Does your A&E firm need a FAR audit?
If your architecture or engineering (A&E) firm has government contracts or collects federal or state funding, make sure your overhead rates are compliant with the Federal Acquisition Regulation (FAR).
FAR is the primary regulation that executive agencies use to acquire supplies and services with appropriate funds. It contains standard solicitation provisions, contract clauses and various agency supplements.
Federal contracts need to be compliant with FAR to ensure that government agencies receive quality goods and services at fair prices.
If your A&E firm isn’t FAR compliant — or unprepared for an audit — it could result in lost bids, repayments or lower profits.
FAR rules for calculating overhead
Overhead calculations are a key part of FAR. An overhead rate is the ratio of allowable indirect costs to total allocable direct costs (sometimes referred to as the “indirect cost rate”). The goal of the calculation is to determine the amount of indirect costs that can be charged to a governmental agency.
It’s critical to calculate correctly, and according to FAR. An error could impact your overall job profit.
According to FAR rules:
- A&E firms should calculate their overhead rates before they submit a grant proposal or while bidding for a contract subject to FAR.
- A&E firms with government contracts exceeding $500,000 generally need to have their overhead rates independently audited by a CPA firm.
- Some smaller contracts may be exempt from an audit if the Department of Transportation (DOT) performs a risk assessment and ensures FAR compliance.
What’s a FAR audit?
A FAR audit ensures your firm is compliant with the regulation. It can also help you maximize your overhead rate, minimize expenses and secure more government contract work at the best rates possible.
Depending on the contract value, an audit of your firm’s accounting and internal control systems may be required.
Your management team should prepare a schedule of indirect costs and related footnotes, as outlined in Part 31 of FAR. Then, an external firm will audit the information based on generally accepted auditing principles (GAAP), government auditing standards, applicable cost accounting standards, Defense Contract Audit Agency guidelines and guidance from the American Institute of Certified Public Accountants. The auditor will issue a report on the schedule of indirect costs and your internal controls over the financial reporting.
The auditor and the governmental oversight group (often the DOT) use an audit guide published by the American Association of State Highway and Transportation Officials. This is simply a guide and does not supersede the regulations in FAR 31.
How to prepare for a FAR audit
Review your project costing policies and procedures, chart of accounts, accounting system and internal controls before an audit — it could save you substantially and help you win more work.
To prepare for a successful audit, A&E firms can:
- Maintain accounting records and financial statements on an accrual basis, subject to GAAP.
- Determine disallowable expenses.
- Stay current on the latest FAR guidelines.
- Educate your staff on FAR audits.
A CPA firm that specializes in FAR can help you calculate the overhead rate and review your documentation and controls ahead of your audit.
How Wipfli can help
Need to prepare for a FAR audit? We can help you get the most out of every contract. Our audit and accounting team can guide you through the FAR process and help ensure your overhead rates and internal controls are accurate and compliant. Contact us today to get started.
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