FAR Overhead Calculations for A/E Firms

calendar iconSeptember 17, 2019

Architecture and engineering (“A/E”) firms are finding increased scrutiny of their overhead rates in accordance with the Federal Acquisition Regulation (“FAR”). Under The American Association of State Highway and Transportation Officials’ Uniform Audit and Accounting Guide, many A/E firms are being required to provide audited FAR overhead rates in lieu of estimated or provisional rates. Understanding these rates can be a challenge for some A/E firms without the proper assistance.

An FAR overhead rate is the percentage of general expenses that consultants can bill to a contracting government agency. For engineering firms with experience providing services for government agencies, including state Department of Transportation, determining the FAR overhead rate is not a new task. As more architecture firms begin performing work for the government, they are faced with familiarizing themselves with the FAR to adequately negotiate contracts and procure work.

Maximizing your FAR overhead rate is crucial to performing services at a competitive and fair rate. Additionally, ensuring that you are controlling your firm’s overhead and minimizing unnecessary expenses are key advantages of properly calculating your FAR overhead rate.

Where Should My Firm Start?

Maintaining an orderly trial balance and internal financial statements is key to calculating your rate. This will also enhance billing and can aid in boosting profitability. Properly formatting the firm’s statements may also include segregating the firm’s disallowed expenses, and maintaining project-costing and labor-charging systems to accurately account for direct and indirect labor costs. Additionally, in the event that the firm requires a FAR audit, maintaining these accounts will aid in the efficiency of the audit.

Disallowable Expenses

Determining disallowable expenses in a firm’s overhead costs is a critical step in preparing FAR overhead statements. Disallowances include:

  • Advertising (direct sales, including bid and proposal costs, are generally allowable under FAR 31.205-18 and FAR 31.205-38)
  • Bad debts
  • Contributions
  • Personal use of company vehicles
  • Fines and penalties
  • Lobbying and political activities
  • Interest expense
  • Travel expenses in excess of per diem
  • Expenditures in connection with acquisitions and divestitures

Additionally, A/E firms are charged with analyzing the compensation levels of executive and management positions, which typically contain disallowable expenses.

While management may rely on a certified public accountant (“CPA”) firm to provide support and guidance, it is ultimately the A/E firm’s responsibility to establish an internal control system, train accounting staff, and identify all necessary disallowable costs in accordance with the FAR. Gaining a thorough understanding of the FAR and seeking the assistance of a CPA firm to conduct a FAR audit as needed are crucial steps to maximizing your firm’s compliance with the FAR.

For more information on how Cherry Bekaert can assist with your firm’s understanding of the FAR, please contact Brynn McNeil.