kreischer miller architecture & engineering industry seminar - october 16, 2013

Architecture/Engineering Industry Seminar Wednesday, October 16, 2013

Credit/Collection Controls for

Professional Design Firms

A challenge facing design firms is the credit and collection function and its impact on the

property and financial well-being of their firms. This program will introduce credit and collection

procedures, how to deal with difficult clients, in-house training and periodic progress audits.

Presented by: Andy Harmelin, AI Consulting LLC

1

10/15/2013

1

D e f i n i t i o n o f K e y Te r m s

Extension of Credit:

– Extending credit to your clients can make the difference between a firm that’s holding on and one that is prospering.

– It is always better to chase the dollar, not the sale!

Definition of Key Terms

Cash Flow:

– Focuses on operational cash flow from the firm’s core business activities

– Measure of a firm’s liquidity or ability to meet payroll and pay vendors

– Firm can be profitable but still have trouble remaining liquid or solvent if it does not collect its receivables in a timely manner



Accounts Receivable:

– Accumulation of billing to clients of an organization who have been provided goods or services

– Firm’s over-investment in accounts receivable can create significant cash flow problems



2

droach

Rectangle

droach

Rectangle

10/15/2013

2

C r e d i t A p p r o v a l P r o c e s s

Purpose: to establish a policyto provide credit for contracts and new client invoicing toprotect companyAccounts Receivable

Credit Approval Process


Procedure

– Standard Credit Terms

When do you expect to be paid?

What is the business structure?

– Corporation/LLC

– Partnership



Procedure

– Establishment of Credit Client Name and Address

Dollar value of project

Length of project

Project address

Contact person: phone/Fax

Bank references

Trade reference– Find out how a company pays its bills


3

droach

Rectangle

droach

Rectangle

10/15/2013

3


Fees

– Request retainer?

– How much?

How to spot a potentially bad risk.


Policy to Review for ContractCompliance

Purpose

– Contract compliance review is designed to ensure that all contracts contain the requirements necessary to support financial performance, cash flow and financial systems, and the legal and operational integrity of each project.

An Engagement Register Form (ER) is developed by Accounting which includes all pertinent data such as:

• Type of contract: lump sum or time and materials

• Total contract amount

• Estimated length of job

• Estimated profitability

Policy to Review for ContractCompliance

4

droach

Rectangle

droach

Rectangle

10/15/2013

4

C o n t r a c t C o m p l i a n c e P r o c e d u r e

Contract Compliance Board

– Contract Compliance oversight is the responsibility of YOUR OVERSIGHT REVIEW BOARD. Standing board members are as follows: Office Manager

Accounting Manager

Senior Project Manager

Contract Compliance Procedure

C o n t r a c t C o m p l i a n c e P r o c e d u r e

Parameters of projects for Board review Contracts that exceed $50,000 Contracts which include bonding requirements Contracts which include progress payments and/or

significant WIP run up before billing Contracts that are lump sum without progress payment

provisions

Areas of focus Estimated profitability Previous experience with client Anticipated profit

Contract Compliance Procedure

How to spot a troublesome client– Early haggling over

what is covered and what is not

– Constant demands for special treatment

– Too many “battlefield decisions”on extra services

– Hiding from you after the work product has been delivered

Out of Scope Work and Contract Overruns

5

droach

Rectangle

droach

Rectangle

10/15/2013

5

P M I n t e r v e n t i o n w i t h C l i e n t s

PM should be in touch with each client at least every 2 weeks

Prior to contacting clients, PM should have updated account balance, including WIP, and should match up with contract limits

PM Intervention with Clients

P M I n t e r v e n t i o n w i t h C l i e n t s

During contact, PM should

– Find out how job is progressing

– Determine if billing has been received

– Ask if there are any issues with services

– Determine if client anticipates additional services for out-of-scope items

– Watch client payment habits

PM Intervention with Clients

P o s s i b l e C o u r s e s o f A c t i o n

Notify firm’s principals and accounting department of problem Accounting department sends letter to

client that payment terms of contract are not being met Based on client’s response, consider using

available leverage:– Stop work letter as of a date certain if open account if not paid up

to date– Notify the owner/funding source by a certain date– Place a lien on the project– Place the account with an outside collection agency

Possible Courses of Action

6

droach

Rectangle

droach

Rectangle

10/15/2013

6

Control & Issuance of A/R Write-offs When and under what circumstances

should A/R write-offs be considered?– Common causes

Out of scope services Contract overruns WIP: Work-in-process held for billing on future projects Warehoused hours logged as WIP

– How to minimize

Get weekly or daily time records from personnel and crosscheck against contracts

Make sure to get contract modifications and/or addenda as needed

C a s e S t u d y

Medium-sized architectural firm needed help with their aging accounts receivable

Case Study

Solutions

– Work with the Project Managers on a two week basis, engaging them in the billing process and making them more aware of client issues that need to be addresses

– Manage a year-end collection effort, sending out balance confirmation letters to selected clients, supported by PM assistance

– Established routine telephone calling practices to be followed at set intervals

C a s e S t u d y

Case Study

7

droach

Rectangle

droach

Rectangle

10/15/2013

7

Outcomes Made PMs more responsible for their entire projects

from start to finish, and helped tie their project profitability into year-end company bonuses

Made their clients aware of payment responsibilities, and set up a mechanism to deal with slow paying clients

Established year-end internal collection program which exceeded expectations 2 consecutive years

Year 1-actual results were 112% of target

Year 2-actual results were 118% of target

Reduced bad debt ratio by 70%

C a s e S t u d y

Case Study

Q U E S T I O N S ?

For more information about

AI Consulting, LLC,

please visit

www.ai-consultingllc.com.

Presented by: Andy Harmelin, AI Consulting LLC

Questions?

8

droach

Rectangle

droach

Rectangle

P r e s e n t e d b y :

Tom Yankanich, CPA Manager, Audit & Accounting

AASHTO Update

9

10/15/2013

1

Topics

The Statutory and Regulatory Framework

Key Cost Principles

Internal Control Systems

Key Areas of Cost, Including Compensation

The Use of Audit Information

The Risk Management Framework, Oversight and Cognizance

1www.kmco.com

Learning Outcomes

Explain the Federal and State laws, regulations, policies and procedures relating to the procurement of A/E design services and administration of A/E Contracts.

Summarize and differentiate key cost principles.

Demonstrate an understanding of the importance of internal controls.

Explain how to use audit information in the procurement of A/E services and administration of A/E contracts.

Discuss the risk management framework and tools and correlate them to your role in administering A/E contracts.

2www.kmco.com

Federal Statutes and Regulat ions

3www.kmco.com

23 U.S.C 112(b)(2) 23 CFR 172

Contracting for Engineering and Design Services Administration of Engineering and Design Related Service Contracts

48 CFR Part 31 (FAR Part 31) 40 U.S.C Chapter 11 Sections 1101 to 1104

Contracts with Commercial Organizations Selections of Architects and Engineers (Brooks Act)

49 CFR 18

Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments (Common Grant Rule)

10

droach

Rectangle

droach

Rectangle

10/15/2013

2

www.kmco.com 4

State Statutes and Wri t ten Procedures

In what ways might the application of State Statutes and procedures differ for the for the

following types of contracts?

Contracts using Federal-Aid Highway Program Funds?

Contracts using State and local agency funding?

www.kmco.com 5

Account ing and Audi t ing Pr inc ip les, Standards, Cr i ter ia and Guidance

FAR Part 31 GAS or GAGAS

Federal Acquisition Regulation Government Auditing Standards(Also known as "Yellow Book")

GAAP DCAA CAM

Generally Accepted Accounting Principles Defense Contract Audit Agency Contract Audit Manual

CAS GAAS and AICPA Guidance

Cost Accounting Standards Generally Accepted Auditing Standards

AASHTO Audit Guide

AASHTO Uniform Audit & Accounting Guide

Key Cost Pr inc ip les

Allowability, FAR 31.201-2

Reasonableness, FAR 31.201-3

Allocability, FAR 31.201-4

Direct and Indirect Costs

6

11

droach

Rectangle

droach

Rectangle

10/15/2013

3

www.kmco.com 7

A l lowabi l ty

Five Criteria per FAR 31.202(a):

Reasonableness

Allocability

Standards promulgated by the CAS Board, if applicable, otherwise GAAP

Terms of Contract

Any limitations set forth within this subpart

www.kmco.com 8

A l lowabi l i ty (cont inued)

Must be excluded from claimed costs:

www.kmco.com 9

Reasonableness

Burden of proof rests with the A/E Consultant

Costs incurred by the A/E Consultant not necessarily reasonable

FAR 31.201-3(a) states:

“No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.”

12

droach

Rectangle

droach

Rectangle

10/15/2013

4

www.kmco.com 10

A l locabi l i ty

What is meant by Allocability?

Was the cost incurred specifically for the contract?

Does the cost benefit both the contract and other work, and can it be distributed to them in reasonable proportion to the benefits received?

Is the cost necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown?

FAR 31.201-4 states:

“A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship.”

www.kmco.com 11

B i l lable/Nonbi l lab le

Whether a cost is billable or nonbillable is based on contract terms.

Often costs are allocable to a project, but are not billable.

www.kmco.com 12

In ternal Contro ls

Systems, policies and procedures that prevent or detect misstatements.

Responsibility of the A/E Consultant to establish and maintain strong internal controls.

Strong internal controls are critical to proper contract costing and FAR compliance.

13

droach

Rectangle

droach

Rectangle

10/15/2013

5

www.kmco.com 13

Object ives of Internal Contro ls

Strong A/E Consultant internal controls support:

Proper charging to contracts

Accurate cost estimations

Proper calculation of indirect cost rate

FAR compliance

Consistency in tracking, accumulation and allocation

www.kmco.com 14

In ternal Contro l Pyramid

www.kmco.com 15

Key Systems of a Typica l A/E Design Firm

Labor Charging System

Compensation System

Purchasing/Accounts Payable System

Estimating System

Job Costing System

Billing System

General Ledger/Accounting System

Budget/Planning SystemFinancial Reporting

System

14

droach

Rectangle

droach

Rectangle

10/15/2013

6

www.kmco.com 16

Importance of Labor Charging

Labor hours are A/E consultant’s core product

Labor charging practices drive

‒ Invoicing

‒ Project Costing

‒ Calculation of indirect cost rate

Highest Risk area in most A/E design firms

www.kmco.com 17

AASHTO Internal Contro l Quest ionnai re ( ICQ)

Assists the auditor in reviewing the internal control structure in place.

Must be completed by the A/E consultant

Developed to help increase consistency and minimize redundancy between State DOTs

Not mandatory unless the State DOT requires it

Other assessment tools: any internal controls and/or process documentation prepared by the A/E consultant or CPA firm auditor

www.kmco.com 18

Key Areas of Cost

Compensation:

Allowable – Subject to Excess Compensation Analysis

‒ Direct Labor

‒ Bonus (unless based on ownership)

‒ Deferred Compensation

‒ Employer Contributions to Pension Plans

15

droach

Rectangle

droach

Rectangle

10/15/2013

7

www.kmco.com 19

Key Areas of Cost (cont inued)

Compensation:

Unallowable

‒ Compensation tied to changes in value of corporate securities, e.g. Phantom Stock Plan

‒ Payments in the event of a change in ownership

‒ Lobbying/Advertising/Charitable/Client Entertainment Activities Cost

Management responsible for tracking time

www.kmco.com 20

Common Unal lowable Costs

Advertising

‒ Includes Website Development and Maintenance

Personal Use of Company Owned Vehicles

‒ Daily mileage logs must be kept and separate expense tracking for each vehicle

Lobbying Costs

Golf Outings and Other Entertainment

‒ Rule of Thumb – If it’s fun it’s UNALLOWABLE!

www.kmco.com 21

The Use of Audi t Informat ion

Indirect Cost Rate Audits

Performed to provide reasonable assurance as to the accuracy of the indirect cost rate

Primarily focused on the Income Statement

Involve understanding and testing an A/E consultant’s internal controls

Typically performed annually by a CPA Firm

16

droach

Rectangle

droach

Rectangle

10/15/2013

8

www.kmco.com 22

The Use of Audi t Informat ion (cont inued)

The Audit should be designed to determine if:

Expense balances are stated in accordance with GAAP

Direct and indirect costs are properly segregated and reported

Indirect costs are evaluated for allowability

Costs allowable per FAR Part 31

www.kmco.com 23

Indi rect Cost Rate Uses

Applying indirect cost rates to work performed in current or prior periods

Establishing provisional or fixed rates to be used prospectively

Improving systems, procedures and internal controls

www.kmco.com 24

Pre-Award Review

Pre-award reviews are typically performed:

‒ On behalf of State DOT procurement or contracting staff

‒ To obtain reasonable assurance that financial information provided by the A/E consultant is materially correct

‒ Occurs during the annual prequalification process and/or during the contract negotiation process

Pre-award audit may also be performed to ensure an A/E Consultant internal controls are adequate to support accurate project costing and invoicing

17

droach

Rectangle

droach

Rectangle

10/15/2013

9

www.kmco.com 25

Pre-Award Review:Costs Typica l ly Examined

Direct Labor costs (especially labor rates)

Indirect costs

Direct materials, costs

Subconsultant costs

Other Direct Costs

Profit/Fixed Fee

Overall presentation and mathematical accuracy of the cost proposal

www.kmco.com 26

Incurred Cost Audi t

Performed:

‒ By state DOT or local agency auditor or by a CPA hired by the contracting agency

‒ During the course of the project or after an A/E consultant completes all scheduled work on the project

‒ To verify invoiced costs for a project, including direct costs, indirect costs and subconsultant costs

Results are used to determine whether project billing was accurate, and/or necessary corrections were made.

www.kmco.com 27

The Risk Management Framework, Overs ight and Cognizance

Risk Analysis Performed by State DOT: Risk Criteria

Dollar Thresholds Type and Complexity of the Accounting

System

Experience in Working With State DOT

Contracts

Experience of the CPA Firm

Size, History, and Reputation of the A/E

Consultant

Responses to AASHTO ICQ

Number of States in Which the A/E

Consultant Does Business

Changes in Organizational Structure

Date of the Last Audit Other Risk Criteria

18

droach

Rectangle

droach

Rectangle

10/15/2013

10

www.kmco.com 28

Overv iew of Cognizance and Rel iance of Other Audi ts

In the course of performing audit and attest functions, auditors often rely on the work of other auditors, with appropriate procedures established to do so.

Home State DOT

- Performs the indirect cost rate audit or reviews the audit performed by a CPA firm

Cognizant Audit

State DOT #2

State DOT #3

www.kmco.com 29

Quest ions?

19

droach

Rectangle

droach

Rectangle


David E. Shaffer, CPA Director

BENCHMARKING

20

10/15/2013

1

Learning Object ives

Learners will become familiar with key ratios of professional service firms

Learners will become familiar with the definition of terms used in the computation of different ratios

Learners will understand the recent trends of A&E firms

Learners will get example reports of key ratios that our managers and directors look at weekly/monthly

Contents

Key definitions used in the ratios

Respondent information

What happened to the trends in 2012

History of some key ratios/expenses

Common sized balance sheet

Key reports used by professional service companies- Sample Kreischer Miller Reports

Key Definit ions Used in the Ratios

Median values: are the midpoint of the values versus the mean which is the average. In most cases, the median values have been used to eliminate the extreme values in the database.

ODC’s: Other direct costs such as mileage, printing, etc.

Net Revenues: Total revenues less subcontractors and ODC’s

Technical Staff: Those charging over 50% of their total time to projects

21

droach

Rectangle

droach

Rectangle

10/15/2013

2

PSMJ Respondents

Respondents by Total Staff Size

1 to 20 (52)

21 to 50 (80)

51 to 100 (51)

101 to 200 (42)

201 to 350 (25)

351 to 750 (15)

over 750 (4)

PSMJ Respondents

By Firm Type

Architectural 34

Architectural/Interiors 28

Interior Design 0

Engineering (Prime) 94

Engineering (Subconsultant) 44

Engineering (Survey) 13

Architecture/Engineering (orE/A) 36

Landscape Architecture 7

Enviromental 8

Construction Management 1

PSMJ Respondents

Source of Revenue Number Percentage

Private Sector 130 48%

Government Sector 79 29%

Mixed 60 22%

22

droach

Rectangle

droach

Rectangle

10/15/2013

3

Big Picture Results

Recovery is SLOW!!! The net multiplier achieved decreased from 3.04 to 3.02, and still remains below 2008’s all-time high of 3.09. This indicates that companies were providing additional price concessions to obtain work.

Op’g profits (before incentive/bonuses and taxes) as a percentage of net revenues increased from 9.3% to 11.4%.

Gross revenues increased 8% this year versus 3%growth last year and 7.0% decrease reported in 2010.

Backlogs grew last year, indicating a 7% increase for the median firm. Nearly all firms indicated a shrinking backlog of booked business at the end of 2010.

Balance sheets continue to gain strength – median leverage is less than 1-1 (total liab/equity)

Big Picture Results

This year’s results indicate a median 2.7% growth in staff size, a significant improvement from the 7.5% decrease reported in 2010 and the 0% reported in last year’s results.

Overhead rates decreased to 159.56%, 5% below the 2012 report and significantly below the 20-year high established in 2010. It is expected that the economic recovery will result in continued emphasis on reducing overhead costs.

Key Rat io Comparisons of 2012 to 2011

Medians 2011 2012 %

Net Revenues per Total Staff $119,410.00 $125,589.00 5.0%

Net Revenues per DL Hour $100.32 $101.66 1.0%

DL Costs per DL Hour $31.31 $31.90 2.0%

Total Costs per DL Hour $88.73 $86.50 -3.0%

Equity per Total Staff $22,249.00 $21,666.00 -3.0%

Operating Profit (Net Revenues) 9.31% 11.42% 23.0%

OH Rate (Before Bonus) 168.42% 159.56% -5.0%

Chargeability (Payroll Dollars) 58.40% 59.69% 2.0%

23

droach

Rectangle

droach

Rectangle

10/15/2013

4

Key Rat io Comparisons of 2012 to 2011

2011 2012 %

Backlog Change 4.0% 7.0%

Gross Revenues Change 3.0% 8.0%

Staff Size Change 0.0% 2.70%

Net Direct Labor Multiplier achieved 3.04% 3.02% -1%

Average Work-in-Process Days 25.48 25.51 0%

Average Collection Dates 70.27 70.12 0%

2013 PSMJ A/E Financial Performance Benchmark Survey

Highl ights

Net direct labor multiplier achieved decreasedslightly to a reported level of 3.02 (median). The performance ranged from 2.75 (25th percentile)to 3.36 (75th percentile). This indicates that high-performing firms continue to achieve much more profitable project results than some of their counterparts.

Backlog increased by 3% in 2012. Gross revenues increased 5% compared to a 3% increase in 2011 and a reduction in 2010. Increase continues to reflect slow recovery and ongoing uncertainty in the economy.

Companies doing more with less. Net revenues per total staff increased (by 5%) to $125,589. Similarly, net revenues per project manager increased 7% to $555,142. PM’s financial responsibility continue to increase.

Highl ights

The turnover rate increased slightly to 12.0%, though it remains significantly below the 15.9% reported in the 2010 survey. This rate, which reflects all types of terminations (resignations, layoffs, retirements, etc.), peaked in 2000 at 18.1%. In times of rapid expansion, turnover rates have increased to well over 20%, due to employee being enticed to move to other firms. Anticipation of the recent economic downturn and forced cutbacks once the full impact of the recession hit the industry may have been influential in pushing turnover rates upward over the past few years. However, with significant decreases for the 2011 and 2012 survey, the rate reached a 25-year low last year and increased only slightly in this year’s results.

24

droach

Rectangle

droach

Rectangle

10/15/2013

5

Key Spending Per Staff

Lower Quartile

MedianQuartile

MeanQuartile

UpperQuartile

Group Insurance Expenses per TotalStaff (no increase for 2011 and 2012)

$3,786 $5,346 $5,512 $6,946

Professional Liability Insurance Expenses per Total Staff (slight decrease)

$860 $1,260 $1,558 $1,911

Total Insurance Expenses per Total Staff (slight decrease)

$4,967 $6,541 $6,439 $8,090

Total Taxes per Total Staff (includespayroll, slight increase)

$5,369 $6,486 $7,232 $8,000

Payroll Taxes per Total Staff (flat) $4,990 $5,833 $5,785 $6,753

Business Development Costs per Technical Staff (increase)

$2,995 $7,375 $8,460 $12,439

Key Spending Per Staff

Direct Labor Hours Per:Lower

QuartileMedianQuartile

MeanQuartile

UpperQuartile

Space Expenses per Total Staff (flat) $4,617 $6,583 $7,064 $8,769

Education Expenses per Total Staff (9% lower – too low???)

$215 $386 $411 $582

Registrations & Licenses Expenses per Professional Staff (flat)

$279 600 $1,071 $1,045

Local Taxes, Permits & Licenses Expenses per Total Staff

$153 $285 $620 $683

IT Operating Expenses per Total Staff (increasing) Windows versus MAC?

$1,195 $2,138 $2,446 $3,032

Direct Labor Hours

Direct Labor Hours Per:Lower


MeanQuartile

UpperQuartile

Technical Staff 1,367 1,554 1,545 1,710

Total Staff 1,116 1,228 1,249 1,365

Project Manager 3,678 5,311 6,479 8,365

Partner/Principal 6,799 10,264 14,050 17,189

25

droach

Rectangle

droach

Rectangle

10/15/2013

6

Staff ing Size

Technical Staff Ratio to:Lower


MeanQuartile

UpperQuartile

Non-Technical Staff Ratio 3.0 4.0 4.5 5.6

Project Managers Ratio 2.5 3.5 5.3 5.3

Partners/Principals Ratio 4.6 6.8 9.1 11.1

Common Sized Balanced Sheet

Median Mean

Cash 7.8% 11.4%

Accounts Receivable 49.4% 47.6%

Work in Process 9.7% 11.1%

Other Current Assets 3.6% 4.4%

Total Current Assets 78.3% 71.8%

Fixed Assets 10.6% 15.6%

Other Assets 3.0% 3.1%

Total Assets 100.0% 100.0%

Common Sized Balanced Sheet

Liabilities Median Mean

Accounts Payable 7.1 9.4

Deferred Taxes 4.7 8.0

Line of Credit Borrowing 5.7 7.5

Current Portion of Long Term Debt 2.3 2.7

Other Current Liabilities 9.2 10.3

Total Current Liabilities 34.4% 33.8%

Long-Term Portion of Debt 6.7 8.4

Other Liabilities 2.8 5.4

Total Liabilities 44.8% 43.1%

Total Equity 47.6% 41.8%

Total Liabilities and Equity 100.0% 100.0%

26

droach

Rectangle

droach

Rectangle

10/15/2013

7

Weekly Report

Billable hours per director, manager, senior, and staff for the week, month to date, and year to date – all compared to prior totals

Total production in $ compared to prior year.

Current billing per director, gross and net.

Gross production per billable hour compared to prior year.

Cash position, including debt, compared to prior year.

Total accounts receivable and work in process compared to prior year. Director reports are available for everyone to see.

Monthly Reports

Director performance report:

Gross production compared to prior year

Net production $ and percentage

Aged AR and WIP per director

Total WIP and AR as a percentage of total production

Billable hours compared to prior year

Production per billable hour

3 year realization history per director per client

Have similar reports for each manager

Summary

27

droach

Rectangle

droach

Rectangle

10/15/2013

8

Questions?

28

droach

Rectangle

droach

Rectangle


Kevin McGinn, CPA Tax Manager

TAX UPDATE AND ISSUES

29

10/15/2013

1

Agenda

New tax law- The Fiscal Cliff? What happened?

Domestic Production Activities Deduction Overview

Cash Basis of Accounting

ESOP’S

Questions & Answers

Few Tax Quotes

We have a tax code that favors those with the best accountants.

-- Shane Keats

When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a "break" requires -- now or down the line -- that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. -- Warren Buffett

Few Tax Quotes

Where there is an income tax, the just man will pay more and the unjust less on the same income. -- Plato

[The Tax Code] is a monstrosity and there's only one thing to do with it. Scrap it, kill it, drive a stake through its heart, bury it and hope it never rises again to terrorize the American people. -- Steve Forbes

[The Tax Code is] a disgrace to the human race. -- Jimmy Carter

30

droach

Rectangle

droach

Rectangle

10/15/2013

2

Bonus Depreciation

Eligibility - overview

2012 – 50%

2013 – 50%

2014 -

Section 179

Eligibility - overview

2012 - $500,000 - $2,000,000 investment cap

2013 - $500,000 - $2,000,000 investment cap

2014 - $25,000 - $ 200,000 investment cap

Income Tax Rates

Taxpayers with taxable income greater than $400,000—$450,000 for couples—have a new 39.6% top marginal income tax rate.

31

droach

Rectangle

droach

Rectangle

10/15/2013

3

Capital Gains

Qualified Dividends

Qualified dividends continue to be taxed at preferential capital gains rates, rather than as ordinary income.

Payroll Tax Holiday

The employee share of payroll taxes will return to its 2010 level of 6.2% on the Social Security wage base, ending the 2011 and 2012 2% tax holiday.

This means a return to the 6.2% withholding rate on wages up to $113,700 in 2013. The rate was 4.2% in 2012. So, for a taxpayer with an annual salary of $30,000, the increase in withholding rate means $50 less in take-home pay per month. For someone earning $60,000, take-home pay goes down by $100 per month—and at $90,000, it’s $150 less per month. For earners making $113,700 or more, monthly take-home pay is reduced by $189.50.

32

droach

Rectangle

droach

Rectangle

droach

Rectangle

10/15/2013

4

3.8 Percent Medicare Contribution Tax

Starting 2013, the Medicare surtax tax will be imposed on the “net investment income” (NII) and will generally apply to passive income.

The Medicare surtax also will apply to capital gains from the disposition of property.

The Medicare surtax will not apply to income derived from a trade or business or from the sale of property used in a trade or business.

For individuals the Medicare surtax will apply to the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income above a specified threshold.

3.8 Percent Medicare Contribution Tax (cont’d)

Thresholds

The Medicare surtax applies to an individual on the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income above certain thresholds. Those AGI thresholds are:

• $250,000 for married taxpayers filing jointly or a surviving spouse

• $125,000 for married taxpayers filing separately; and

• $200,000 for single and head of household taxpayers.


Net Investment income (NII)Net investment income (NII) for purposes of the 3.8 percent Medicare surtax includes:

• Gross income from interest, dividends, annuities, royalties, and rents provided this income is not derived in the ordinary course of an active trade or business;

• Gross income from a trade or business that is a passive activity (within the meaning of Code section 469)

• Gross income from a trade or business of trading in financial instruments or commodities; and

• Net gain (taken into account in computing taxable income) from the disposition of property, other than property held in an active trade or business.

33

droach

Rectangle

droach

Rectangle

10/15/2013

5


Example 1

A single taxpayer has modified AGI of $230,000, including NII of $40,000. The Medicare Surtax applies to the lesser of NII($40,000) or the excess of AGI over the applicable threshold ($230,000– $200,000= $30,000). Thus, the Medicare surtax applies to $30,000.

Example 2

A single taxpayer has modified AGI of $175,000, including $70,000 of NII. Because the taxpayer’s income is below the single taxpayer threshold of $200,000, the taxpayer does not owe the Medicare surtax, despite having substantial NII.

Example 3

Married taxpayers have modified AGI of $350,000, including NII of $75,000 and filing jointly. The Medicare surtax applies to the lesser of NII ($75,000) or the excess of AGI over the applicable threshold ($350,000 - $250,000 = $100,000). Thus, the Medicare surtax applies to $75,000.

Additional .9 Percent Medicare Tax

Effective January 1, 2013, higher income individuals will be subject to an additional 0.9 percent HI (Medicare) tax. This additional Medicare tax should not be confused with the 3.8 percent Medicare surtax.

The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing a joint return and $125,000 for married couples filing separately) will be subject to a 2.35 percent Medicare tax rate.

The additional Medicare tax also attaches to self-employed individuals.

Alternative Minimum Tax (AMT)

The alternative minimum tax (“AMT”) exemption is permanently patched (with inflation adjustments), thereby sparing millions of middle-income Americans from the AMT’s snare. In 2013 the AMT exemption is $51,900 for single filers and $80,800 for joint filers, up from $50,600 for single filers and $78,750 for joint filers in 2012.

34

droach

Rectangle

droach

Rectangle

10/15/2013

6

Domestic Production Activities Deduction (DPAD)

The American Jobs Creation Act of 2004 authorized a deduction for income attributable to certain manufacturing and domestic production activities conducted in the U.S. (the Domestic Production Activities Deduction, or DPAD). The DPAD is 9% for tax years beginning in 2010 and beyond. It is not limited to any specific entity and is available to sole proprietorships, C and S corporations, and partnerships, among other entities. The DPAD is not allowed in computing self-employment income and the taxpayer can claim the deduction for both regular tax and AMT.

Domestic Production Activities Deduction (DPAD) (Cont’d)

The DPAD equals a percentage 9% for 2011 and beyond of the lesser of:

1. Qualified Production Activities income (QPAI) for the year, or

2. Adjusted Gross Income (for an individual taxpayer) determined

a. after application of IRC Sec. 86 (Social Security and tier 1 railroad retirement benefits), IRC Sec. 135 (income from U.S. savings bonds used to pay higher education tuition and fees), IRC Sec. 137(adoption assistance programs), IRC Sec. 219 (retirement savings), IRC Sec. 221 (interest on education loans), IRC Sec. 222 (qualified tuition and related expenses), and IRC Sec. 469 (passive activity losses), and

b. without regard to the DPAD.


QPAI is defined as the taxpayer's domestic production gross receipts for the year, reduced by the sum of the following items [IRC Sec. 199(c)(1)]:

1. The cost of goods sold allocable to such receipts; and

2. Other deductions, expenses, or losses directly allocable to such receipts. The DPAD itself is not an allocable deduction.

The taxpayer's domestic production gross receipts drive the deduction, but the deduction is limited to 50% of the qualified W-2 reported wages for the year that are allocable to domestic production gross receipts. Thus, for those taxpayers with large production activities but little W-2 wages (because the work is subcontracted out), the benefits of the deduction may be minimal.

35

droach

Rectangle

droach

Rectangle

10/15/2013

7


Domestic Production Gross Receipts (DPGR)

Taxpayers must have income from qualified production activities to be eligible for the DPAD. In order to compute income from qualified production activities, taxpayers must determine the amount of DPGR that they have for the tax year. The definition of DPGR from qualified production activities is very broad. DPGR includes the taxpayer's gross receipts from the lease, rental, license, sale, exchange, or other disposition of any of the following [IRC Sec. 199(c)(4)]:

1. Qualifying production property (tangible personal property, computer software, and sound recordings), if the property is manufactured, produced, grown, or extracted (see discussion later in this key issue) by the taxpayer in whole or significant part [see Reg. 1.199-3(g) for what constitutes significant part] in the U.S.

2. Motion picture, film, videotape, and sound recording production, renting, and licensing (with exclusions provided in the statute), provided at least 50% of the total compensation relating to the productionof the film is compensation for specified production services(such as actors, directors, or producers) performed in the U.S.


3. Production of (but not transmission or distribution of) electricity, natural gas, or water in the U.S.

4. Construction or substantial renovation of real property in the U.S., including residential and commercial buildings and infrastructure such as roads, power lines, water systems, and communications facilities.

5. Civil engineering and architectural services performed in the U.S. for construction projects in the U.S.

6. Farming (i.e., growing and selling agricultural products and food).

7. Processing of agricultural products and food (but not the sale of food and beverages prepared by the taxpayer at a retail establishment).


The following steps compute the DPAD:

Step 1 Determine DPGRStep 2 Determine QPAIStep 3 Compute the AGI limitationStep 4 Determine the W-2 wage limitationStep 5 Calculate the DPAD

Example

Mel Myers owns Myers Engineering, a sole proprietorship in the U.S. The company conducts no other activities; therefore, all of its income is qualified production activity income. Mel's adjusted gross income for 2011 is $250,000. During 2011, Myers Manufacturing showed the following income and expense:

Gross receipts $900,000

Costs of Goods sold (including $350,000 of W-2 wages allocable to DPGR) (600,000)

Other allocable expenses (100,000)

Net Income $200,000

Mel's QPAI is $200,000 and his tentative deduction is $18,000 [9% × $200,000;the lesser of QPAI ($200,000) or modified adjusted gross income ($250,000)]. His DPAD is limited to 50% of W-2 wages, which is $175,000 (50% of $350,000).

36

droach

Rectangle

droach

Rectangle

10/15/2013

8

Cash Basis of Accounting

Eligibility – overview

Accrual Basis

Constructive Receipt

Prepaying expenses

Tax Planning – very powerful tool

Cash Basis of Accounting – Accrual to Cash Conversion

CASH CONVERSION

Client Name: ABC Company

Client Code: 3944.205

Year Ended: 12/31/11

3900F.01

Retained Earnings Income Workpaper Reference

DR (CR) Add(Subtract)

Per Financial Statements (Beginning) 80,371 (120,964) TB

ADD:

Beginning Accounts Receivable 611,566 PY

Beginning Prepaid Expenses (10,671)

Allowance for Doubtful Accounts 12,943 PY

1380-000-00Interest Receivable

613,838 613,838

SUBTRACT:

Beginning Accounts Payable (548,995) PY

Beginning Accrued Expenses (28,217)

Beginning Accrued Accounts Payable (70,127) PY

Prior Period Adjustments 0

Beginning Accrued Expenses 0 PY

PY

0 0 (647,339) (647,339)

Beginning Retained Earnings per Tax Return 46,870 BOY R/E

SUBTRACT:

Ending Accounts Receivable (1,505,196)

Add: Ending Allowance 60,187

Ending Prepaid Expenses (22,193)

Allowance for Doubtful Accounts

(0)

(0) (1,467,202)

ADD:

Ending Accounts Payable 1,330,903

Ending Accrued Expenses 37,608

Ending Accrued Accounts Payable 163,800

(0) (0) 1,532,311

Income before tax adjustments 89,356 (89,356) Engagement/TR

Cash Contributions M-2

Ending Retained Earnings per Tax Return 136,226 CY TR

What is an ESOP?

ESOP = “Employee Stock Ownership Plan”

Qualified deferred compensation plan under ERISA and Internal Revenue Code

Similar to Profit Sharing and 401(k) Plans

Must invest primarily in company stock

Can be leveraged

37

droach

Rectangle

droach

Rectangle

10/15/2013

9

Typical Goals of an ESOP

Shareholder Liquidity

Long-term succession plan

Corporate and personal tax planning

Ownership/Partnership incentive for key employees

ESOP Tax Preferences

Effective deduction of principal on ESOP loan repayment

Section 1042 Capital Gains Deferral

Deduction of dividends paid on ESOP shares

S Corporation ESOP non-recognition of corporate income

Section 1042 Gain Deferral

Permits shareholders selling to an ESOP to defer indefinitely capital gains tax on sale of shares

ESOP must own 30% of value of all company stock after sale

Selling shareholders must purchase qualified replacement property (“QRP”)—stocks or bonds of any domestic operating corporation

38

droach

Rectangle

droach

Rectangle

10/15/2013

10

S Corporation ESOP’S

“S” Corporation income attributed to shareholders

ESOP as S Corp shareholder pays no taxes on its share of corporate income

No section 1042 Capital Gains Deferral

How Does an ESOP Work?

Company establishes an ESOP Trust

ESOP Trust purchases company stock from shareholders or company

Bank or seller provides financing to Company

Company pays contributions or dividends to ESOP that ESOP uses to repay debt

Company or ESOP repurchases shares from employees after termination

Company

ESOP

Note &Pledge

of Stock

Cash

Company Stock

Cash

Bank

Shareholders

Pledge ofQRP??

Cash

Note & Collateral

Initial C Corp ESOP Transaction

39

droach

Rectangle

droach

Rectangle

10/15/2013

11

30

Company

Bank and/orShareholder

ESOP

Release of Shares Pledged as Collateral and Share Allocations

to Individual ESOP Accounts

Contributions or Dividends ($$$)

Loan Payments ($$$)

LoanPayments

($$$)

ESOP Loan Repayment

31

Company

ESOP

Note &Pledge

of Stock

Company Stock

Company Stock

Cash &Sub. Note

Bank

Shareholders

Cash

Note & Collateral

Initial S Corp ESOP Transaction

32

ESOP Transaction Concerns

Valuation

Financing

Effect of ESOP on overall benefits structure

Legal/fiduciary risk

Cost and complexity

40

droach

Rectangle

droach

Rectangle

10/15/2013

12

33

ESOP Plan Design Issues

Eligibility

Stock allocations

Vesting

Benefit Distributions

Voting of company stock

Trustee

34

Steps in an ESOP Transaction

Feasibility study

Financing

Appraisal

Plan Design

Legal Documents

Closing

IRS Determination Letter

Questions & Answers

41

droach

Rectangle

droach

Rectangle

APPENDIX I

Internal Control Questionnaire for Consulting Engineers

42

Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)

AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-2

Internal Control Questionnaire (ICQ) for Consulting Engineers

Name of Engineering Consultant (―the Company‖):

TIN (Taxpayer Identification Number):

Headquarters Address:

Company Website:

Fiscal Year End:

This ICQ was prepared for (DOT/agency name):

Time Period Covered:

Location of Accounting Records:

- Please include the following items as attachments to this ICQ:

FAR Part 31 Overhead Audit Report for most recent fiscal year, including audited Statement of Direct Labor,

Fringe Benefits, and General Overhead (hereinafter ―Indirect Cost Rate Schedule‖) and related reconciliation

to the financial statements.

Cognizant audit report or cognizant letter of concurrence from the cognizant Government agency.

Check here if not applicable:

Post-closing trial balance and financial statements (balance sheet, income statement, and statement of cash

flows) for the most recent fiscal year. (Note: If the indirect cost rate schedule does not directly tie to the trial

balance, then please provide a supplemental reconciliation schedule.)

Current chart of accounts that ties to financial statements and indirect cost rate schedule.

Independent Auditor’s Report on financial statements and accompanying management letter.

Check here if not applicable:

Sample timesheet.

The Company’s policies for vacation and sick leave.

The Company’s bonus policy.

Other written policies, as requested throughout this ICQ.

Note: Throughout this ICQ, all references to ―AASHTO Guide‖ pertain to the 2012 Edition of the

AASHTO Uniform Audit & Accounting Guide.

- Please identify the Company’s primary contact for accounting questions:

Name:

Title:

Phone Number:

E-mail Address:

Mailing address (if different than headquarters address listed above):

A. Background Information

A.1. Year Established. When was the Company formed?

A.2. Business Form. What form of business entity is the Company?

Sole Proprietorship Partnership C Corporation S Corporation

Other

43

AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers



A.3. Parent/Subsidiary. Is the Company a subsidiary of any other company?

Yes If ―yes,‖ please explain:

No

A.4. Common Ownership. Does the Company own or control any other company or legal entity (e.g., trust or

foundation) through common ownership? (See AASHTO Guide Section 8.23.B for details.)

Yes If ―yes,‖ please explain:

No

A.5. Ownership. Please list the stockholders, partners, or other owners with greater than five percent ownership of

the Company and their respective percentages of ownership.

Table 1: Company Ownership

Name Title Ownership Percentage

%

%

%

%

%

%

%

%

%

%

%

%

A.6. Services Provided. What types of services does the Company provide? (e.g., consultant–Architectural and

Engineering Design)

a.

b.

c.

d.

A.7. Locations. How many offices does the Company operate, and where are these offices located?

a. Number:

b. Locations:

44




A.8. Number of Employees. How many employees (including managers and principals) does the Company currently

employ?

a. Full time: b. Part time:

- Has this number changed in the past one-year period?

No Yes. If ―yes,‖ please explain:

A.9. Revenue Sources.

1. For most recent fiscal year, what percentage of the Company’s revenue was generated from each of the

following?

a. State government: % c. Local government: %

b. Federal government: % d. Commercial/private: %

2. Please specify all revenues earned as either a prime consultant or subconsultant:

a. Revenues from Government Projects: $

b. Revenues Other Customers: $

Total Company Gross Revenue: $

A.10. Contract Mix. What percentage of the Company’s revenue was generated from each of the following contract

types?

a. Lump sum: % c. Cost plus (time and materials): %

b. Cost plus fixed fee: % d. Other: % Please explain ―Other.‖

B. Accounting: General Background

B.1. Fiscal Period. Has the Company used the same fiscal reporting period for the past two years?

Yes No

B.2. Accounting Method/Basis. What basis of accounting does the Company use to prepare general purpose

financial statements?

Cash Accrual Hybrid. Please explain ―Hybrid.‖

- Was the same basis of accounting also used to prepare the firm’s indirect cost rate schedule?

Yes No. Please explain:

B.3. Accounting Policies. Does the Company have written accounting policies that address the following topics?

(If ―yes,‖ please provide a copy.) Yes No

a. Accounting system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Cost estimating/allowability. . . . . . . . . . . . . . . . . . . . . . . . . . . .

d. Recording time worked/timesheet preparation . . . . . . . . . . . . .

e. Fringe benefits/leave time . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

f. Recording overtime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

g. Compliance with FAR Part 31(†)

and applicable CAS . . . . . . . .

h. Recording direct and indirect costs . . . . . . . . . . . . . . . . . . . . . .

i. Overhead/indirect cost rate development . . . . . . . . . . . . . . . . .

j. Billing rate development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(†) FAR Part 31 is codified at 48 CFR Part 31, which is available at

https://www.acquisition.gov/far/html/FARTOCP31.html.

45




B.4. Preparing the Indirect Cost Schedule. How frequently does the Company prepare an indirect cost rate schedule

to determine costs eligible for reimbursement per FAR Part 31?

Annually Other (please specify):

- Was the most recent schedule prepared by the Company or by another entity instead (e.g., CPA firm)?

Prepared by: Internal staff External party (specify):

- Period covered by most recent indirect cost schedule:

One-year period ended December 31, 20

Other (please specify):

B.5. Fraud, Abuse, and Contract Violations. Is the Company’s management aware of any material instances of

fraud, illegal acts, abuse, or violations of contracts provisions or grant agreements?

No Yes. If ―yes,‖ please explain:

B.6. Knowledge of FAR Part 31. Are appropriate personnel within the Company familiar with FAR Part 31?

Yes No. If ―no,‖ please explain:

B.7. Audits/Examinations. Within the past three years, has a CPA or governmental agency performed an independent

audit, review, attestation, or compilation of the Company’s financial data or any phase of the Company’s

operations?

No Yes. If ―yes,‖ please complete the following (if applicable):

a. Financial Statements: Audit Review Compilation Other (please specify):

Name of CPA or Agency:

Contact:

Period Covered:

b. Overhead Rate: Audit Review Compilation Other (please specify):

- Was the overhead rate calculated in accordance with FAR Part 31? Yes No


Contact:

Period Covered:

c. Project Audits: Audit Review Compilation Other (please specify):


Contact:

Period Covered:

46




C. Accounting System(s)

C.1. Accounting Software. What type of accounting software does the Company use?

Internally-developed system. Commercial system. Name of vendor:

Hybrid system. Please explain:

- Please describe any significant manual procedures used outside of the automated accounting system to record transactions:

C.2. Job Costing. Does the Company have a job-cost accounting system? Yes No

If ―no,‖ please explain what type of system is used to determine project costs:

C.3. Integration. Does the accounting general ledger interface with the job-cost ledger?

Yes No N/A (no job-cost ledger used)

a. Are billings prepared from, or reconciled to, reports generated from the Company’s job-cost system?

Yes No. Please explain:

b. Describe any manual procedures that occur outside of the automated accounting system to prepare

billing packages.

C.4. Accounting Records. Which of the following types of records does the Company maintain to support financial

transactions?

Yes No

a. General ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Cash disbursements journal . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Cash receipts journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

d. Job/Project-cost ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

e. Labor distribution reports . . . . . . . . . . . . . . . . . . . . . . . . . . . .

f. Employee expense reports . . . . . . . . . . . . . . . . . . . . . . . . . . . .

g. Payroll registers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

C.5. Direct and Indirect Expenses. Does the general ledger contain separate direct and indirect accounts for the

following?

a. Labor costs Yes No

b. Non-labor expenses Yes No

If ―no,‖ please explain:

C.6. Exclusion of Unallowable Costs. Does the Company have a system in place to identify and remove from the

indirect cost pools all unallowable costs, in accordance with per FAR Part 31 and applicable Cost Accounting

Standards? (See AASHTO Guide, Sections 2.2, 4.4, 5.2, 5.5, and 6.3.)

No. Please explain:

Yes. If ―yes,‖ please answer a through c, below.

a. Please provide details about the system.

b. How are appropriate personnel trained to distinguish between allowable and unallowable costs?

c. When does the primary review for allowability occur—at time the transaction is recorded, or later?

47




C.7. Divisions/Cost Centers. Does the Company have more than one division/cost center?

No Yes

- If ―yes,‖ are separate ledgers maintained for each? Yes No

Comment:

C.8. Reconciliations.

a. Does the Company reconcile the financial accounting system to the job-cost system?

N/A (no job-cost ledger used).

No. Please explain: Check here if systems are integrated:

Yes. If ―yes,‖ how often? (Check all that apply.) Monthly Quarterly Semi-annually Annually

Comment:

b. How frequently are bank statements reconciled? Who performs this process?

C.9. Budgeting. Does the Company use a budgeting system for project planning and oversight?

Yes No

Comment:

- If ―yes,‖ does the Company prepare variance reports to compare budgeted amounts to actual amounts on

projects, and are the reports distributed to appropriate management personnel?


C.10. Cost Allocation. Does the Company use cost allocation methods consistently for all contracts, including

commercial contracts as well as for State and Federal government contracts?

(See AASHTO Guide, Sections 5.3 and 10.5.)


C.11. Allocation Base(s). When computing indirect cost rates, the Company uses—

a single base for cost allocation. Description of base:

multiple bases for cost allocation. Description of bases:

(See AASHTO Guide Section 4.7 for a discussion of common allocation bases for indirect costs.)

C.12. Field Offices. Does the Company have field offices? (See AASHTO Guide Section 5.6.)

No

Yes. If ―yes,‖

a. Are separate indirect cost rates used for the home office and field offices?

Yes No

Please explain:

b. If home office and field office indirect cost rates are computed, are they presented consistently to

all State DOTs?


Please check here if not applicable:

48




C.13. Project-Specific Indirect Cost Rate(s). Does the Company have any special, project-specific indirect cost

rates negotiated with a State DOT?

No Yes. If ―yes,‖ please explain, and list the States that use these rates:

D. Information Technology (IT) Systems

D.1. IT Policies. Does the firm have written IT system policies concerning the following topics?

(If ―yes,‖ please provide a copy.) a. Hardware/Software Yes No

Purchasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Use of In-house and off-site . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Addition and removal/retirement/disposition of . . . . . . . . . . . . . . . . . . .

b. Business Continuation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Security Protocol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

d. Activation and deactivation of employees upon hiring or termination. . . . . . . . .

D.2. IT Risk Assessment. Has the Company’s management conducted an IT system risk assessment within the past

three years?

Yes No

D.3. IT Security Review. Are system security and application access logs enabled and reviewed periodically?

Yes No

Comment:

D.4. IT Electronic Data Safeguards. If documents are retained in electronic format, are they stored in a format that

cannot easily be modified, removed, or replaced, and does a mechanism/audit trail exist to track all such events?

Yes No

Comment:

49




E. Accounting – Payroll and Timekeeping

E.1. Payroll Service. Does the Company use an external payroll service?

No Yes. If ―yes,‖ please specify:

E.2. Pay Cycle. What is the Company’s standard pay cycle?

Bi-weekly Monthly 1st & 15th Other (please specify):

If the Company uses more than one pay cycle, please explain:

E.3. Payroll Register. Does the payroll register include the following data?

Yes No

a. Employee Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Employee ID number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Gross pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

d. Payroll deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

e. Net pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

f. Check amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

g. Hourly rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

h. Pay period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

i. Normal hours for pay period . . . . . . . . . . . . . . . . . . . . . . . . . . .

j. Overtime hours for pay period . . . . . . . . . . . . . . . . . . . . . . . . . .

Comments:

E.4. Timekeeping System.

a. Does the Company use an electronic timekeeping system?

Yes No

- If ―yes,‖ please provide an explanation of its operation, or provide system documentation:

b. Are all employees, including managers and owners/principals, responsible for signing their own timesheets?

Yes No


c. Are all employee timesheets approved by supervisors?

Yes No


d. Is there a certification and approval process required for all time worked by owners and principals?

Yes No

If ―no,‖ then how is time accounted for and billed to projects?

e. How are timesheet coding errors detected and corrected?

f. How do timesheets identify work performed outside an agreement’s original scope of services?

50




F. Labor Cost Accumulation

F.1. Direct & Indirect Labor. Do the Company’s timesheets include reporting codes for both direct and indirect

hours? (See AASHTO Guide, Chapter 6.)

Yes No

- If ―yes,‖ do all employees, including managers and principals, record direct and indirect time on their

timesheets?

- If ―no,‖ then please explain the method used to segregate direct and indirect labor hours.

F.2. Work Week. Please list the Company’s normal hours of business operation (normal work week):

F.3. Uncompensated Overtime (see AASHTO Guide, Section 5.4). Does the Company record all hours worked by

all employees, including managers and principals, regardless of whether the employees are exempt from overtime

pay or whether all direct labor hours are billed to specific contracts?

No. If ―no,‖ please explain:

Yes. If ―yes,‖ which of the following methods does the Company use to account for uncompensated

overtime—the hours worked without additional compensation in excess of an average of 40 hours per

week by direct-charge employees who are exempt from the Fair Labor Standards Act?

Effective Rate Method. Please explain:

Salary Variance Method. Please explain. (E.g., What was the total dollar amount of

the salary/payroll variance for the year?): $

Other. Please explain:

F.4. Contract Modifications/Time Tracking. How does the Company segregate work performed under a basic

agreement/contract from work performed for contract changes/modifications?

51




G. Labor Billings and Project Costing

G.1. Billing Rates. Please describe how billing rates are determined, or attach the Company’s billing-rate policy.

Description:

Billing-rate policy attached.

G.2. Premium Overtime. Does the Company pay overtime at a premium to any employees? Yes No

- If ―yes,‖

a. What premium rate is paid, and what categories of employees are eligible for this rate?

Time-and-a-half for all non-exempt employees.


b. How is the overtime premium accounted for and billed?

As part of direct labor, and overhead is applied.

As an Other Direct Cost (no overhead applied).

As an indirect labor cost (included in the indirect cost rate).


G.3. Allocation of Overtime Costs. Are overtime costs allocated to contracts consistently, regardless of the type of

contract (lump sum versus actual cost) or customer (government versus commercial)?


G.4. Cost Allocation versus Billing. If the Company pays a principal or an employee at a rate in excess of a

contract’s maximum hourly labor rate, where will the excess cost be allocated/charged?

G.5. Contract/Purchased Labor. Does the Company invoice/bill contract labor directly to any customers?

Yes No N/A

- If ―yes,‖ please complete the following: Contract labor is billed—

As part of direct labor, and overhead is applied.

As an Other Direct Cost (no overhead applied).


52




H. Expense Accumulation and Billing

H.1. Nonsalary Direct Costs (Other Direct Costs). Besides labor, what type of costs does the Company normally

bill/invoice as direct expenses?

H.2. Credits Associated with Direct Costs. Is the indirect cost pool relieved/reduced for credits/reimbursements

received for direct costs?


H.3. Design/Build Stipends. Has the Company received a stipend from any State DOT in connection with

design/build efforts?

Yes No

- If ―yes,‖ please explain how the Company accounted for the stipend in the accounting

system:

H.4. Classification of Cost Items. How are the following cost items accounted for and billed?

(Check both ―D‖ and ―I,‖ if applicable.)

(D = Direct; I = Indirect; N/A = not applicable) D I N/A

a. Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Computer Assisted Design and Drafting (CADD) . . . . . . . . . . . . . . . . .

c. Computer (non-CADD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

d. Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

e. Printing / Reproduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

f. Postage

g. Lab

h. Drilling

i. Travel and Subsistence

j. GPS and/or Nuclear Density Meters

k. Other (list if significant)

H.5. Nonbillable Costs. Describe the accounting treatment for direct costs not billable to clients. (Where/how are

these costs recorded?)

H.6. Authorization. How does the Company ensure that costs are not billed to Government projects prior to proper

authorization?

H.7. Vehicle Expenses. Does the Company provide vehicles to employees for business purposes?

Yes No

a. If ―yes,‖ are the vehicles leased or owned?

Leased Owned

b. Identify the total number of vehicles owned or leased by the company.

Leased Owned

c. Are mileage logs maintained for all vehicles? If ―no,‖ please explain below.

Yes No

Explanation:

53




d. Is mileage separated by direct and indirect classifications, and is mileage incurred in connection with

unallowable activities tracked? Yes No

Explanation:

e. What recovery/billing rate is used for Company vehicle mileage reimbursement?

$ per mile.

Explanation:

f. How was the rate developed?

H.8. Computer Expenses. Are the Company’s computer expenses incurred as a result of (select one):

a. Outside Services? Company ownership? Both?

b. Does the Company compute a charge rate for computers? Yes No

- If ―yes,‖ what is the rate?

- How was the rate developed?

c. Is computer usage segregated by direct and indirect classifications? Yes No

d. Are computer usage logs maintained and coded by job/project? Yes No

H.9. Printing and Reproduction Costs. How are printing and reproduction expenses treated?

- In House: Direct cost Indirect cost Combination of direct and indirect

- Outside vendor: Direct cost Indirect cost Combination of direct and indirect

If you marked “combination of both,” please explain:

a. For in-house services, are usage logs maintained and coded by job/project?

Yes No

b. Is usage segregated by direct and indirect classifications?

Yes No

c. If these costs are incurred through the use of an outside vendor, are the invoices coded by job/project when

received?

Yes No

H.10. Telephone Costs. How is the expense for telephone service recorded and billed?

Direct cost Indirect cost Combination of direct and indirect

If you marked “combination of direct and indirect,” please explain below:

- Does the Company maintain a telephone log to record toll calls? Yes No

- Are the calls job-coded by direct and indirect classifications? Yes No

54




H.11. Activities Ineligible for Cost Reimbursement. Did any of the Company’s employees engage in activities for

lobbying, advertising, public relations, charity, and/or entertainment?

- If ―yes,‖ please list the employees who engaged in these activities, and describe how the associated costs

were tracked and accounted for in relation to the submitted indirect cost rate.

Table 2: Unallowable Activities

Employee Name or ID & Title/Classification:

Activities: Accounting Treatment:

I. Compensation for Owners and Employees

I.1. Bonuses.

a. Did the Company pay, or accrue for, bonuses earned by owners or employees during the period covered by

the latest indirect cost rate schedule?

Yes No

- If ―yes,‖ were the bonuses included in the submitted overhead rate? Yes No N/A

- Was any portion of these bonuses excluded from the submitted overhead rate? Yes No N/A

Comment:

b. Does the Company have a written bonus plan?

Yes. Please provide a copy of the plan.

No. Please describe how bonuses are determined and how this is communicated to employees.

c. Are all employees eligible for the bonuses? Yes No. If ―no,‖ please explain:

I.2. Executive Compensation. Has the Company, an independent CPA, or compensation consultant performed an

evaluation of executive compensation for reasonableness in accordance with FAR 31.205-6? (See AASHTO

Guide Section 7.5.)

Yes No

- If ―yes,‖ describe the methodology used and how this process has been documented:

55




J. Related-Party Transactions

J.1. Related Employees. Please provide the following information for all employees who are related to the parties

listed in the Ownership Table (Table 1) shown in A.5:

Table 3: Employees Related to Company Owners

Name or ID: Title/Position: Wages/Salary: Bonus: Other Compensation:

Total Compensation:

1

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related (e.g., spouse, parent, child, sibling, in law):

2

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related:

3

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related:

4

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related:

5

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related:

6

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related:

7

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related:

8

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related:

56




Name or ID: Title/Position: Wages/Salary: Bonus: Other

Compensation: Total Compensation:

9

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related:

1

0

$ $ $ $

Total Hours

Worked During

Year:

Job Duties:

Related to:

How Related:

J.2. Related Vendors. Please provide the following information for all vendors related to the parties listed in the

Ownership Table (Table 1) shown in A.5:

Table 4: Vendors Related to Company Owners

Name: Contact Information: How Related: Products/Services Provided: Total Payments

During Year:

$

$

$

$

$

$

$

$

$

$

$

$

57




J.3. Property or Facilities Leased from Related Parties. Does the Company rent or lease property and/or facilities

from another entity (organization or individual)?

Yes No

- If ―yes,‖

a. Are any of the Company’s owners/stockholders, or members of their immediate family, also

owners/stockholders of the other entity?

Yes No

- If ―yes,‖ please explain:

b. Have the rental/lease costs been adjusted to the property owner’s actual costs?

Yes No

- If ―yes,‖ what basis was used to determine actual cost? (E.g., the property owner’s tax return

less interest expense, plus cost of money).

Description:

J.4. Other Related-Party Transactions. Did the Company engage in any transactions with related parties other

than those listed and described in J.1 through J.3?

No Yes. If ―yes,‖ please complete Table 5:

Table 5: Other Related-Party Transactions

Name: Contact Information: How Related: Products/Services Provided: Total Payments

During Year:

$

$

$

$

$

$

$

$

$

$

$

$

58




K. Other Questions

K.1. Life Insurance. Does the Company pay life insurance for officers/principals?

Yes No

- If ―yes,‖

(a) Have any costs associated with this life insurance been included on the indirect cost rate schedule?

Yes total amount: No

(b) Please identify the beneficiary of the life insurance:

Company/surviving partners Officer/principal’s family

Other (specify)

(c) Please identify the type(s) of the life insurance:

Term Whole life Universal life Endowments (annuities)

Accidental death Other (please specify):

K.2. Suspension or Debarment. Has the Company, its parent, subsidiary, or any owner, stockholder, officer, partner,

or employee of the Company been suspended or debarred from doing business by any State or the Federal

government?

Yes No

- If ―yes,‖ please provide complete details:

K.3. Updates for Changes to FAR Part 31. Does the Company have an existing process designed to provide timely

updates to company policies and procedures to accommodate changes in the FAR Subpart 31.2 cost principles?

Yes No

- If ―yes,‖ please describe the process:

K.4. Risk Assessment. Does the Company have a process for assessing risks that may result from changes in cost

accounting systems or processes?

Yes No

- If ―yes,‖ please describe the process. How are risks identified and addressed?

K.5. Communications of FHWA/DOT Requirements. How does information flow from the FHWA/State DOT to

appropriate management personnel? (E.g., How are relevant updates to State DOT procedures or Federal

Regulations disseminated to project managers and accounting personnel?)

59




I certify that to the best of my knowledge and belief this ICQ is a complete and accurate representation of the above-

named Company’s cost accounting and billing practices.

Typed or Printed Name

___________________________

Signature Title Date Completed

Note: The representations on this ICQ were made by, and are the responsibility of, the Company’s management.

60

kreischer miller architecture & engineering industry seminar - october 16, 2013

Business

type of contract

payment terms of contract

billing contracts

clients pm

contract limitspm intervention

board review contracts

materials total contract

e y te r