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HomeMy Public PortalAboutExhibit MSD 30P10- Overhead Rate Review July, 2012This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. OVERHEAD RATE REVIEW FY 2012 AUDIT PLAN Metropolitan Saint Louis Sewer District Overhead Rate Review July, 2012 Exhibit MSD 30P10 This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. OVERHEAD RATE REVIEW i FY 2012 AUDIT PLAN Table of Contents Introduction ............................................................................................ 1 Objectives and Scope ............................................................................ 2 Methodology ........................................................................................... 3 Results and Conclusions ........................................................................ 5 Acknowledgements ................................................................................ 6 INTRODUCTION This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. OVERHEAD RATE REVIEW 1 FY 2012 AUDIT PLAN The Metropolitan Saint Louis Sewer District (MSD) is planning for major construction spending over the next several years as part of the Capital Improvement and Replacement Program (CIRP). MSD’s current plans include issuing four contracts for this work with the following companies: • Jacobs North America Infrastructure (Jacobs NAI), which has HDR Engineering (HDRE) as a major subcontractor. Jacobs NAI is a wholly-owned subsidiary of Jacobs Engineering Group, Inc. • Parsons Water and Infrastructure (Parsons WI). Parsons WI is a wholly-owned subsidiary of Parsons Corporation. • AMEC Environment & Infrastructure, Inc. (AMEC EII). AMEC EII is a wholly-owned subsidiary of AMEC plc of Great Britain. • Burns & McDonnell (B&M). The MSD contracts with these companies contain provisions for either cost plus or lump sum pricing of work order assignments. As part of the contracts, each company has submitted overhead rates that will be applied to the direct labor costs invoiced to MSD. MSD Management requested that Internal Audit (IA) review and report on the overhead rate structures for the five aforementioned engineering companies. Generally acceptable and widely used provisions for overhead rates are defined in Title 48, Part 31 of the Federal Acquisition Regulations (FAR 31). This review assesses the conformity and reasonableness of each contractor’s overhead rate based on the requirements of FAR 31. The overhead rates are a major cost component of each company’s billing rates and MSD wants sufficient confidence that the overhead rates are appropriate. IA previously conducted a similar assessment of 2011 overhead rates making this the second annual review of the rates for HDRE, Jacobs NAI and Parsons WI. With the CIRP being a multi-billion dollar, multi-year plan, small deviations in overhead rates can have multi-million dollar impacts on the total project costs. MSD has defined goals to: • Deliver consistent, high quality customer service • Comply with all legal and regulatory requirements and schedules • Minimize customer rate increases; and • Be accountable to the St. Louis community Achieving these goals is a high priority for MSD, and meeting them while implementing the CIRP will require focusing on effective project controls and conscientious construction auditing and overhead auditing. The overhead rate reviews were conducted in June, 2012, and focused on the 2012 chargeable overhead rates, based on the data and reports provided by the contractors covering the fiscal year 2011. OBJECTIVES AND SCOPE This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. OVERHEAD RATE REVIEW 2 FY 2012 AUDIT PLAN Objectives The objectives of the review were to determine that the calculations used in arriving at the overhead rates were generally allowable, were properly allocated, were consistent among the contractors, and were reasonable. The engagement used the requirements of FAR 31 as the basis for determining whether costs were allowable. FAR is universally used by government contracting agencies; the auditing standards are established by the Defense Contract Audit Agency. The review included a determination of whether accounting categories, or portions of those categories, should be allowable overhead charges. For categories that are only partially allowable, the methodology the contractors used for determining the allowable amounts was reviewed to the extent possible based upon the information and data available. To the extent possible based on the documentation provided, we: • Reviewed the submitted overhead rates and the methodology behind the calculations. • Traced charges from the trial balance, if submitted, to the reported overhead categories. • Compared 2010 and 2011 financial information, where available, for significant deviations. • Reviewed the disallowed amounts for accuracy and compliance with FAR 31. • Compared our calculations to the provided audited reports. • Identified potential non-compliances. • Presented the results to MSD Management for review. Scope We reviewed the submitted 2012 overhead rates of Jacobs NAI, HDRE, AMEC EII, and Parsons WI. This review was designed to include Burns & McDonnell (B&M), however the external audit of the B&M overhead rate had not been completed and preliminary information was not available. The B&M external audit is expected to be completed by June 30, 2012. MSD has been apprised of this situation and agreed to defer the review of the B&M rate to July. It should also be noted that the HDRE information is preliminary to the conclusion of their external audit of the overhead rate and may be subject to revision. The AMEC EII information is based on their current budget because actual costs are not available. The scope of the audit was limited to review, analysis and assessment of the documentation in support of the overhead rates as submitted by the contractors and subcontractors. METHODOLOGY This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. OVERHEAD RATE REVIEW 3 FY 2012 AUDIT PLAN Methodology To accomplish the objectives of this engagement we reviewed audits of overhead rates performed by third parties for FAR compliance and reviewed the 2011 financial information submitted by the contractors in support of their third-party audits. The review was conducted using summary financial and account-level information in order to provide an opinion with respect to the logic of the approach used by the contractors and to determine whether allowable categories of cost were included in the overhead rates. The review methodology was designed to provide reasonable assurance that the contractors are providing overhead rates consistent with the accounting information submitted for review. The volume of transactions associated with overhead costs for these contractors is too large to allow a review at the transaction level on anything more than a highly select sample basis to determine if costs are allowable. Transaction-level audits are conducted by the contractors’ outside Certified Public Accounting firms. No single calculation method will accommodate all contractors because each contractor has a different accounting breakdown and categorization structure, which means the method of reviewing overhead rate calculations needs to be adapted to each contractor. The following cost categories were reviewed: • Executive Compensation • Labor Fringe Rates including Pension Plans, Insurances, Payroll Taxes and Training • Travel • Business Meals • Entertainment • Employee Training • Vehicle Expenses • Recruiting and Relocation • Marketing • Public Relations • Advertising • Memberships • Lobbying • Goodwill • Subscriptions • Charitable Donations • Insurance • Bad debts • Interest • Expenses allocated from the parent • Bad debts • Fines and Penalties • Acquisition Costs • Leased airplanes • Taxes METHODOLOGY This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. OVERHEAD RATE REVIEW 4 FY 2012 AUDIT PLAN The amount included in the overhead rates is dependent on several factors. The key drivers are the costs of personnel and equipment not engaged on the project for which the rate is being calculated. Also, the quality of accounting and cost tracking systems and the accuracy of accounting entries associated with the project or overhead costs can have an effect on the overhead rate. Unlike direct costs that are specifically identified to a project, work activity or cost objective indirect costs are charged to projects based on an allocation method. However, certain indirect costs are not allowed to be charged to projects. FAR 31 provides detailed guidance as to which costs are allowed to be included in overhead charges. The non-allowed costs are generally those that provide no benefit to project performance. Direct labor costs are the most often used basis for allocating overhead costs. Overhead rates are generally expressed as a percentage of direct labor dollars. Allowed overhead costs include fringe benefits on labor and many categories of general and administrative (G&A) expenses. The allowable G&A expenses include certain costs of executive management, legal, accounting, treasury, information systems, human resources, health and safety, and other corporate functions. A parent company's corporate office costs may be included in the costs, provided they have been properly adjusted to reflect non- allowed costs. It is generally acceptable, but not required, to use two indirect overhead rates: the first being an ‘at-office’ rate that is applied to work performed in the contractor’s owned facilities, and the second being an ‘at-site’ or ‘field’ rate for work performed at other facilities. The contractors’ cost accounting information is considered confidential and the use of such information is confined to the work papers associated with the review and are not included in this report. Missouri Sunshine Laws are applicable to MSD. Except to the extent disclosure is otherwise required by law, MSD is authorized to close records relating to confidential or privileged communications with its auditor, including all auditor work product. However, this report is to be considered an open public record. All work papers associated with this report are considered closed to the public. RESULTS AND CONCLUSIONS This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. OVERHEAD RATE REVIEW 5 FY 2012 AUDIT PLAN Results and Conclusions Overall, we found no material error, miscalculation or error in methodology (not applicable to B&M, as review of their overhead rate has yet to occur). AMEC EII, Jacobs NAI, B&M and HDRE are routinely audited for compliance to FAR since they pursue contracts with the U.S. government. The resulting audits by government agencies provide additional assurance that their rates are in compliance with FAR 31. However, Parsons WI is not necessarily FAR 31 compliant and does not receive such audits. Conclusions associated with each contractor follow: AMEC EII – This is a newly constituted corporation within the AMEC plc structure. It is a combination of the acquired MACTEC Corporation and AEII, AMEC Geomatrix, Inc. and AMEC-BCI Engineers & Scientists, Inc. The mergers resulted in organizational consolidations and cost structure changes. The new entity cannot be simply represented as a sum of the merged entities making it unfeasible to establish an overhead rate based on historical costs. In lieu of actual costs, AMEC EII submitted a budget estimate of indirect costs and anticipated indirect cost rates for field and office forces for 2012. This is an acceptable approach and is consistent with FAR, which has provisions for accommodating changes in accounting practices using general dollar magnitude estimates (FAR 30.604). Since we are dealing with estimates, we cannot assess the AMEC EII overhead rate based on underlying costs. Based on discussions with MSD Management, MSD will accept the current budget-based rates. It is recommended that a clause be added to the AMEC EII contract to allow MSD to recover overcharges, if any, when the 2012 rates are confirmed in 2013 and to restrict AMEC EII to the same cost structure used in determining the estimated 2012 rate. B&M – The overhead rate review is deferred awaiting completion of their independent auditor’s report covering the overhead rate. That information is expected to be available sometime in July. MSD may wish to obtain a review of their overhead rate at that time. HDRE – No items of concern were identified. However, their rate is preliminary and there is some possibility that they may opt to adjust their overhead rate based on the outcome of their independent auditor’s report. If such an adjustment occurs, MSD may wish to obtain a review of the updated rate. Jacobs NAI – No items of concern were identified. Parsons WI – IA reviewed accounting data for FAR 31 compliance to determine whether overhead cost items are allowable for use in the overhead rate calculation. For certain cost categories we were unable to determine the actual amount of non-allowable costs, so minimal disallowances were established based on the similar cost categories for other contractors. Using these minimal disallowances, the estimated rates for Parsons WI would be approximately 5.5 percentage points lower for both the field and office rates submitted by Parsons WI. We recommend that MSD pursue a reduction of 5.5 percentage points in the overhead rate with Parsons WI. General - To ensure meaningful control of unwanted overhead costs we recommend that MSD include contractual requirements that impose compliance with the FAR 31 regulations regarding the calculation of overhead rates and the determination of the allowability of costs. ACKNOWLEDGEMENTS This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. OVERHEAD RATE REVIEW 6 FY 2012 AUDIT PLAN Internal Audit Engagement Team: MSD Internal Audit: Todd Loretta Brown Smith Wallace, LLC: Dale Helle - Principal Nick Lombardi - Manager We would like to thank HDRE, Jacobs NAI, AMEC EII, B&M and Parsons WI personnel for their cooperation and assistance during this engagement. Specifically, we would like express our gratitude to the following: Anita Stotts - Parsons WI Michael Brainard - HDRE Julie Garber – Jacobs NAI Ronald Smith – AMEC EII Amy Lewis – B&M