Navigating FAR Overhead Audits: Tips for a Smoother Process

FAR overhead audits can be overwhelming even for experienced contractors. These audits demand significant staff time, from document requests to entrance and exit conferences and all the questions in between. So, how can you streamline the process and reduce stress?

Starts with Organization

Staying organized throughout the year is key to simplifying the year-end, including FAR overhead audits. From our experience working with firms nationwide, the most significant challenges often stem from needing more policies and procedures to capture the data and more efficient processes to document the information.

Here are some tips on how to get organized for your improved FAR overhead audit experience.

• Prepare a labor distribution reconciliation with each payroll.
• Complete monthly reconciliations of bank accounts, credit cards, loans, and other high-volume balance sheet accounts.
• Perform quarterly reconciliations of fixed assets, leases, and other low-volume balance sheet accounts.
• Prepare an executive compensation schedule with all salaries, benefits, and adjustments for unallowable labor.
• Organize your retirement contribution schedule for all employees.
• Save final copies of year-end closing documents in a separate FAR overhead audit folder so they are readily available.

Review the Audit Document Request

While the list of documents requested for your FAR overhead audits might change slightly each year, the core items remain consistent. Reviewing the prior year’s document list can help you prepare in advance. Keep these documents in a readily accessible folder for the audit.

Commonly requested items include:

Signed AASHTO Internal Control Questionnaire (ICQ)

The ICQ must be signed by a senior official such as the owner, partner, CFO, or others charged with accounting oversight and compliance. Check out this recent webinar, What’s in Your ICQ: A Guide to Compliance, by Kellianne Mayer and Robert Jones.

Client-Prepared Overhead/Indirect Rate Calculation

Clients must prepare their version of the overhead schedule or indirect rate calculation. While auditors may adjust based on their findings, clients are responsible for calculating indirect rates.

Labor Checklist

A roadmap to your policies and procedures for your labor charging system. Answering the questions on the checklist aids in understanding labor charging practices and identifies company policies and procedures for recording labor.

Cost Principles Checklist

Details the principles in FAR Part 31 and how they apply to your organization.

Accrual-Based Trial Balance, Balance Sheet, and Income Statement

FAR overhead audits require an accrual format for FAR. While some software has cash-to-accrual reports, the underlying processes and data entry must be accurate for the accrual-based report to work correctly.

GL Detail in Excel

Auditors request several files in Excel format so that they can quickly sort, filter, and search within the documents as part of their processes.

Employee List with Pay Dates

Include all employees active and paid throughout the year, not just the employees active on the last day of the year.

Contractor/Temporary Labor List

Differentiate between contractor services and sub-consultant costs to ensure proper treatment.

List of Premium Overtime (OT) Transactions

Accurately calculate indirect rates by including premium overtime transactions, which vary by state.

GL Labor Detail

Identifies the actual cost of labor incurred either directly or indirectly, as recorded by timesheet entries during the fiscal year.

Bonus Schedule

Evaluates the compliance of bonus amounts to the contractor’s policy and the reasonableness and allowability of those amounts.

Quarterly 941s and Annual 940

Used as part of the payroll reconciliation from expenses incurred to employees paid and taxes filed.

Customer Invoice Transaction Register

Lists the invoices billed during the year by project number/name and invoice number/date, with amounts billed for labor, overhead, fee (profit), sub-consultant costs, and other direct costs. Used to consistently test project billings during the year to allocate costs between direct and indirect efforts.

Detail of Direct Expenses Billed

Provides the individual direct transaction details by line item, including unit cost, number of units, cost amount, and billed amount. Demonstrates whether the consultant has correctly established unit rates for direct cost recovery, if applicable.

IT Checklist

Facilitates an understanding of the framework of IT systems and controls in place to monitor and safeguard company data.

Prepare for Common Challenges for FAR Overhead Audits

The two biggest hurdles to completing audits promptly are missing documents and delayed responses. Stambaugh Ness uses SuraLink to send document requests, checklists, templates, and due dates. With this tool, we can share all the information and schedules necessary for a timely audit. We encourage firms to review the checklist and “share the love” by assigning responsibility to others on the team.

Best Practices

Start Early

Review checklists when provided and ask questions as they arise.

Train Your Employees

Ensure they understand compliance requirements.

Use Resources

Download and review the 2024 AASHTO Uniform Audit & Accounting Guide and related resources including the Internal Control Questionnaire (ICQ) and National Compensation Matrix (NCM).

Next Steps

We invite you to join us for our upcoming webinar, Preparing for Your FAR Overhead Audit, when we will go into much greater detail on how to have a successful FAR Overhead Audit experience. Whether you are new to FAR or a veteran, we’re confident you will grab some key takeaways and actionable tips to make the process smoother.