HomeMy Public PortalAboutExhibit MSD 30P11 - Overhead Rate Review November, 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 2013 AUDIT PLAN
Metropolitan Saint Louis Sewer District
Overhead Rate Review
November, 2012
Exhibit MSD 30P11
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 2013 AUDIT PLAN
TABLE OF CONTENTS
INTRODUCTION ........................................................................................................................ 1
OBJECTIVES AND SCOPE ........................................................................................................ 2
METHODOLOGY ........................................................................................................................ 3
RESULTS AND CONCLUSIONS ................................................................................................ 5
ACKNOWLEDGEMENTS ........................................................................................................... 6
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 2013 AUDIT PLAN
INTRODUCTION
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 multiple contracts for this work. These contracts contain provisions for either cost plus or lump sum pricing of work order assignments. As part of
the contracts, companies submit overhead rates that are 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 following two engineering companies:
• Shannon & Wilson, Inc., which is a Seattle based geotechnical engineering and
environmental consulting service provider that operates primarily in the United States.
• Parsons Brinckerhoff, Inc., which is a New York based architecture, engineering and construction management firm that does business internationally. Parsons Brinkerhoff is a wholly owned professional services division of Balfour Beatty plc, an international
infrastructure group. Their US services group does business as PB Americas Inc. Generally acceptable and widely used provisions for overhead rates are defined in Title 48, Part
31 of the Federal Acquisition Regulations (a.k.a., 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 similar assessments of several suppliers for the current and prior year.
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 October, 2012, and focused on the 2012
chargeable overhead rates, based on the data and reports provided by the contractors covering
the fiscal year 2011.
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 2013 AUDIT PLAN
OBJECTIVES AND SCOPE
The objectives of the review were to determine that the calculations used in arriving at the
overhead rates involve use of allowable costs, are properly allocated, are applied consistently among the contractors, and are 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. The scope of the review encompassed 2012 overhead rates, which are calculated using financial results from fiscal 2011. Rate calculation methodology and supporting documentation
was reviewed for Shannon & Wilson, Inc. and Parsons Brinkerhoff, Inc..
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 2013 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.
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 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-compliance items.
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’ external 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 bonuses
• Travel
• Business Meals
• Entertainment
• Employee Training
• Vehicle Expenses
• Recruiting and Relocation
• Marketing
• Public Relations
• Advertising
• Memberships
• Lobbying
• Goodwill
• Subscriptions
• Charitable Donations
• Insurance
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.
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METHODOLOGY (CONT’D)
• Bad debts
• Interest
• Expenses allocated from the parent
• Bad debts
• Fines and Penalties
• Acquisition Costs
• Leased airplanes
• Taxes
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 this 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. MSD considers this report to be an open public record. However, the associated work
papers are confidential and closed to the public.
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.
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RESULTS AND CONCLUSIONS
Overall, we found no material error, miscalculation or error in methodology. Both Shannon &
Wilson, Inc. and Parsons Brinkerhoff, Inc. are routinely audited for compliance to FAR since they pursue contracts with the U.S. government and various state agencies that have federal
funding. The resulting audits by government agencies provide additional assurance that their
rates are in compliance with FAR 31. Both of these firms have accounting processes designed to meet the requirements of FAR 31
and accordingly have submitted independently audited and certified overhead rate calculations. For both of these firms, trial balance sheets that provide summaries of each account
classification were provided and reviewed. This review involved confirming the correlation of the
trial balance information to the overhead rate calculations provided in the independent audit report. Additional information was reviewed as available to confirm the validity of the overhead
rates submitted. Conclusions associated with each contractor follow:
Shannon & Wilson, Inc. – Their overhead rate appears to be relatively high, but is reasonably
supported. A concern was identified regarding the overhead rate applicable to the Shannon & Wilson employees working on MSD projects in Saint Louis.
Relative to other service providers, Shannon & Wilson, Inc. is a smaller entity in both total revenue and in geographic diversity of their offices. And like other smaller firms that have been
subject to recent market pressures that reduce their volume of direct labor charges, they have a
relatively higher overhead rate. The quantity and classification of non-allowable costs is similar to other firms and appropriate costs appear to have been excluded from the applied overhead rate calculation. Their direct labor to overhead ratio is such that any moderate increases in their
volume of direct charge work could result in a substantial reduction of their applied overhead rate. The MSD standard contract language now contains wording to recapture any reduction in
the actual rate for next year.
Shannon & Wilson, Inc. does not calculate separate rates for office versus field work, but it
appears most of their work is office based. They maintain an office in Saint Louis and the
personnel on the MSD project will be working from that office, so most of their typical office overheads apply. However, MSD will be providing the telecommunications and computer
equipment for these field personnel. As such, the cost of these items should be excluded from their overhead rate. The following recommendation is given:
• For the field labor Shannon & Wilson, Inc. provides for MSD, it is recommended
that the overhead rate be reduced by 8.6 percentage points, which is the portion
of their overhead rate due to telecommunications and computer costs.
Parsons Brinkerhoff, Inc. – No items of concern were identified. Their overhead rates appear
to be reasonably supported.
Being an international firm with multiple affiliates, their overhead costs included allocations from
the parent company. They also calculate overhead rates for both office and field based labor. However, their trial balance accounts do not break down to the field versus office classification.
As such, calculation of the overhead rate requires access to, and use of, many other sources of
operational information and the calculation process is exhaustive. Our review was limited to confirming selected aspects of interest regarding the overhead rate calculation. The methods
used in the calculations and the results appear appropriate. No recommendations are provided.
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.
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ACKNOWLEDGEMENTS
Internal Audit Engagement Team:
MSD Internal Audit:
Todd Loretta
Brown Smith Wallace, LLC: Ron Steinkamp - Principal
Nick Lombardi - Manager
We would like to thank Shannon & Wilson, Inc. and Parsons Brinkerhoff, Inc. personnel for their
cooperation and assistance during this engagement.
Specifically, we would like express our gratitude to the following:
Jeannie Brozik – Shannon & Wilson, Inc.
Tom Abkemeier – Shannon & Wilson, Inc.
Dan DeArmond – Parsons Brinkerhoff, Inc.