Audited Overhead
Rates – The Good,
The Bad,
and The Ugly
AASHTO Subcommittee on Internal and External Audit
2014 Annual Meeting
August 10 – 13, 2014
Savannah, Georgia
MH Miles Company CPA PC
 Niche Certified Public Accounting Firm
 Specialize In Governmental Compliance
 NUTRITION, TRANSPORTATION, EDUCATION
 TRANSPORTATION
 State Agencies
 FAR Overhead Rate Audits
 CPA Workpaper Reviews
 Final Costs Audits / Agreed-upon Procedures Reviews
 Staff Augmentation
 Training & Consulting Services
 A/E Firms
 FAR Overhead Rate Audits
 Assist management in calculating rate
 Accounting system set-up and improvements
 Guidance regarding State examinations & disputes
AGENDA
Common issues and findings noted
Facilitate open discussion
MEALS
Employee Team Building
 Cost incurred to improve employee working
conditions, employee relations, and morale are
allowable (reasonable) FAR 31.205-13
 Often covered by the entertainment cost
principle FAR 31.205-14 which overrides all other
principles
 Examples
 Donuts & coffee on Fridays for weekly department
meeting
 Meal cost incurred at a Quarterly Progress meeting
MEALS
Overhead Meals
 Overhead meals are allowable when the
purpose is not in support of projects and relates
to the overall normal operations of business
 Examples
 A job interview for a project candidate at a
restaurant.
 A lunch meeting held with a company lawyer to
discuss trademark filings
 Corporate strategy meeting with managers over
dinner.
 Catered meal for an open house held to celebrate
grand opening of subdivision.
MEALS
Business Meetings
 If a meal is part of a business meeting and
incidental to the meeting then it may be
allowable.
 Technical meeting with speaker – allowable
 Simply discuss some business during meal unallowable
 For the meal to be allowable it must be part of
the whole meeting, an incidental part (meeting
can stand on its own) and the meeting itself is
allowable.
 Meal cost must be reasonable
MEALS
The Key is Proper Documentation
 Who – employee name and names of all guest
 What – was purchased and price (including
itemized meal receipts)
 When – date meal occurred
 Where – place meal occurred
 Why – purpose of the meal/meeting
MEALS
Common Mistakes
 Credit Card statement only
 Purpose of meal missing
 Meal cost excessive
 Alcohol not removed
 Misinterpretation of < $75 receipt rule
Poll – State procedure for unallowable costs
TOTAL TIME ACCOUNTING
 Requires all hours are recorded
 No specific regulation that requires TTA
 FAR 31.201-4: Cost Allocability and Assignability to
Final Cost Objectives
 CAS 401: Consistency in Estimating, Accumulating,
and Reporting Costs
 CAS 418: Proper Allocation Bases for Direct and
Indirect Costs
TOTAL TIME ACCOUNTING
FAR 31.201-4: Cost Allocability and Assignability to Final
Cost Objectives
 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 relationships.
CAS 418.40: Proper Allocation Bases for Direct and
Indirect Costs
 Pooled costs shall be allocated to cost objectives in
reasonable proportion to the beneficial or causal
relationship of the pooled costs to cost objectives.
Implied that all hours worked are needed to correctly
determine the beneficial/causal relationship between
the cost and the cost objective.
TOTAL TIME ACCOUNTING
CAS 401: Consistency in Estimating, Accumulating, and
Reporting Costs (Bid = Book = Bill)
 FAR 31.201-1: Composition of Total Costs - The total
cost is the sum of the direct and indirect costs
allocable to the contract…
 FAR 31.203(d): Once an appropriate base for
allocating indirect costs has been accepted, the
contractor shall not fragment the base by removing
individual elements.
The premise is that consistent application of cost
accounting practices will result in reliable cost
estimates, and later facilitate comparing the
estimated cost of contract execution with the actual
cost.
TOTAL TIME ACCOUNTING
Common Mistakes
 Owners only recording 40 hours/week
 Employees stop recording time at 40 hours
 Time in excess of 40 hours only recorded if billable
 All hours recorded but only direct time is
compensated
Poll – State procedure for correcting
CONTRACT/PURCHASED
LABOR
 Accounting treatment varies depending on
circumstances which costs are incurred
 Most likely causes no fringe benefits
 Labor performed in-house using the consultant’s
supervision and facilities (Overhead Allocated)
 Labor performed offsite under the supervision and
control of another entity (No Overhead)
Does the accounting treatment match billings?
CONTRACT/PURCHASED
LABOR
Common Mistakes
Bill as employee direct labor – Accounted for as
ODC or Indirect expense (And Vise-Versa)
 How do States correct?
 Redistribute in overhead to match billing practices
 Make adjustments on individual project basis
OTHER ISSUES
 CPA firms performing substantial work to produce
overhead audit without identifying Internal
Control weaknesses
 Travel expenses not limited to FTR
 Indirect Labor on timesheets not detailed
enough to identify unallowable activities.
 Rotary and Chamber of Commerce Dues
 Common Control Rent
 Parent Company Allocations