FAR Overhead Rate Submissions: 4 Surprisingly Allowable Costs
When an architecture or engineering (A/E) firm prepares its department of transportation (DOT) overhead rate submission, every dollar of allowable cost matters. An overhead rate increase of even 1% can have a significant positive impact on an A/E firm’s profitability when multiplied over an entire portfolio of DOT contracts. Performing a detailed analysis of overhead costs is, therefore, a worthwhile time investment because it enables firms to identify nuanced instances of allowability. Certain allowable costs can easily be dismissed as unallowable if only a cursory overview is performed. The following are a few such examples.
Bonuses
When analyzing bonuses for allowability, the key distinguishing factor to consider is whether the payment is directly tied to the individual’s performance. Performance-based bonuses are generally allowable under the regulations, while profit-sharing bonuses must be disallowed. Establishing and documenting performance-based criteria for bonus distributions (even if the amounts being distributed are ultimately discretionary rather than strictly formula driven) can provide A/E firms with sufficient standing to include those expenses as allowable costs within their overhead rate calculations.
Bid and Proposal Costs
While most marketing expenses are disallowed under the regulations, the costs associated with bid and proposal (B&P) activities are generally permissible for inclusion in the overhead rate calculation, if they are reasonable and allocable to specific contracts. Maintaining consistent timekeeping records that clearly and specifically connect employee time to the underlying B&P activities is critical to establishing the allowability of these costs.
Legal Costs
The costs of fines and penalties are expressly disallowed under the regulations. However, there are many types of legal costs that are allowable, as well. Generally, A/E firms may treat legal expenses as allowable if the costs arose in the normal course of business and do not involve:
- Claims or appeals involving the government, including bid protests.
- Matters in which the A/E firm was found criminally liable.
- Matters in which the A/E firm was found liable for fraud or similar misconduct.
The determination of legal cost allowability is an especially nuanced topic. The key takeaway here is that legal costs should not be immediately dismissed as unallowable, as there are plenty of opportunities for allowability depending on the nature of the underlying litigation. The list above should serve as a starting point for a more thorough analysis from the firm.
Gifts to Employees
Most employee gifts are unallowable. However, there are some notable exceptions to this rule. One such exception is a gift to an employee in recognition of an achievement made pursuant to an established plan or policy. Thus, if an A/E firm has an established practice of awarding employees for achievements, such as years of service or professional licensure, it is worthwhile to track these costs, as they will likely meet the allowability standards.
The common theme with all of these costs is proper and consistent documentation, as this practice will ultimately enable the A/E firm to ascertain and support their conclusions as to allowability.
At McKonly & Asbury, we enjoy helping A/E firms maximize the overhead rate available to them in compliance with the Federal Acquisition Regulations (FAR). If you have any questions about the costs we detailed above – or any other topics related to FAR Overhead Rates in general – please feel free to reach out to us and or visit our Architecture, Engineering, and Construction (AEC) industry page.
About the Author
Tim is a leader within our Architecture, Engineering, and Construction (AEC) Practice, serving clients across the Mid-Atlantic. He also chairs the firm’s Technical Committee, which exercises oversight of the firm’s Assurance Segmen… Read more
