AASHTO UNIFORM AUDIT & ACCOUNTING GUIDE Disadvantaged Business Enterprise (DBE) Supportive Services Program The contents of this training course reflect the views of the author who is responsible for the facts and accuracy of the data presented herein. The contents do not necessarily reflect the official views or policies of the State of California or the Federal Highway Administration. This course outline does not constitute a standard, specification, or regulation.
ABOUT THE GUIDE PURPOSE Assist users in understanding terminology, policies, procedures and sources for applicable Federal Regulations Define contract cost principles and procedures as set forth in Title 48, Chapter 1, Part 31. To encourage users to adopt uniform accounting and reporting procedures 2
ABOUT THE GUIDE • To encourage users to adopt uniform accounting and reporting procedures including but not limited to, labor charging systems, cost accumulation and reporting practices, and the format and content of statements of direct labor, fringe benefits and general overhead (“indirect cost rate schedules”). 3
ABOUT THE GUIDE • SCOPE & APPLICABILITY • Construction and architectural-engineering (A&E) contracts. • Private consulting firms providing architectural, landscape architectural, engineering, environmental, land surveying, or construction management services are termed Architectural and Engineering Consultants (A&E). 4
ACCOUNTING SYSTEM CONTRACTS WITH CALTRANS In order to successfully compete for a contract with Caltrans and meet potential audit requirements, a contractor (whether a prime or subcontractor) must have a system of record keeping and internal control. An award may be delayed or even not awarded at all if your accounting system does not meet certain criteria set forth by Caltrans or local transportation agencies 5
ACCOUNTING SYSTEM • OBJECTIVES • Due to the nature of the types of contracts awarded (cost, reimbursable, time and materials, cost plus and firm fixed price), the government contracting industry imposes unique burdens on a contractor ’ s accounting system. It must employ the following basic processes before it will pass a potential audit: 1. A job order cost accounting system considered adequate to identify, account for, record and accumulate project costs. Each project is assigned a job number so that project costs can be segregated and accumulated in the accounting system. 2. Ability to identify and segregate direct and indirect project costs on a consistent basis. 3. Employ a logical and consistent method for the allocation of indirect costs 6
ACCOUNTING SYSTEM 4. Costs are accumulated under General Ledger control. 5. A timekeeping system that identifies labor by cost objective and allocates this time properly. 6. While construction contractors must adhere to the cost principles of Title 48, CH1, Part 31, the overhead rates on Construction contracts are developed completely different than A&E contracts. 7. Interim determination of costs. 8. Segregation of unallowable costs. 9. A system of internal control which provides reasonable assurance that assets are protected; financial data, records and statements are reliable; and errors and irregularities are promptly discovered, reported, and corrected. 7
ACCOUNTING SYSTEM • SEGREGATING DIRECT COSTS FROM INDIRECT COSTS • Direct costs are defined in FAR 31.202 as any cost that can be identified specifically with a particular final cost objective (e.g; a contract). An example would be labor specifically identified to the contract or materials purchased specifically for the contract. 8
ACCOUNTING SYSTEM • Indirect costs are defined in FAR 31.203 as any cost not directly identified with a single or final cost objective, but can be allocated to two or more final cost objectives. An example would be administrative costs incurred by corporate headquarter. The administrative costs incurred benefits all projects, but cannot practically be identified with any particular project or final costs objective. 9
ACCOUNTING SYSTEM • ACCUMULATING AND SEGREGATING COSTS • The ability to accumulate and segregate reasonable, allocable (incurred solely for a project) and allowable (per terms of the contract) costs through the use of a cost accounting system (commonly referred to as a job cost accounting system). The following are some attributes which would ideally be found in such a system: 10
ACCOUNTING SYSTEM a. A chart of accounts which includes indirect, direct, and unallowable general ledger accounts. b. Segregation of costs by contract, and in some instances by cost category and milestones (if applicable) c. Proper recording of direct and indirect costs. For example, recording of labor costs should provide that administrative labor hours be recorded on a timesheet and accumulated in the accounting records to a fringe benefit, vacation, sick leave or other indirect cost account/code. Direct project hours should be recorded on a timesheet and in the payroll records to a direct project cost account/code. 11
ACCOUNTING SYSTEM d. Consistent accounting treatment of costs in recording and reporting. For example, if copy/printing expense is charged directly to a project, all copy/printing expense incurred on any project should be considered a direct cost. As a result, project related copy/printing, whether reimbursable per the contract terms or not, should not be included as an indirect cost pool. 12
ACCOUNTING SYSTEM e. Ability to trace from invoices submitted to job cost records and original, approved source documents, for example, timesheets, vendor invoices, cancelled checks. f. Ability to reconcile job cost records (i.e, subsidiary records) to accounting and payroll records (i.e., G/L). 13
ACCOUNTING SYSTEM • ALLOCATION OF INDIRECT COSTS • Indirect costs are allocated to cost objectives based upon relative benefits received or other equitable relationship, as required by FAR 31-201-4. Such costs need to be grouped into logical categories (i.e. fringe, overhead, G&A, etc.) then allocated to every contract based on a defined methodology. An example of this would be to allocate overhead on the basis of direct contract labor dollars. The methodology employed should be consistently applied to all cost objectives. 14
ACCOUNTING SYSTEM Per FAR 31-201-4 a cost is allocable to a government contract if it: a. Is incurred specifically for the contract; or b. Benefits both the contract and other work, and can be distributed to them in reasonable proportion to benefits received c. Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown. 15
ACCOUNTING SYSTEM • FAR 31.203 “ indirect costs ” sets forth the provisions for allocating indirect costs as follows: a. After direct costs have been determined and charged directly to the contract or other work, indirect costs are those costs remaining to be allocated to two or more final cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs Incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective. 16
ACCOUNTING SYSTEM b. The contractor shall accumulate indirect costs by logical cost groupings with due consideration of the reasons for incurring such costs. The contractor shall determine each grouping so as to permit use of an allocation base that is common to all cost objectives to which the grouping is to be allocated. The selected base used is what predominately drives costs, such as direct labor dollars or other equitable basis. The base selected should allocate the grouping on the basis of relative benefits received. 17
ACCOUNTING SYSTEM c. Once an appropriate base for allocating indirect costs has been accepted, the contractor may not fragment the base by removing individual elements. All items properly includable in an indirect cost base shall bear a pro rata share of indirect costs irrespective of their acceptance as government contract costs. The rate calculated would be the contractor’s proposed rate. However, the government’s accepted rate may differ based upon audit of contractors incurred costs. The point here is that you, the contractor need be consistent with respect to allocating indirect costs. 18
ACCOUNTING SYSTEM • ACCUMULATION OF COSTS UNDER G/L CONTROL • Government agencies want to determine if the job cost records and other underlying accounting records can be reconciled to the general ledger. Contractors should job cost records to the G/L at least monthly. • Contractors should recognize that an operable accounting system that is under general ledger control is of paramount importance when performing government contracts. 19
ACCOUNTING SYSTEM • However, prospective contractors may not have previously administered such contracts that requires the same type of accounting system required for government work. A prospective contractor may not want to install such a system unless awarded a contract. In this case, if the potential government contractor anticipates a contract award, it must have developed (or acquired) a system this is operable, though not necessarily in use. The contractor must be in a position to demonstrate this new system and be ready to implement the system prior to incurring any costs on a government contract. 20
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