Audit - Indirect Cost Rate Review Process

If you have any questions about the indirect cost rate review process that this page doesn’t answer please let us know by sending an email to HarveyS@wsdot.wa.gov .

1) Who reviews Indirect Cost Rates for Local Agency Agreements?

2) What is the 180-Day Requirement?

3) What is the difference between an Indirect Cost Rate Review (ICR – formerly called “Overhead”) and an Indirect Cost Rate Audit?

4) Do I need to have my rate audited or reviewed by WSDOT?

5) What documents do I need to submit for the ICR review process?

6) How do I initiate a rate review and where do I send the information?

7) Do I need to submit the WSDOT Cost Disclosure Questionnaire (CDQ)?

8) Do I need to complete a Compensation Analysis; if so, do I need to submit the analysis to the Audit Office?

9) Do I need to submit a Field Rate ICR?

10) What timeframe can I expect for the completion of my ICR review?

11) What are some tips for a successful ICR review?

12) What are some current ICR review issues?

13) What resources are available to help prepare for an ICR review?

14) What is the resolution process for an ICR review?

15) Does everyone need to keep timesheets?

16) What is the Consultant Certification of Indirect Costs?

17) What can I expect from an Agreement Compliance Audit?




 

1) Who reviews Indirect Cost Rates for Local Agency Agreements? 
 
Please contact the WSDOT Consultant Rates for local agency agreement (city/county) rate approvals ( Effective May 14, 2014, until further notice) .

2) What is the 180-Day Requirement?

In accordance with 23 CFR 172.11 (b) (1) an annual update of your Indirect Cost Rate (ICR) is required. The standard WSDOT agreement language incorporates this requirement. Consultants should pay special attention to the language included in the standard WSDOT Agreement Section V – Payment Provisions. WSDOT has adopted the process that requires firms to submit their ICR information within 180 days of the fiscal year end (FYE) closing date. If for example you have a FYE of December 31, you should submit your ICR for review prior to June 30 of the following year (this applies to sub-consultants as well as primes).


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3) What is the difference between an Indirect Cost Rate Review (ICR - formerly called “Overhead”) and an Indirect Cost Rate Audit?
  


ICR Review
ICR Reviews are an independent and objective service that we provide to assist WSDOT Management in the negotiation process. This is not an audit. Our risk assessment process determines the depth of each review. The ICR review is an interactive process, and we rely on data and information provided by the consultant to determine if the costs are reasonable and allowable. We may ask the firm to send documentation to us, and when possible, we will conduct the reviews at the consultant’s office.

ICR Audit
The Internal Audit Office conducts agreement compliance audits, which may include an audit of the firm’s ICR schedule. We perform these audits on-site at the consulting firm’s place of business, and they are performed in more detail than the ICR reviews. We trace the amounts on the ICR schedule to the consultant’s source documents to determine reasonableness, allowability, and allocability. At the conclusion of our fieldwork, we issue the audited rate with a cover letter .

4) Do I need to have my rate reviewed by WSDOT?

Yes, as mentioned in FAQ 1 a firm is required to update its ICR on file with WSDOT annually. The process and documents you need to submit are contingent on whether your firm has a cognizant review, CPA audit, or if the ICR is prepared by the firm; each of these circumstances is described more in FAQ 5, “What documents do I need to submit for the ICR review process?”


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5) What documents do I need to submit for the ICR review process? 


We typically receive ICR’s from firms in one of three statuses: (1) a letter from the firm’s home state DOT (or other state DOT, as agreed to by the home state DOT); this is called a cognizant audit or review; (2) a CPA-audited rate or a rate approved by another state DOT (not performed as a cognizant review); or (3) an unaudited and/or reviewed by independent agency ICR schedule prepared by the consultant. The following information lists the required documentation you will need to submit based upon the type of report you are submitting:

    A. Cognizant Letter

        a. Cognizant Letter

        b. Complete Audit Report

        c. Certificate of Indirect Cost (Forms and Templates)

        d. Consultant Information Sheet (Forms and Templates)
         
        e. AASHTO Internal Control Questionnaire (ICQ)

(Please note, if we have questions we may ask for additional information) 

B. ICR Audit completed by an Independent CPA or rate approval from another State DOT

        a. Complete Audit Report

        b. Certificate of Indirect Cost (Forms and Templates)

        c. Rate approval from another State DOT (if applicable)

        d. Consultant Information Sheet (Forms and Templates)

        e. AASHTO Internal Control Questionnaire (ICQ) 

(Please note, if we have questions we may ask for additional information)

 

    C. Unaudited/Unreviewed ICR

a. ICR Schedule for the most recently completed fiscal year – in the WSDOT Excel format (Guidance Documents

b. Please do not provide your schedule in the Adobe .pdf format. The accounts, and their respective amounts, on the ICR schedule are from the firm’s financial statements for the associated fiscal year. The ICR schedule will include adjustments for all unallowable costs, referenced with the appropriate footnote designations that provide the reason for the adjustment.

c. Financial Statements (detailed Balance Sheet and detailed Income Statement or Profit and Loss Statement (Forms and Templates) - If the financial statements have been reviewed or audited by a CPA firm, please provide a copy of the completed review or audit report.

          d. Year-end payroll register – broken out by individual employee

e. Labor Distribution Report (LDR) (Forms and Templates), or equivalent, by individual employee. Depending on the firm’s timekeeping system, an Employee Utilization Report or similar type of report may satisfy the LDR requirement.
Note - The four documents above must all tie/match to show that your labor is reconciled. If not, we will not be able to continue a review for your firm. Include the reconciliation for the four documents, if needed.

          f. Certificate of Indirect Cost (Forms and Templates)

         g. Consultant Information Sheet (Forms and Templates)

 

 (Please note, if we have questions, we may ask for additional information)  


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6) How do I initiate a rate review, and where do I send the information ?

For new agreements
Submit your rate information and rate review request to the WSDOT Consultant Services Office (CSO) at WSDOT Consultant Rates . Please identify if the review is for a WSDOT agreement (include the Y agreement number) or a local agency agreement. CSO will contact our office if they would like us to complete a review. When we complete the review, we will issue a memorandum to CSO with the reviewed and accepted rate. The memo notes that the ICR is still subject to WSDOT audit.

 

For existing agreements
If you are the prime or a sub-consultant on an active WSDOT agreement, please send the information directly to the WSDOT Audit Office at HarveyS@wsdot.wa.gov for the annual update and please identify the Y agreement number.

(Please note email messages are limited to 50 MB, including attachments)  

7) Do I need to submit the WSDOT Cost Disclosure Questionnaire (CDQ) (hyperlink to document page)?

Not necessarily, we may ask for the CDQ based on our risk assessment process. Also, if you have completed the Internal Control Questionnaire (ICQ) from the AASHTO Audit Guide, we will accept that in lieu of the CDQ.

We ask you to submit your completed CDQ:

  • If we have not worked with your firm in the past; or
  • If we have not received an updated CDQ in recent years; or
  • If your firm has made significant changes in firm’s business structure and/or accounting system in the past year

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8) Do I need to complete a Compensation Analysis? If so, do I need to submit the analysis to the WSDOT Audit Office? 


Firms must demonstrate that executive compensation is reasonable and in compliance with FAR 31.205-6. A firm can either complete its own analysis as described in the AASHTO Audit Guide Paragraph 7.5.C or use the National Compensation Matrix (NCM). Please note, this analysis is not limited to the top five executives at your firm; all executives must be included in this analysis. The AASHTO website includes the NCM instructions and template. You may use the NCM to complete the analysis for your firm’s most recent completed FYE. If using the NCM, please read the Instructions and the Q&A first. Pay particular attention to Step 2, which requires mapping/matching of executive positions. Our risk assessment process will determine if we ask for a copy of the analysis.

9) Do I need to submit a Field Rate ICR?
 

If your firm is working in a WSDOT office instead of your firm’s office, you will most likely need to provide a Field Rate. For projects where the consultant’s employees do not work out of the consultant’s home/division offices and do not receive home/division-office support in their day-to-day activities, the hours billed for those employees may not qualify for the consultant’s full indirect cost rate. The AASHTO Audit Guide Chapter 5.6 has additional guidance and examples.

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10) What timeframe can I expect for completion of my ICR review?
 

The typical review time can range from one week to a month. The responsiveness of the firm often dictates how quickly a review is completed. The type of review influences the timeline as well; the review for a firm with a cognizant letter will typically have a quicker turn time than an unaudited rate. The firm has one week to provide the documentation for review. It is our expectation that when a firm bids on new work, they have their documentation ready for review. The Audit Office has one month (30 calendar days) from the original request by the Consultant Services Office (CSO) to complete the review and issue a rate for the firm. If a firm becomes unresponsive at any time during this process, we will contact the firm by email or phone to discuss the delay. We will also notify CSO of any delays. On average, a review for a firm that has a cognizant letter takes 1 day and an independently audited ICR takes 4 days.

11) What are some tips for a successful ICR review? 

  • Provide all of your documentation in your initial email. 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. If all firms wait until the deadline to send in their submission packet, our workload might prevent us from starting on the review at the time of submission. The review will start when we have received all documents requested in FAQ ”What documents do I need to submit for an ICR review?,” above, and not before.
  • Provide the ICR Schedule in our Standard WSDOT format. This should be sent to us, by email, as an Excel file. We will not accept Adobe .pdf files. Prepare the schedule in compliance with Part 31 of the Federal Acquisition Regulations (FARs) (48 CFR Part 31). Remember to provide a field rate if applicable to your firm. The AASHTO Audit Guide Chapter 8 discusses some common costs and the allowability requirements.
  • You should remove all unallowable costs from the schedule prior to submitting it to WSDOT for review. The FHWA certification form notes that all unallowable amounts have been removed. There is no materiality level for unallowable expenses in the Indirect Cost Rate.
  • Please identify a contact for the review. The contact person should be available for follow up questions. This will help to facilitate the review process; our staff has a limited budget for each review.
  • Provide the end-of-year labor reconciliation (4-way tie between ICR, Financials, LDR, and Payroll). The ICR Training Module 5, “Labor Reconciliation,” provides more information on this topic. (add hyperlink)


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12) What are some current ICR review issues
?

We see some common issues that are delaying the process or causing us to conclude our process without issuing a rate for a firm. We are sharing these challenges to help raise awareness, and we need your help! If you are a prime consultant, these issues might apply to some of the small to medium firms that you are requesting for sub-consultant work. Please ensure that your sub-consultants are ready for a review when you propose them. Below are some of the frequent challenges that can delay or halt a review:

a) Firms that do not have a timekeeping system that meets the guidelines in the AASHTO Audit Guide.

b) Firms are not able to reconcile the labor between the ICR schedule, LDR, payroll, and general ledger.

c) Firms that do not require employees to record all hours worked to include uncompensated overtime.

d) The uncompensated overtime on the ICR schedule is not recorded using the salary variance method.

13) What resources are available to help prepare for an ICR review?

The following resources are available to help a firm with developing its ICR Schedule. These are meant to help communicate the rules, regulations, and policies used by WSDOT management to assist firms as they develop their indirect cost rates and document their supporting records:

  1. Federal Acquisition Regulations (FARs) 48 CFR Part 31
  2. American Association of State Highway & Transportation Officials (AASHTO) Audit Guide – 2016 Edition . The Internal Audit Office relies on the FARs as our primary criteria, but feels that the AASHTO Guide provides further detail for some of the FARs citations.
  3. Defense Contract Audit Agency (DCAA) Audit Guide
    Chapter 5-910 and Chapter 6-410
  4. US Department of Treasury, Bureau of Public Debt
    Treasury Direct, Semiannual Interest Rate Certifications
  5. Continental USA Per Diem rates
  6. WSDOT Audit Office Webinars ( Training )


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14) What is the resolution process for an ICR review?

If you have questions or comments concerning your ICR 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 the Agreement Compliance Audit Manager. If you still have questions or comments after speaking with the Audit Manager, feel free to contact Jeri Sivertson or Steve McKerney. The Audit Office home page provides contact information.

15) Does everyone need to keep timesheets?

Yes, we require that all employees track all hours worked in a pay period on a timesheet. This requirement includes exempt employees, owners, and principals. Exempt employees’ timesheets must include the hours worked in excess of the standard 40 hours in a week, or in excess of 2,080 hours in a year. This includes hours worked by exempt employees, but not compensated (this is uncompensated overtime). Your uncompensated overtime hours must also be included in your indirect cost rate schedule. (Guidance Documents)

The AASHTO Audit Guide, Chapters 5 and 6, discusses timekeeping and labor charging systems in substantial detail. The Labor Charging Checklist at the end of Chapter 6 is a good guide to determine the minimum controls a firm should have in place for automated as well as manual timekeeping.

The consultant must have procedures covering the consistent recording and 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. (FAQ ”What resources are available to help prepare for an ICR review?” includes the links to the DCAA Manual and AASHTO Audit Guide)

16) What is the Consultant Certification of Indirect Costs?

The Federal Highways Administration (FHWA) implemented a policy, FHWA Order 4470.1A, requiring consultants to certify that costs used to establish their indirect cost rates are in accordance with the applicable cost principles contained in the Federal Acquisition Regulations (FARs), 48 CFR Part 31.

WSDOT has incorporated this Order into our procedures for A&E procurement, and for our audit/review of A&E indirect cost rates. Prior to agreement execution and start of services, prime and sub-consultants are required to submit the Certification along with the consulting firm’s ICR schedule and related materials to the WSDOT Internal Audit Office for review.

The FHWA Order applies to:

  • Indirect cost rate proposals by the prime consultant and any sub-consultants that 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 Federal-Aid Highway Program funds, and directly related to an ultimate highway construction project (as specified in 23 U.S.C. §112(a)).

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17) What can I expect from an Agreement Compliance Audit?

The Internal Audit Office conducts independent and objective agreement compliance audits. These types of audits determine if amounts paid under the agreement were paid in compliance with agreement terms, 48 CFR Part 31, and the WSDOT Accounting Manual, M 13-82, Chapter 10 Travel.

We use a risk-based approach to determine which agreements and firms to audit. We notify the firm in advance of any audit. We will arrange for a mutually agreeable date to perform the audit fieldwork.

The various types of compliance audits we perform are:

Invoice Audit – this audit looks at current invoices, and the agreement would still be subject to a post audit. Since we are looking at current invoices, the documentation that we need to see is usually readily available.

Special or Interim Audit – these audits may be requested by WSDOT management and may be performed anytime during the life of the agreement. The entire agreement is still subject to a post audit.

Post Audit – this is a close out audit performed at the end of an agreement.

We perform all audits on-site at the consulting firm’s place of business. 

 

 

Contact Us

Schatzie Harvey
Agreement Compliance Audit Manager
(360) 705-7006

Jeri Sivertson, CFE
Assistant Director of Internal Audit
(360) 705-7058

Steve McKerney, CPA
Director of Internal Audit
(360) 705-7004