WSDOT Internal Audit Office overview
The WSDOT Internal Audit Office provides a variety of services to management including audit, consulting, and investigations. Our audits focus on internal agency activities as well as agreements with external service providers, including consultants.
The WSDOT Internal Audit Office has developed this FAQ in an effort to provide the consultants that are working with WSDOT with resources to understand the WSDOT audit process.
In this FAQ, we are providing guidance and tools to assist the consulting firms in developing Indirect Cost Rates (ICR), understand and prepare for an Audit or Desk Review of the ICR, and to improve consistency in the documentation that is provided to the Internal Audit Office. The information provided should help firms to develop an understanding of the treatment of various cost items included in the ICR, and assist with determining which costs are allowable and which are unallowable.
The information in this FAQ was provided as a response to several inquiries from Consulting Firms.
1. What is the difference between an Indirect Cost Rate (ICR) Audit and an Indirect Cost Rate Desk Review? (ICR previously called “Overhead”)
- Indirect Cost Rate Audit
The Internal Audit Office conducts agreement compliance audits, which may include an audit of the firm’s ICR schedule for the most recent fiscal year end. These audits are performed on site at the consulting firm’s place of business, and are performed in greater detail than ICR desk reviews. Amounts on the ICR schedule are traced to the consultant’s source documents to determine reasonableness, allowability, and allocability. At the conclusion of our fieldwork, the audited rate is issued with a cover letter. See example (pdf, 16kb).
- Indirect Cost Rate Desk Review
ICR Desk Reviews are an independent and objective service that we provide to assist WSDOT Management in the negotiation process. With the cooperation of the consulting firm, Desk Reviews are intended to be a quick process to provide a high- level review of the proposed ICR rate.
A Desk Review of an ICR schedule is completed in the WSDOT Internal Audit Office, with no visit to the consulting firm. This is an interactive process based on information provided by the consulting firm. We rely on data and information provided by the consultant to determine allowability of ICR costs, and if the ICR costs appear to be reasonably stated.
At the end of each Desk Review, we issue a letter with the reviewed ICR rate. The letter notes that the ICR rate is still subject to WSDOT audit. See example (pdf, 16kb).
If your firm has an audited ICR rate from a CPA firm, a Federal agency, or from another State Agency please provide a copy of the entire report to our office for consideration during our ICR Desk Review.
2. What Documents are Needed for a Desk Review?
When we perform a Desk Review of a firm’s ICR rate, we request the following documents from the firm to help us perform the review:
- Indirect Cost Rate Schedule in our Standard WSDOT Format
The firm’s ICR schedule should be provided to the Internal Audit Office by email, in an Excel-compatible attachment – please do not provide your schedule in pdf format.
The ICR schedule should be in the WSDOT Standard Format. See attached example of the WSDOT format (xlsx, 33kb). The accounts and their respective amounts on the ICR schedule are from the firm’s financial statements for the associated fiscal year (typically we look at the most recently completed fiscal year), and should also tie to the firm’s general ledger. The ICR schedule will include adjustments for all unallowable costs, and these adjustments should be referenced with appropriate footnote designations with the reason for the adjustment.
Note: For your firm’s ICR schedule, the account titles and dollar amounts will be different for each firm. Those are taken directly from your financial statements & general ledger summary reports. The attached sample ICR schedule is just an example of one firm’s schedule.
- Copy of Financial Statements
Financial Statements include the detailed Profit & Loss Statement (pdf, 24kb), and the detailed Balance Sheet (pdf, 104kb). If your financial statements have been reviewed or audited by a CPA firm, please provide a copy of the completed review or audit report.
- Cost Disclosure Questionnaire
Answers to the Cost Disclosure Questionnaire (CDQ) (pdf, 171kb) provide us with basic but essential information as we approach the ICR Desk Review. We encourage the firms to complete the questions fully and return to the Internal Audit Office with your ICR schedule.
- Consultant Information Worksheet (docx, 26kb)
- ICR Desk Review Documents Checklist (docx, 35kb)
We have found this questionnaire to be a real time saver for the firm as well as for the Internal Audit Office in the Desk Review process. The firms are encouraged to reply to the Cost Disclosure Questionnaire as soon as possible during our Review and to call our audit staff with any questions or concerns.
3. What timeframe can I expect for completion of the desk review process?
Indirect Cost Rate Desk Review – Tracking & Workload Management
Documents Required to Assign a Desk Review
WSDOT Management contacts our office when an Indirect Cost Rate is needed for an A/E firm. After this request is received, we contact the firm and request the firm’s last completed fiscal year’s Indirect Cost Rate Schedule and related documentation for a desk review. The firm is given up to one month (30 calendar days) from the original notification date to provide all the requested documentation** needed to begin the desk review.
The desk review will not begin until the WSDOT Internal Audit Office has received ALL of the required documents. If the requested documentation has not been provided to our office within this one month time frame, we will remove the firm from our desk review queue. We will send the firm a letter notifying them that their Indirect Cost Rate has been removed from our queue. We will typically reinstate the firm at the bottom of the queue if an Indirect Cost Rate request is later received from WSDOT Management, and if all of the required information is provided at that the time of request for reinstatement. This process allows us to focus our efforts on consultants that do submit the requested documentation. At any given time, we have a queue of firms going through our office for a desk review.
Only after all of the necessary documentation has been received will the desk review begin. During the review process, we request that an employee who is knowledgeable about the Indirect Cost Rate schedule components be available to answer follow up questions and provide additional documentation, as needed.
**The Cost Disclosure Questionnaire has quite a few document requests within the document. For your submission to be considered complete, and the desk review to begin, please be sure to send all requested documentation. The Labor Distribution Report and Labor reconciliation (both requested in the CDQ) are both essential to support your direct labor base. Please pay particular attention to other requests – timesheet examples, year end payroll register, etc.
Participation During a Desk Review
Indirect Cost Rate desk reviews are a service that we provide to assist WSDOT management in the negotiation process, and audit staff have a limited budget and timeframe for each desk review. If a firm becomes unresponsive at any time during this process, we will contact the firm by email or by phone to discuss the delay.
Unexplained delays will result in our office concluding the review without issuing a rate for your firm. (One week (seven calendar days) with no response from the firm is considered “unresponsive” and will result in the conclusion of the desk review process, unless previous arrangements have been made with the audit staff assigned to the reviews.)
We consider “good faith efforts” to maintain the forward movement of the process and communication by the firm with the assigned auditor, as being responsive, so this would not affect the firm’s status in our work queue.
Tips for Your Successful Desk Review
- You will have one month from the date of the initial notification email from the Audit Office to submit all documentation. At the one month date if all documents have not been received your firm will be removed from our desk review queue.
- The desk review will start when we have received ALL documents, and not before. Password protected files will not be accepted.
- Provide all of your documentation prior to the one month deadline, if possible so we may get started on the review and respond timely. If all firms wait until the one month deadline to send in their submission packet, our workload might prevent us from starting on your desk review at the time of submission.
- Your Indirect Cost Rate (ICR) schedule must be provided in our Standard WSDOT format. This should be sent to us, by email, in excel format. PDF will not be accepted. Your ICR will differ from the example – it should show your firm’s account titles, account amounts, your adjustments, and should tie to your year-end financial statements. Your schedule must be prepared in compliance with FARs to be accepted for review.
- Each firm must provide a Compensation Analysis to our office, along with their Indirect Cost Rate. This requirement is discussed in Chapter 7 of the AASHTO Audit Guide. Please follow the steps as shown in Chapter 7.5 – C to complete your analysis. Also, be sure & complete the “related parties” section in 7.9 if your firm has related parties (employees). If you have a CPA audit, your CPA probably reviewed this analysis. Please provide a copy of that analysis. Please note – this analysis is not limited to the top five executives at your firm – all executives must be included in this analysis.
Each firm has the choice of providing a Compensation Analysis that they prepare, or using the National Compensation Matrix (NCM). The NCM is located on the AASHTO web site and may be used to complete your analysis for your firms’ most recent completed fye if you choose to use that method.
If using the NCM, please read the Instructions and the Q&A first. Please pay particular attention to Step 2, which requires mapping/matching of executive positions. We do have an example of this step if you have questions.
- Cost Disclosure Questionnaire (CDQ) – Please complete the CDQ carefully. The questionnaire asks for a Labor Distribution Report (LDR) and a labor reconciliation. The LDR is used to verify your direct labor base. The CDQ also asked for various other documents – timesheet examples, year-end payroll register, etc. Please review your submission packet before sending to us. Your desk review will not be assigned to staff until ALL documents have been provided by your firm.
- Your documentation will need to be submitted to our office in one all-inclusive packet with all the required, completed documents. (If you need to send several emails due to the size of your files, please send them on the same day for ease of identification.) Please do not send any documentation to us until you have everything that is requested. A thorough and well prepared submission saves time for both you and our office.
- Please identify a contact for this review. The contact person should be available for follow up once you do provide all documents to our office for a desk review. This will help to facilitate the desk review process; staff have a limited budget of 15 hours for each desk review. Please also note that your firm will need to complete all reconciliations. It is your responsibility to remove all FAR unallowable amounts from your Indirect Cost Rate prior to submission of documents to our office.
- If during the desk review process we identify additional documentation we need to complete our review, we will notify you. All documentation must be submitted to the Audit Office during the desk review process. Once we complete our review and submit the final draft Indirect Cost Rate to you for your review and final questions/comments, additional documentation will not be accepted or reviewed, except in rare and extenuating circumstances upon our agreement to review the documentation.
- When we send you the final draft Indirect Cost Rate for your review, you will have one week (7 calendar days) to respond with any questions or comments you may have. Once we provide a draft IDR Schedule for review, if we have not heard back from you after a week, your silence will be interpreted as concurrence, and we will issue a rate acceptance letter based on the final draft rate.
The desk review timelines have been modified to allow us to have a more lean & efficient process. This will also ensure that we keep the desk review process moving forward, and will enable us to provide an approved Indirect Cost Rate for WSDOT Management in a more timely manner.
4. What Resources Are Available To Help Prepare for an Indirect Cost Rate Audit or Desk Review?
The following resources are available to the firm to help with developing its overhead rate. These are meant to help communicate the rules, regulations, and policies used by WSDOT management to assist firms as they develop their overhead rates and document their supporting records:
5. What is the Resolution Process for a Desk Review?
If you have questions or comments in regard to your Indirect Cost Rate desk review during the process, please phone the Auditor that is currently working with you on your schedule. If you have questions or comments after the desk review is completed – please contact Martha Roach. If you still have questions or comments after speaking with Martha, feel free to contact Jeri Sivertson or Steve McKerney. The contact information is provided on this website.
Another option available to you aside from WSDOT relying solely on the completed desk review of your ICR schedule, would be for your firm to obtain a CPA Audit of your ICR, according to guidelines in the 2012 edition of the AASHTO Audit Guide. Your firm would be responsible for the cost of this service. The Internal Audit Office would reserve the right to review and accept the CPA workpapers. We do encourage the CPA firms to contact the Internal Audit Office before they begin their work, in regard to their approach to the overhead audit.
6. Effective date of 2012 Edition of AASHTO Audit Guide
Updated May 2012 – National Compensation Matrix Available
The criteria in the 2012 AASHTO Audit Guide will apply to your Indirect Cost Rate (ICR) for fye December 31, 2012 (and all subsequent years). The 2012 edition has minor revisions from the 2010 edition. Clarifications were added to strengthen certain areas. Please review the guide and become familiar with the requirements. Link to 2012 AASHTO Audit Guide:
Chapter 7 of the Guide includes a requirement for all firms to provide a Compensation Analysis on an annual basis when submitting your ICR schedules to the Internal Audit Office. Chapter 7 of the Guide also includes clarifications for the rules regarding Bonus in 48 CFR 31.205-6 (f).
The National Compensation Matrix (NCM), as mentioned in Chapter 7, is currently available for use on the AASHTO website (as of May, 2012). Use link above.
The NCM is an interactive tool that establishes compensation amounts presumed reasonable for certain executive positions. A/E firms now have a choice of using the NCM to prepare an alternative analysis of compensation, or they may prepare the Compensation Analysis using National Surveys, per the steps listed in Chapter 7.5 – C, and we will review it. The Compensation Analysis and the NCM is not limited to the top five executives, but applies to all executives.
If your firm choose the use the NCM, please read the Instructions and the Q&A first. (also found on the AASHTO link above.) Please pay particular attention to Step 2, mapping/matching of position descriptions. FHWA has noted that the matching of detailed position descriptions is key to the analysis.
As a reminder, all ICR schedules and/or CPA Audits must be sent to the Internal Audit Office for our review on an annual basis.
This information is important for WSDOT to apply the guidelines in the 2012 AASHTO Audit Guide.
The Internal Audit Office is continuing updates to our polices & procedures. Please check this website regularly for more information.
7. Does everyone need to keep timesheets?
Yes, we require that all employees track all hours worked on a timesheet. This requirement includes exempt employees, owners, and principals. Hours worked by exempt employees in excess of the standard 40 hours in a week, or in excess of 2,080 hours in a year, must be tracked on timesheets. This includes hours worked by exempt employees, but not compensated (this is uncompensated overtime). Your uncompensated overtime hours must also be included in your overhead schedule.
The elements of a timesheet are:
- employee name
- dates applicable to timesheet
- a space for the employee & the supervisor to sign
- There should be sections to record any sick, vacation, holiday, or overtime hours.
- There should be a job description section to what the employee worked on – project coding, marketing coding, or admin hours.
- Having the employee’s work schedule recorded on the timesheet is helpful. (for example – Monday – Friday, 8 am to 5 pm)
If your firm uses an electronic timesheet process, there is a lot of helpful information in the 2012 edition of the AASHTO Audit Guide. (See Chapter 6 of the Guide. This Chapter discusses manual timesheets as well as electronic.)
The consultant must have procedures covering the consistent recording & accounting for all hours worked, whether paid or unpaid, to ensure the proper distribution of labor costs. See DCAA Audit Manual 5-910 and 6-410 for further information. The 2012 AASHTO Audit Guide, Chapter 6, has a lot of useful guidance related to Labor Charging. (The links to the DCAA Manual and AASHTO Audit Guide are provided above – see FAQ Question #3 – Available Resources.) Uncompensated/Overtime Worksheet (pdf, 31kb)
8. Consultant Certification of Indirect Costs
Background on New FHWA Order
The Federal Highways Administration (FHWA) has implemented a new policy – FHWA Order 4470.1A requiring consultants to provide a Certification of Final Indirect Costs for compliance with federal cost principles.
WSDOT has incorporated this Order into our procedures for A&E procurement, and for our audit/review of A&E overhead rates.
Requirements of the New FHWA Order
The FHWA Order requires consultants for engineering and design-related services certify that costs used to establish indirect cost rates are in accordance with the applicable cost principles contained in the Federal Acquisition Regulations (FAR) 48 CFR, part 31.
Prime and subconsultants are required to submit the Certification along with the consulting firm’s Overhead Schedule and related materials to the WSDOT Internal Audit Office for review, before the agreement can be executed and before services may begin. The Certification should be submitted when providing the annual Overhead Schedule for review or when submitting an Overhead Schedule to WSDOT for its first agreement. The Certification should also be provided for renewals or revisions of rates effective immediately.
The FHWA Order applies to:
- Indirect cost rate proposals by the prime consultant and any subconsultants to provide engineering and design-related services
- New Agreements with WSDOT to provide engineering and design-related services
- Requests to revise rates under existing agreements for engineering and design-related services
- All prime & sub agreements for engineering and design-related services that are funded in whole or in part with FAHP funds, and directly related to an ultimate highway construction project (as specified in 23 U.S.C. §112(a)).
Relevant Links and Contact Information
FHWA’s Order 4470.1A is available in its entirety at the following link. Please see the complete Order for responsibilities and consequences http://www.fhwa.dot.gov/legsregs/directives/orders/44701a.htm
The Certification of Final Indirect Cost form can be accessed here.
This new requirement is effective January 25, 2011.
Posted to the WSDOT Internal Audit FAQ site on January 25, 2011
If you have questions, please phone the WSDOT Internal Audit Office at 360-705-7003.
The Internal Office plans to issue future FAQ’s on related topics.
 Training and guidance from AASHTO & FHWA in regard to the applicability of this guide is as follows:
“Most of the information in the Uniform Audit & Accounting Guide provides additional clarification and guidance in regard to federal regulations and auditing standards that are already in place and effective. Therefore, those regulations and standards should already be followed. One item in the Guide that is new is the National Compensation Matrix (NCM). The NCM is a recommendation from the Audit Guide Task Force to the Federal Highway Administration and, as such, it does not currently exist.”