If your architectural/engineering (“A/E”) firm proposes or works on government contracts, you may be asked to provide overhead rates prepared in accordance with the Federal Acquisition Regulation (“FAR”). The FAR outlines the specific rules and procedures A/E firms must follow when calculating their overhead rates. Additionally, many government agencies require that A/E firms have their overhead rates audited by a CPA.
While the larger A/E firms will likely be required to undergo a FAR audit, smaller firms may be exempt if the Department of Transportation (“DOT”) of their headquarters’ state performs a risk assessment and ensures their rates are FAR compliant. Some DOTs require FAR audits when a firm’s charges exceed a certain dollar amount, and other state and local governments may accept internally prepared rates.
The FAR audit includes an examination and tests of the firm’s accounting and internal control systems. In addition to ensuring that your firm is compliant with the FAR, the audit can identify if your firm’s systems are optimal for the continued profitability and growth of your company. Moreover, your ability to bid for and complete work for many government contracts will be positively affected by ensuring potential clients that your firm is FAR compliant. The FAR audit will also ensure that you can receive the best possible rate for government contract work. Unlike audited rates, provisional or estimated rates will generally favor the state DOT and not the A/E firm.
Once you identify your firm’s need for an FAR audit, there are several steps you can take to prepare. Maintaining the firm’s accounting records on an accrual basis in accordance with generally accepted accounting principles is critical to the efficiency of the audit. Familiarizing yourself with the latest guidelines and providing necessary FAR training for accounting staff and management will also ensure the audit is completed in a timely manner.
In addition to allowing your firm to participate in lucrative government contracts, the FAR audit can help assess the accuracy of your firm’s information, and provide insight into the adequacy of internal controls. With adequate preparation and the assistance of a trusted CPA, your firm can reap the benefits of a FAR audit and safeguard future success.
