Purpose of FAR Compliant ICR Choose an ICR Requirements of a FAR Compliant ICR Schedule Disclosure Notes

ARCHITECTURAL AND ENGINEERING CONTRACTS WITH LOCAL AGENCIES

LETTER TO LOCAL AGENCIES

January 2, 2018

Dear Transportation Partners:

The California Department of Transportation (Caltrans) will be implementing a new process for reviewing and accepting Indirect Cost Rates (ICR) of Architectural and Engineering (A&E) firms contracting with Local Government Agencies (LGA) on projects using state and federal-aid highway funds. This is in response to existing federal regulations at 23 Code of Federal Regulations (CFR) Part 172. These requirements are effective January 2nd, 2018 with a grace period up to April 1st, 2018.

As part of this process, A&E firms will now be required to submit to LGAs, certain financial documents to support their ICR(s). Enclosed you will find exhibits that outline these requirements.

LGAs will be responsible for ensuring all required financial documents from A&E firms are received and forwarded to Caltrans Audits and Investigations (A&I) for review prior to contract execution. Within 30 business days of A&I's receipt of the financial document package, A&I will make the recommendation to the LGA to either accept, or adjust the A&E firm's ICR. Upon agreement between the LGA and A&I, however, the 30 business days can be extended. We recommend LGAs include language in the Request for Proposals with A&E firms stipulating the financial document requirements for A&E ICR(s).

To provide additional support for LGAs and A&E firms in this new process, by the end of January, A&I will post to our website at http://dot.ca.gov/audits/ a training module on the new financial document requirements as well as a training module on prevailing wages. We hope these will be a helpful resource to all.

Sincerely,

ALICE LEE
Chief, External Audits — Local Governments
Enclosures

  1. Exhibit IOA
  2. Exhibit IOA Checklist

c: Rodney Whitfield, Director of Financial Services, FHWA, California Division
Matt Schmitz, Director of Project Delivery, FHWA, California Division
Veneshia Smith, Financial Program Manager, FHWA, California Division
Scott McHenry, Local Programs Manager, FHWA, California Division
Eraina Ortega, Inspector General, Independent Office of Audits and Investigations, California Department of Transportation
William Lewis, Assistant Deputy Director, Independent Office of Audits and Investigations, California Department of Transportation
Socorro Briseno, Deputy Director, Planning and Modal Program, California Department of Transportation
Rihui Zhang, Chief, Division of Local Assistance, California Department of Transportation
Mark Samuelson, Office Chief, Division of Local Assistance, California Department of Transportation
Felicia Haslem, Program Manager, Division of Local Assistance, California Department of Transportation

Exhibit 10A

Click here to Download Exhibit 10a Document

*  ICR FYE = Indirect Cost Rate Fiscal Year End.  All items on this checklist may not be all inclusive.  A&I reserves the right to request additional documents as deemed necessary. 

** Caltrans ICR Acceptance ID # is an identification number issued by Caltrans upon review and acceptance of consultant's indirect cost rate(s) schedule for a specific fiscal year.  This ID # can be referenced for use on future contracts using the same FYE ICR.

*** Firms using SHR can be reimbursed for the prevailing wage deltas either as an Oth­­er Direct Cost or as an Overhead/Indirect Cost - refer to A&I's PW Interpretive Guidance on www.dot.ca.gov/audits.

  1. Local Agencies are required to complete Exhibit 10-A and include all applicable required documents upon submission.
  2. FAR Compliant ICR schedule includes FAR References, and Disclosure Notes.  If the Disclosure Notes are not provided, A&I will provide a first-year waiver of this requirement; however, the notes will be required on future fiscal year ICR schedules. See AASHTO Guide Chapter 5, 8, and 11 for references.  The fiscal year-end indirect cost rate (ICR) to be applied to the Agreement is based on the submission package received by A&I. For financial document packages received from January 1, 2018 to June 30, 2018, the 2016 FYE ICR must be submitted or the FYE 2017 ICR if available.  For financial document packages received from July 1, 2018 to December 31, 2018, the 2017 ICR must be submitted.
  3. Go to AASHTO website @ audit.transportation.org,  for Appendix B-Internal Control Questionnaire
  4. Accounts and balances must match costs proposed on the FAR Compliant ICR schedule, as per 48 CFR Part 31.
  5. Prevailing Wage (PW) contract requires written PW Policy.  It must be on the company’s letterhead, signed, and dated by company's official to show accounting methods used on delta base and delta fringe - refer to A&I's PW Interpretive Guidance on www.dot.ca.gov/audits.
  6. Document/Report must summarize total labor costs that agree to total direct labor and total indirect labor amounts included in the fiscal year ICR schedule proposed on the contract.  Uncompensated overtime must be presented for salaried/exempt employees that are not compensated for hours worked in excess of 8 hours a day/40 hours per week/2080 hours per year. Refer to Uncompensated Overtime Interpretive Guidance on www.dot.ca.gov/audits.

FINANCIAL DOCUMENT REQUIREMENTS

To view a video of financial document requirements click here.

Welcome to the Caltrans Independent Office of Audits & Investigations training module on Financial Document Requirements for Architectural and Engineering Firms on Local Government Contracts.

In this training module we will discuss A&I’s Financial Document Review Process which focuses on the review of Indirect Cost Rates, as required by the Federal Highway Administration.  

It is our goal that through this training module, Consultants and Local Government Agencies will understand the review process and be able to submit a complete submission package to A&I with all required financial documents.

The timeline for A&I to complete a Financial Document Review is up to 30 business days from when a complete package is received and the receipt of a complete package is integral to its timely completion. At the end of the review, A&I will either accept or adjust the Indirect Cost Rate or rates proposed.

OK, let’s begin.

Why is this important?

Here are the Learning Outcomes for this Training Module. By the end of this training module you should understand the answers to the following six items:

  • Why this information is important?
  • When do the requirements apply?
  • Who do the requirements apply to?
  • What is the submittal process?
  • What are the Financial Document Requirements?
  • And what are the requirements of a Federal Acquisition Regulation, or FAR, Compliant Indirect Cost Rate Schedule?

Per FHWA, in 23 Code of Federal Regulation, Part 172, A&E Consultants with contracts using state or federal‐aid highway funds must have their ICR accepted or approved by the State Transportation Agency (in the case of California, Caltrans) prior to contract execution.

In order for Caltrans to comply with FHWA’s regulation we have established these financial document requirements for A&E firms contracting with Local Agencies. So it is important, because it is Federal regulation.

So when do these requirements apply?

The changes became effective January 2nd, 2018, so the requirements currently apply. There is, however, a grace period.

Consultants and Local Government Agencies should be cognizant of the new changes and work towards being in full compliance no later than the end of the grace period, which is April 1st, 2018.

Now, who do the Financial Document Requirements apply to?

These new requirements apply to all Prime and Subconsultants participating on Local Government contracts using state or federal‐aid highway funds when:

  1. A contract is ≥ $150k
  2. There are amendments to the contract with an updated ICR.
  3. It is a multi‐year contract that requires the ICR to be updated annually.

Essentially, all ICR’s need to be reviewed and accepted by A&I.

Submittal Process

The Consultant is responsible for submitting a complete package to the Local Government Agency.

  • The Local Government Agency then ensures that all required documents provided by the Consultant are included and complete prior to submitting the package to A&I.
  • Afterward, the Local Government Agency should submit the complete package to A&I’s Conformance Email inbox.
    • A&I will send a confirmation e‐mail within 2 business days of receipt of the package. If the Local Government Agency does not get a confirmation e‐mail within 2 business days, then the Local Government Agency should follow up to ensure the package was received.
    • A&I will send a confirmation e‐mail within 2 business days of receipt of the package. If the Local Government Agency does not get a confirmation e‐mail within 2 business days, then the Local Government Agency should follow up to ensure the package was received.
  • A&I has up to 30 business days from the time the complete package is received to “Accept” or “Adjust” the ICR proposed. A&I will then issue a Caltrans Acceptance ID number to the Local Government Agency for each Consultant.

Contracts less than $150,000 are not subject to A&I’s Financial Document Review and therefore do not need to be submitted to A&I.

However, for these contracts, Local Government Agencies are responsible to ensure costs are in compliance with all applicable cost principles, policies, procedures, and guidance.

Requirements

Now, what are the requirements?

For contracts over $150,000, with participation amounts ≥ $150K, Consultants will fall into one of five categories and the requirements will depend partly on whether the ICR has been previously accepted or approved.

If a consultant is on a contract that is greater than $150,000, and has a participation amount lower than $150K, then they will not fall into any of the 5 categories and only the Minimum Document Requirements will apply.

We will discuss the Minimum Document Requirements later in this presentation.

Here are the 5 Categories

You will see that there are 3 categories related to ICR’s that have been either “Accepted” or “Approved.” Let us focus on these three categories first and discuss the requirements of Categories 4 and 5 later.

Here is what determines if you are eligible for Categories 1 through 3:

  • Category 1 is applicable to FY ICR’s that have received a Cognizant Approval, which is an approval by Caltrans or another State Department of Transportation.
  • Category 2 is applicable to FY ICR’s that have been previously accepted by Caltrans.
  • And Category 3 is applicable to Consultant Firms requesting the Safe Harbor Rate.

If you have been accepted in one of these three categories, then the requirements are minimal, and you are not subject to the requirements of category 4 or 5.

Also note, if you are a consultant with a participation amount less than $150K, then you will not fall into any of the categories and only the Minimum Document Requirements will apply to you.

  1. The first Minimum Requirement is the Exhibit 10‐A, from the Caltrans Local Assistance Procedure Manual or LAPM, which should be completed and certified by the Local Government Agency

  2. The second Minimum Requirement is the LAPM Exhibit 10‐K, which is completed annually by the Consultant and certifies that the Indirect Cost Rate is prepared in accordance with federal requirements and that the Consultant has an adequate Financial Management System able to accumulate and segregate direct and indirect costs.
    • For subsequent contracts in the same fiscal year, the Consultant will only need to provide a copy of this form.

  3. The third Minimum Requirement is the cost proposal. The LAPM Exhibit 10‐H1 to 10‐H4 show four different examples of Cost Proposals based on the type of contract and the payment method that consultants can use.

  4. The fourth Minimum Requirement is a list of the Local Government Agency and Consultant’s contact information for the contract.

  5. The fifth Minimum Requirement applies to prevailing wage contracts only. These contracts require a written Prevailing Wage Policy for each Consultant.
    • A&I has developed a Prevailing Wage Interpretive Guidance to assist A&E firms in gaining an understanding of Prevailing Wages, their requirements, and applications. Prevailing Wage training modules will also be available on A&I’s website in the first quarter of 2018.

Category 1 Cognizant Approval Requirements

A Cognizant Approval is an approval letter of your ICR by a Cognizant State DOT that you can use for the entire fiscal year.

The Cognizant State DOT is determined by the location of the Consultant’s accounting records. For example, if the Consultant’s accounting records are located in California, then the Cognizant State DOT would be Caltrans.

Cognizant Approval letters are issued through a very specific process that typically includes a CPA Audit of the ICR and a State DOT review of the CPA’s work papers.

Once a Consultant has a Cognizant Approval Letter, it can be used on future contracts using the same ICR fiscal year. This will reduce the financial document requirements of those contracts.

Requirements for Category 1

For Cognizant Approval submissions, in addition to the Minimum Requirements consultants are to provide their CPA Audit Report of the ICR and the Cognizant Approval Letter for the applicable Indirect Cost Rate fiscal year proposed.

Category 2 Caltrans Acceptance ID Number

Category 2 is applicable to Consultants that have previously received a Caltrans Acceptance Identification Number for the same Indirect Cost Rate fiscal year proposed on the contract.

An Acceptance Identification Number is issued by Caltrans upon review and acceptance of a Consultant's Indirect Cost Rate for a specific fiscal year and can be used on future contracts for the same ICR fiscal year period to reduce documentation requirements.

Requirements for Category 2

For Category 2, in addition to the Minimum Requirements, consultants who have received an acceptance ID Number from Caltrans for a FY Indirect Cost Rate should provide that ID number as part of their financial document package

Requirements for Category 3 / Safe Harbor Rate Definition

Category 3 is applicable to Consultants requesting a Safe Harbor Rate.

All eligible A&E firms can choose to use the SHR of 110% for contracts in the State of California. This may or may not be subject to change in the future though.

The Federal Highway Administration developed the Safe Harbor Rate Program to help remove potential financial barriers that may otherwise prevent or inhibit new, small, and disadvantaged A&E firms from entering the Federal‐Aid Highway Program funded State administered engineering services market.

This program allows firms to enter into contracts if they meet certain Minimum Requirements, without the burden and expense that is required to become fully FAR compliant.

Requirements for Category 3

To be eligible to use the SHR, the following requirements must be met based on the FHWA’s established eligibility criteria:

  • Firms must not have relevant contract cost history to use as a base for developing their own Indirect Cost Rate.
  • Firms must not have a previously approved ICR by a cognizant agency or an accepted ICR by a State DOT like Caltrans.
  • Finally, firms must have a project cost accounting system that is able to accumulate and segregate direct, indirect, and unallowable project costs.

For Consultants requesting the Safe Harbor Rate, in addition to the Minimum Requirements with the exception of the 10‐K, they should provide as part of their Financial Documents Package:

Attachment 1R, the “Consultant’s Certification of Eligibility, Contract Costs, and Financial Management System,” which certifies that the Consultant’s costs are allowable per federal guidelines, and the Consultant has an adequate financial management system.

The Attachment 1R can be found at the link provided here.

Requirements for Category 4.

Category 4 is for Prime and Subconsultants on contract amounts ≥ $150K but less than $1M with a participating amount greater than $150K.

For Category 4, in addition to the Minimum Requirements, Consultants are to provide:

  1. A FAR compliant Indirect Cost Rate schedule.
  2. The Internal Control Questionnaire by AASHTO, the American Association of State Highway Transportation Officials.

The ICQ is located on the AASHTO website. A link to the AASHTO website is provided on the Resources page at the end of this training.

Requirements for Category 5.

Category 5 is for Prime and Subconsultants on contracts greater than $1M with a participating amount greater than $150K.

For Category 5, in addition to the Minimum Requirements, consultants are to provide:

  1. A FAR Compliant ICR schedule.
  2. Prior year ICR Schedule, which is only required from the Prime Consultant.
  3. An AASHTO Internal Control Questionnaire.
  4. Year End Trial Balance or Financial Ledger Reports that reconcile to the ICR schedule amounts.
  5. Vacation/Sick Policy.
  6. Bonus Policy.
  7. Consultant’s Executive Compensation Analysis, which we will discuss in greater detail next.

Purpose of the Executive Compensation Analysis

The purpose of the Executive Compensation Analysis is to document the analysis used to support the allowability and reasonableness of claimed executive compensation costs included in the ICR calculation.

The firm’s analysis should be prepared in accordance with FAR 31.205‐6 and the AASHTO Guide Ch. 7. This analysis should be completed annually as part of a FAR compliant ICR

There are two options available for Consultants to evaluate the reasonableness of executive compensation costs included in your ICR.

They are:

  1. The “National Compensation Matrix Tool,” which can be located on the AASHTO website at the link provided here.
  2. The Salary Surveys, for which more information can be found in Chapter 7.5 of the AASHTO Guide.

Any excess compensation amount over the National Compensation Matrix Tool or Salary Surveys must be removed from the total indirect labor costs.

If the Executive Compensation Analysis is not provided or it is unsupported, then the ICR is deemed non‐ FAR compliant and the entire executive compensation amount or the indirect labor amount could be removed from the ICR calculation.

Exhibit 10-A Checklist

This is The LAPM Exhibit 10‐A checklist we discussed previously. This checklist summarizes the five categories that we have just reviewed and their document requirements. It is an excellent summary and reference for the requirements of each category.

Exhibit 10A

Click here to Download Exhibit 10a Document

Please note though, that these requirements may not be all inclusive, as A&I reserves the right, based on risk, to request additional documents regardless of category and participation amount.

Purpose and Requirements of a FAR Compliant Indirect Cost Rate Schedule

Now we will discuss the purpose and requirements of a FAR Compliant Indirect Cost Rate Schedule.

The purpose of an ICR schedule is to:

  • Itemize indirect costs.
  • Segregate direct and indirect labor.
  • Support the allowability of costs
  • Show the methodology used to develop the ICR

Please note, that due to the time commitment required to develop an ICR, that the ICR should be developed prior to bidding on a contract.

Choosing an ICR

The Fiscal Year ICR to be applied to a contract is based on when the submission package is received by A&I, and not the advertisement date of the contract.

For example:

  • For Financial Document Packages received prior to June 30, 2018, the 2016 FY ICR must be used or the 2017 FY ICR if it is available.
  • For Financial Document Packages received from July 1, 2018 to December 31, 2018, the 2017 FY ICR must be used.

Requirements of a FAR Compliant ICR Schedule

A FAR Compliant ICR schedule should include amounts for:

  • Total direct labor costs, including both billable and non‐billable costs.
  • Total indirect labor costs
  • Indirect non‐labor costs by account.
  • Unallowable costs by account.
  • The ICR Schedule also needs to include FAR References & Notes explaining why costs are disallowed, and be prepared in accordance with FAR Subpart 31.2 and the AASHTO Audit Guide.

    For guidelines on cost allowability and ICR schedule formatting, Consultants should refer to the FAR Part 31.2 and the AASHTO Audit Guide.

    This is an example of an ICR schedule, taken from the 2016 AASHTO Audit Guide, Table 5‐5. AASHTO Audit Guide, Table 5‐5

    Listed here as discussed previously are total direct labor costs, total indirect labor costs, indirect non‐ labor costs by account, and unallowable costs by account.

    You can also see the FAR References & Notes section at the bottom, explaining why costs are disallowed.

AASHTO Audit Guide, Table 8‐1

In this example of common unallowable costs, the 2016 AASHTO Audit Guide Chapter 8 Table 8‐1 provides good information and guidance on common unallowable costs per FAR Part 31.

This table provides examples of common unallowable costs incurred by A&E firms, but the list is not all inclusive.

Some examples of common unallowable costs that our office often sees are: advertising, bad debt, interest expense, personal use of company vehicles, and fines.

Disclosure Notes

Lastly, the ICR Schedule also needs to include certain Disclosure Notes. Some examples of recommended disclosures are:

  1. The description of the company.
  2. The basis of accounting.
  3. Description of accounting policies.
  4. List of other direct cost accounts and charge rates.
  5. Description of the overhead rate structure, such as a single rate or multiple rates

The AASHTO Audit Guide lists the recommended disclosure notes in Chapter 11, and these disclosure notes are required by A&I.

This concludes the requirements of a FAR compliant ICR Schedule.