What are Burden Fringe and Overhead Audits and how they provide Engineering Firms a Competitive Advantage?


Firms that offer engineering and consulting services are facing increased competition. In order to expand their business prospects they have sought to perform engineering and other related services for the State Department of Transportation. A consulting firm new to the State contracting process may not be aware of the prequalification requirements that include a burden, fringe and overhead audit of their most recent fiscal year.

A burden fringe and overhead audit gives an engineering firm contracting with the State Department of Transportation a competitive advantage by fulfilling a major component of the prequalification process.

The audit process relies on the firms financial statements prepared in accordance with GAAP (Generally Accepted Accounting Principals) and reconciled schedules of overhead costs adjusted by regulations contained in the Federal Acquisition Regulations (FAR), Title 48, Chapter 1, Part 31-Contract Cost Principles and Procedures and State regulations and guidelines. These reconciled schedules are used to assess a consultant’s financial capability and the allowability of Indirect or Overhead Costs. These overhead schedules prepared on a basis of accounting practices prescribed in the FAR’S are not intended to be a presentation in conformity with GAAP.

Overhead audits rely on the consultant’s accounting system that is adequate to support costs associated with State contracts. An adequate job cost accounting system should include the following:

• Segregation and accumulation of direct and indirect costs by general ledger account.
• Maintenance of individual job cost ledgers to support direct costs as contained in the general ledger.
• Use of time and expense reports for the separation and identification of direct and indirect costs.
  

Overhead rates are normally determined on an annual basis. Overhead rates shall be determined by removing those costs considered unallowable in accordance with FAR 31 from the overhead cost pool and dividing the remainder by total direct labor dollars. If the consultant’s normal accounting practice provides rates on a basis other than direct labor dollars the overhead audit must convert to a direct labor dollar basis. The Department of Transportation requires all overhead audits to be on a direct labor dollar basis in order to assure consistency with normal contracting procedures.

Normally, the burden fringe and overhead audit is performed by an independent certified public accountant that is familiar with Generally Accepted Government Auditing Standards. The overhead audit opinion shall be in compliance with governmental auditing standards issued by the Controller General of the United States, and any other requirements of the Department of Transportation. These standards require issuance of internal control and compliance with law and regulation reports.

The overhead audit should be submitted to the Department of Transportation with the other prequalification documents. The Department will review the overhead audit to determine that it meets all the audit criteria. The department may request to review the auditors work papers pertaining to the audited overhead rate. The Department will notify the consultant in writing of the approved overhead rate.

In conclusion, a consultant wishing to expand his business to include Department of Transportation consulting contracts needs to comply with the prequalification requirements. A burden fringe and overhead audit gives the consultant a competitive advantage in the contracting selection process by fulfilling a major component of the prequalification requirements.

Engineering firms and consultants needing advice regarding overhead audits should contact CPA firms familiar with these engagements.

By Matthias Strilbyckij
January 2004