Costs incurred by the
A/E Consultant not
necessarily reasonable
FAR 31.201-3(a) states:
“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.”
www.kmco.com 31
31

Allocability
What is meant by Allocability?
 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?
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FAR 31.201-4 states:
“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.”
32

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 33
33

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 34
34

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 35
35

Internal Control Pyramid
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36

Key Systems of a Typical A/E Design Firm
Labor Charging System
Compensation System
Purchasing/Accounts
Payable System
Estimating System
Job Costing System
www.kmco.com 37
Billing System
General
Ledger/Accounting System
Budget/Planning System Financial Reporting
System
37

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 38
38

AASHTO Internal Control Questionnaire
(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 39
39

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 40
40

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
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41

Common Unallowable Costs
 Advertising
‒ Includes Website Development and Maintenance
 Personal Use of Company Owned Vehicles
‒ 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 42
42

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 43
43

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
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44

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
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45

Pre-Award Review
 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 46
46

Pre-Award Review:
Costs Typically Examined
 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 47
47

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 48
48

The Risk Management Framework,
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 49
49

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
Cognizant
Audit
www.kmco.com 50
State
DOT #2
State
DOT #3
50

Questions?
www.kmco.com 51
51

Benchmarking October 16, 2013
P r e s e n t e d b y :
D a v i d S h a ff e r
www.kmco.com 52

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
www.kmco.com 53 53

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
www.kmco.com 54 54

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
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PSMJ Respondents
Respondents by Total Staff Size
www.kmco.com
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)
56
56

PSMJ Respondents
By Firm Type
www.kmco.com
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
57

PSMJ Respondents
Source of Revenue Number Percentage
Private Sector 130 48%
Government Sector 79 29%
Mixed 60 22%
www.kmco.com
58

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)
www.kmco.com 59

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.
www.kmco.com 60

Key Ratio Comparisons of 2012 to 2011
www.kmco.com
Medians 2011 2012 %
Net Revenues per Total Staff $119,410.00 $125,589.00 5.0%
Net Revenues per DL Hour $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%
Equity per Total Staff $22,249.00 $21,666.00 -3.0%
Operating Profit (Net Revenues) 9.31% 11.42% 23.0%
OH Rate (Before Bonus) 168.42% 159.56% -5.0%
Chargeability (Payroll Dollars) 58.40% 59.69% 2.0%
61

Key Ratio Comparisons of 2012 to 2011
www.kmco.com
2011 2012 %
Backlog Change 4.0% 7.0%
Gross Revenues Change 3.0% 8.0%
Staff Size Change 0.0% 2.70%
Net Direct Labor Multiplier achieved 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
62

Highlights
 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.
www.kmco.com 63

Highlights
 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.
www.kmco.com 64

Key Spending Per Staff
Lower
Quartile
www.kmco.com 65
Median
Quartile
Mean
Quartile
Upper
Quartile
Group Insurance Expenses per Total
Staff (no increase for 2011 and 2012)
$3,786 $5,346 $5,512 $6,946
Professional Liability Insurance
Expenses per Total Staff (slight
decrease)
$860 $1,260 $1,558 $1,911
Total Insurance Expenses per Total
Staff (slight decrease)
$4,967 $6,541 $6,439 $8,090
Total Taxes per Total Staff (includes
payroll, slight increase)
$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
$2,995 $7,375 $8,460 $12,439
Technical Staff (increase)
65

Key Spending Per Staff
Direct Labor Hours Per:
www.kmco.com
Lower
Quartile
Median
Quartile
Mean
Quartile
Upper
Quartile
Space Expenses per Total Staff (flat) $4,617 $6,583 $7,064 $8,769
Education Expenses per Total Staff (9%
$215 $386 $411 $582
lower – too low???)
Registrations & Licenses Expenses per
Professional Staff (flat)
$279 600 $1,071 $1,045
Local Taxes, Permits & Licenses
Expenses per Total Staff
$153 $285 $620 $683
IT Operating Expenses per Total Staff
(increasing) Windows versus MAC?
$1,195 $2,138 $2,446 $3,032
66

Direct Labor Hours
Direct Labor Hours Per:
www.kmco.com
Lower
Quartile
Median
Quartile
Mean
Quartile
Upper
Quartile
Technical Staff 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
67

Staffing Size
Technical Staff Ratio to:
www.kmco.com
Lower
Quartile
Median
Quartile
Mean
Quartile
Upper
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
68

Common Sized Balanced Sheet
www.kmco.com
Median Mean
Cash 7.8% 11.4%
Accounts Receivable 49.4% 47.6%
Work in Process 9.7% 11.1%
Other Current Assets 3.6% 4.4%
Total Current Assets 78.3% 71.8%
Fixed Assets 10.6% 15.6%
Other Assets 3.0% 3.1%
Total Assets 100.0% 100.0%
69

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
Total Liabilities 44.8% 43.1%
Total Equity 47.6% 41.8%
Total Liabilities and Equity 100.0% 100.0%
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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.
www.kmco.com
71

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
www.kmco.com
72

Questions?
www.kmco.com 74 74

Tax update and issues
Presented by:
Kevin McGinn, CPA, Tax Manager
75

Agenda
 New tax law- The Fiscal Cliff? What happened?
 Domestic Production Activities Deduction Overview
 Cash Basis of Accounting
 ESOP’S
 Questions & Answers
76

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
77

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
78

Bonus Depreciation
 Eligibility - overview
 2012 – 50%
 2013 – 50%
 2014 -
79

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
80

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.
81

Qualified Dividends
 Qualified dividends continue to be taxed at preferential
capital gains rates, rather than as ordinary income.
83

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.
84

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.
85

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.
86

 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.
87

 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.
88

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.
89

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.
90

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.
91

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.
92

 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.
93

 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.
94

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).
95

 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 $900,000
Costs of Goods sold (including $350,000 of W-2 wages allocable to DPGR) (600,000)
Other allocable expenses (100,000)
Net Income $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).
96

Cash Basis of Accounting
 Eligibility – overview
 Accrual Basis
 Constructive Receipt
 Prepaying expenses
 Tax Planning – very powerful tool
97

Cash Basis of Accounting – Accrual to Cash
Conversion
CASH CONVERSION
Client Name: ABC Company
Client Code: 3944.205
Year Ended: 12/31/11
3900F.01
Retained Earnings Income Workpaper Reference
DR (CR) Add(Subtract)
Per Financial Statements (Beginning) 80,371 (120,964) TB
ADD:
Beginning Accounts Receivable 611,566 PY
Beginning Prepaid Expenses (10,671)
Allowance for Doubtful Accounts 12,943 PY
1380-000-00Interest Receivable
613,838 613,838
SUBTRACT:
Beginning Accounts Payable (548,995) PY
Beginning Accrued Expenses (28,217)
Beginning Accrued Accounts Payable (70,127) PY
Prior Period Adjustments 0
Beginning Accrued Expenses 0 PY
PY
0 0 (647,339) (647,339)
Beginning Retained Earnings per Tax Return 46,870 BOY R/E
SUBTRACT:
Ending Accounts Receivable (1,505,196)
Add: Ending Allowance 60,187
Ending Prepaid Expenses (22,193)
Allowance for Doubtful Accounts
(0)
(0) (1,467,202)
ADD:
Ending Accounts Payable 1,330,903
Ending Accrued Expenses 37,608
Ending Accrued Accounts Payable 163,800
(0) (0) 1,532,311
Income before tax adjustments 89,356 (89,356) Engagement/TR
Cash Contributions M-2
Ending Retained Earnings per Tax Return 136,226 CY TR
98

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
99

Typical Goals of an ESOP
 Shareholder Liquidity
 Long-term succession plan
 Corporate and personal tax planning
 Ownership/Partnership incentive for key employees
100

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
101

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
102

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
103

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
104

Initial C Corp ESOP Transaction
Company
Note &
Pledge
of Stock
ESOP
Cash
Cash
Company Stock
Bank
Pledge of
QRP??
Shareholders
Cash
Note & Collateral
105

106
Company
Bank and/or
Shareholder
ESOP
Contributions or
Dividends ($$$)
Loan Payments ($$$)
Release of Shares Pledged as
Collateral and Share Allocations
to Individual ESOP Accounts
Loan
Payments
($$$)
ESOP Loan Repayment
106

Initial S Corp ESOP Transaction
Company
Note &
Pledge
of Stock
Company
Company Stock Stock
ESOP
Cash &
Sub. Note
Bank
Shareholders
Cash
Note & Collateral
107

108
ESOP Transaction Concerns
 Valuation
 Financing
 Effect of ESOP on overall benefits structure
 Legal/fiduciary risk
 Cost and complexity
108

109
ESOP Plan Design Issues
 Eligibility
 Stock allocations
 Vesting
 Benefit Distributions
 Voting of company stock
 Trustee
109

110
Steps in an ESOP Transaction
 Feasibility study
 Financing
 Appraisal
 Plan Design
 Legal Documents
 Closing
 IRS Determination Letter
110

APPENDIX I
Internal Control Questionnaire for
Consulting Engineers
42

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

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:
44

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.) Yes No
a. Accounting system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Cost estimating/allowability. . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Recording time worked/timesheet preparation . . . . . . . . . . . . .
e. Fringe benefits/leave time . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
f. Recording overtime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
g. Compliance with FAR Part 31(†) and applicable CAS . . . . . . . .
h. Recording direct and indirect costs . . . . . . . . . . . . . . . . . . . . . .
i. Overhead/indirect cost rate development . . . . . . . . . . . . . . . . .
j. 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.
45

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?
No Yes. If ―yes,‖ please explain:
B.6. Knowledge of FAR Part 31. Are appropriate personnel within the Company familiar with FAR Part 31?
Yes No. If ―no,‖ please explain:
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
Contact:
Period Covered:
c. Project Audits: Audit Review Compilation Other (please specify):
Contact:
Period Covered:
46

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 No N/A (no job-cost ledger used)
a. Are billings prepared from, or reconciled to, reports generated from the Company’s job-cost system?
Yes No. Please explain:
b. 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. Labor costs Yes No
b. Non-labor expenses Yes 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?
47

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?
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.)
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?
Please check here if not applicable:
48

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 No
 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. . . . . . . . .
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:
49

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
c. Are all employee timesheets approved by supervisors?
Yes No
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?
50

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?
51

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.
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).
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)?
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).
52

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?
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:
53

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. Outside Services? Company ownership? Both?
b. 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 No
b. Is usage segregated by direct and indirect classifications?
Yes No
c. 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
54

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:
55

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: Bonus: Other
Compensation:
Total
Compensation:
1
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related (e.g., spouse, parent, child, sibling, in law):
2
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
3
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
4
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
5
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
6
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
7
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
8
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
56

Name or ID: Title/Position: Wages/Salary: Bonus: Other
Compensation:
Total
Compensation:
9
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
1
0
$ $ $ $
Total Hours
Worked During
Year:
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:
$
$
$
$
$
$
$
$
$
$
$
$
57

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:
$
$
$
$
$
$
$
$
$
$
$
$
58

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 Endowments (annuities)
Accidental death 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?)
59

I certify that to the best of my knowledge and belief this ICQ is a complete and accurate representation of the above-named
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.
60

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