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Navigating the FAR Overhead Rate Audit for A&E Firms

For architectural and engineering (A&E) firms involved in government contracts, planning and preparing for an overhead rate audit in accordance with the Federal Acquisition Regulation (FAR) is critical to ensuring compliance. Appropriate planning will support an efficient audit, mitigate risks and surprises, and facilitate strategic decisions impacted by the overhead rate. Here’s how A&E firms can prepare for a successful audit.

Understand FAR and AASHTO Guidelines

Become familiar with FAR Part 31, which outlines the criteria for allowable costs, and the 2024 AASHTO Audit Guide, which provides detailed guidance for calculating overhead rates. The AASHTO Audit Guide should be a “go-to” tool that contains nearly anything and everything related to overhead rate calculations and audit.

Invest in Accounting Software

Appropriate accounting software will help ensure accuracy and compliance, efficiency, data management, reporting, and a solid audit trail.

Maintain Accurate Records

Maintaining accurate records is critical to an efficient audit. Keep accounting records and financial statements up to date and in line with Generally Accepted Accounting Principles (GAAP); this ensures that all expenses are properly accounted for and captured. A best practice is to create general ledger accounts for both allowable and unallowable costs. Separate general ledger accounts are one of the most significant contributors to an efficient audit.

Understand Allowable and Unallowable Costs

Training the team on allowable and unallowable costs not only helps with the audit but helps ensure an accurate overhead rate. There are many webinars available for a basic understanding of allowable and unallowable costs; the AASHTO Audit Guide is also a great resource for understanding costs. Common unallowable costs include, but are not limited to, advertising and public relations, bad debts, personal use of vehicles, fines/penalties, alcoholic beverages, interest expenses, and personal expenditures.

Implement Internal Controls

Establish internal controls over financial reporting. This includes training for accounting staff to ensure accurate and timely internal reporting. Some key internal controls to have in place include review and approval of all disbursements, review and approval of time entries by employees, and review and approval of the allowability of all disbursements.

Stay Informed

Keep up to date on the latest FAR guidelines and best practices. This may involve attending workshops, seminars, or simply familiarizing yourself with the AASHTO Audit Guide.

Conduct Internal Reviews

Before the audit, perform an internal review of overhead calculations. This helps identify and correct any potential issues in advance.

Engage with a CPA

Work with a CPA who has experience in FAR audits. They can provide invaluable guidance throughout the preparation and audit process.

By planning and preparing for an overhead rate audit, A&E firms can ensure that their overhead rates are accurate, compliant, and reflective of their true costs. This not only facilitates smooth audits but also enhances the firm’s reputation and competitiveness in securing government contracts.

McKonly & Asbury’s Architecture, Engineering, and Construction (AEC) team is ready to serve your overhead rate audit needs. Our experienced AEC team is prepared to guide you through the audit process, so don’t hesitate to contact us for any additional information or questions.

About the Author

Dan Sturm

Dan is a Partner and the Director of our Architecture, Engineering, and Construction (AEC) Practice, serving clients across the Mid-Atlantic. His industry focus includes construction, employee benefit plans, federal acquisition r… Read more

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