Loading...
HomeMy Public PortalAboutExhibit MSD 30P9 - Overhead Rate Review January, 2012OVERHEAD RATE REVIEW FY 2012 AUDIT PLAN Metropolitan Saint Louis Sewer District Overhead Rate Review January, 2012 This report is intended solely for the use of Metropolitan St. Louis Sewer District and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Exhibit MSD 30P9 OVERHEAD RATE REVIEW i FY 2012 AUDIT PLAN St. Louis Metropolitan Sewer District Overhead Rate Review January, 2012 Table of Contents Introduction ............................................................................................ 1 Objectives and Scope ............................................................................ 2 Methodology ........................................................................................... 3 Engagement Conclusion and Results ..................................................... 5 Comparison of Unallowed Overheads .................................................... 6 Other Matters ....................................................................................... 11 INTRODUCTION OVERHEAD RATE REVIEW 1 FY 2012 AUDIT PLAN The Metropolitan Saint Louis Sewer District (MSD) has plans for major construction spending over the next several years as part of the Capital Improvement and Replacement Program (CIRP). MSD has plans to issue two contracts one with Jacobs North America Infrastructure (NAI) who has HDR Engineering (HDRE) as a major sub and one with Parsons Water and Infrastructure (PWI). NAI is a wholly-owned subsidiary of Jacobs Engineering Group Inc. and PWI is a wholly-owned subsidiary of Parsons Corporation. Both contracts are hybrid contracts that have both cost plus or lump sum work order assignments. The work order assignments will either be done on a Cost Plus or Lump Sum basis. As part of the contract each company has submitted overhead rates that will be used to bill MSD. MSD has requested Brown Smith Wallace to review the overhead rate structures for Jacobs North America Infrastructure (NAI), HDR Engineering (HDRE), and Parsons Water and Infrastructure (PWI) for appropriateness and reasonableness based on the requirements of Part 31 of the Federal Acquisition Regulations (FAR). The overhead rates are a major cost component of each company’s billing rates and MSD would like to insure that the rates are in compliance with the contract terms to reduce the risk of overcharges. Reviewing the overhead rates will become increasingly important, as the CIRP is a multi-billion dollar, multi-year plan. 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 a focus on effective project controls. The reviews were conducted by Brown Smith Wallace from12/1/2011 thru 12/24/2011 and focused on the 2011 chargeable overhead rates, based on the data and reports covering the calendar year 2010 for the three contractors. OBJECTIVES AND SCOPE OVERHEAD RATE REVIEW 2 FY 2012 AUDIT PLAN Objectives The objectives of the BSW review was to determine that the calculations used in arriving at the allowed overhead rates were generally allowable, allocable, consistent, reasonable and to provide a degree of assurance of compliance to standards generally imposed by the Defense Contract Audit Agency. The engagement was designed to identify compliance with FAR 31 and concentrated on the unallowable costs. 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 contingent upon the information and data available. Specifically we: • Reviewed the submitted overhead rates and the methodology behind the calculations. • Traced charges from the trial balance to the reported overhead categories. • Compared 2009 and 2010 financial information 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. • Presented the results to Management for review. Scope We reviewed the submitted 2011overhead rates of Jacobs North America Infrastructure (NAI), HDR Engineering (HDRE), and Parsons Water and Infrastructure (PWI). METHODOLOGY OVERHEAD RATE REVIEW 3 FY 2012 AUDIT PLAN Methodology To accomplish the objectives of this engagement we interviewed personnel from each company and reviewed audits of overhead rates, performed by third parties for FAR compliance, and review 2009 and 2010 financial information. The review was conducted using summary financial and account level information in order to provide an opinion on the logic of the approach used by these contractors and to determine whether allowable categories of cost were included in the overhead rates. Brown Smith Wallace’s review methodology is designed to provide reasonable assurance that HDRE, Jacobs NAI and PWI 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 of transactions to determine if they are allowable. The transaction-level audits are conducted by the contractors’ outside Certified Public Accounting firms. No single calculation method will fit all contractors. This means that each contractor’s approach may be different, and so 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 o Pension Plans o Insurances o Payroll Taxes o 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 METHODOLOGY OVERHEAD RATE REVIEW 4 FY 2012 AUDIT PLAN • Taxes The engagement was performed with a fundamental objective of assessing the accuracy and appropriateness of the overhead rates that will be incurred by MSD as a result of the two contracts. ENGAGEMENT CONCLUSION AND RESULTS OVERHEAD RATE REVIEW 5 FY 2012 AUDIT PLAN The amount included in the overhead rates is dependent on several factors, for example, having less people and equipment not engaged on projects, the quality of accounting and cost tracking systems and the effort made by individuals in seeing that charges are correctly recorded if they are on a project. Unlike direct costs which 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 the allocation and 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 the costs of certain 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’ rate for work performed at other facilities. Overall we could find no overt material error, miscalculation or unequivocal error in methodology based on the information submitted for review. NAI and HDRE are routinely audited for compliance to FAR since they pursue contracts with the U.S. government. This frequency reduces the risk of non-compliance. However, PWI is not necessarily FAR 31 compliant. Although PWI is FAR non-compliant, BSW attempted to recreate PWI’s data as though it was FAR compliant by utilizing the data PWI submitted as an estimate of FAR unallowed costs based on their corporate FAR disallowances and adjusting other cost categories to align those costs more closely with NAI and HDRE. The estimated rate for PWI would be approximately 7% lower for both field and office. We recommend that MSD include contractual requirements that impose compliance with FAR 31 in these contracts to HDRE, PWI and NAI to ensure the avoidance of unwanted overhead costs. 2010 2009 Office Field Office Field Office Field Office Field Office Labor Burden 30.78%Labor Burden 44.09%44.09%47.25%47.25%Labor Burden 27.11%27.11%26.94%26.94% General Overhead 123.13%Gen'l & Admin.25.86%25.86%18.77%18.77%Gen'l & Admin.69.92%69.92%70.00%70.00% Total 153.92%152.32%General Overhead 101.36%120.22%89.04%106.54%Office Occupancy 25.85%26.32% Total 171.31%190.17%155.06%172.56%Total 97.03%122.88%96.94%123.26% BSW Adjusted Labor Burden 44.09%44.09% General OH+G&A 120.74%139.59% Total 164.83%183.68% RATE COMPARISON HDRE PWI 20102010 2009 NAI 2009 COMPARISON OF UNALLOWED OVERHEADS OVERHEAD RATE REVIEW 6 2011 INTERNAL AUDIT REPORT General Overhead Actual Unallowed % Unall.Net Actual Unallowed % Unall.Net Actual Unallowed % Unall.Net General Indirect Labor 114,726,318 3,263,008 2.8%111,463,310 10,019,366 384,000 3.8%9,635,366 57,463,497 191,277 0.3%57,272,220 Marketing Labor 33,179,990 128,599 0.4%33,051,391 Fringe Benefits 45,531,258 45,531,258 4,410,503 0.0%4,410,503 15,571,093 0.0%15,571,093 Travel Expense 7,900,474 785,221 9.9%7,115,253 1,153,860 61,000 5.3%1,092,860 3,958,290 548,430 13.9%3,409,860 Travel Expense Est. BSW 19,600 1.7%-19,600 Entertainment 191,901 191,901 100.0%0 Employee Expense 11,382,143 2,837,979 24.9%8,544,164 1,037,843 0.0%1,037,843 1,680,094 273,985 16.3%1,406,109 Public Relations & Adv.26,800 26,800 100.0%0 160,775 138,320 86.0%22,455 Pension & Stock Amort.2,578,744 0.0%2,578,744 Recruiting and Relocation 434,997 0.0%434,997 788,718 220,042 27.9%568,676 Supplies 80,314 0.0%80,314 210,049 0.0%210,049 757,879 120,282 15.9%637,597 Building Rent & Expense 46,034,592 0.0%46,034,592 2,039,425 0.0%2,039,425 30,749,324 28,723 0.1%30,720,601 Autos 838,138 55,470 6.6%782,668 1,767,769 764,863 43.3%1,002,906 Taxes General 3,068,425 0.0%3,068,425 54,813 0.0%54,813 1,123,220 745 0.1%1,122,475 Depreciation 9,882,690 4,649,889 47.1%5,232,801 -721,513 0.0%-721,513 Dues & Registration 127,548 12,755 10.0%114,793 Licenses & Fees 26,747 0.0%26,747 Postage and Freight 828,197 0.0%828,197 31,584 0.0%31,584 Telephone 4,671,481 0.0%4,671,481 244,404 0.0%244,404 Subscriptions 187,482 39 0.0%187,443 9,752 0.0%9,752 Donations 482,921 482,921 100.0%0 142,773 142,773 100.0%0 Insurance 11,596,321 1,256,198 10.8%10,340,123 648,518 0.0%648,518 Bad Debts 740,295 740,295 100.0%0 Penalties and Fines 1,475 1,475 100.0%0 Office Expenses 1,159,245 168 0.0%1,159,077 1,886,482 0.0%1,886,482 531,603 7,262 1.4%524,341 Interest 879,680 879,680 100.0%0 1,091 1,091 100.0%0 Professional Services 720,617 441,858 61.3%278,759 2,380,144 119,007 5.0%2,261,137 872,491 202,415 23.2%670,076 Temporary Help 361,445 0.0%361,445 0 133,330 -2,511 -1.9%135,841 Marketing 5,205,835 4,665,599 89.6%540,236 0 Allocated Expense 42,381,031 27,806,795 65.6%14,574,236 6,301,000 613,000 9.7%5,688,000 52,002,764 1,693,026 3.3%50,309,738 Computer Expense 10,456,796 7,545 0.1%10,449,251 1,566,106 0.0%1,566,106 14,366,530 53,673 0.4%14,312,857 Fringe Benefit Comp. Lbr 1,843,200 0.0%1,843,200 Intercompany Overhead 94,040 0.0%94,040 Administrative Costs 12,312,915 2,011,651 16.3%10,301,264 Miscellaneous 1,295,216 979,415 75.6%315,801 95,586 9,559 10.0%86,027 2,134,485 945,059 44.3%1,189,426 Miscellaneous 880-203 Tr.11,131 11,131 100.0%0 State Income Tax 775,823 -112,425 -14.5%888,248 Sales, Project Services 268,779 1,927 0.7%266,852 Public Mgmt. & Adm.226,010 66,963 29.6%159,047 Bonus Payments 2,743,973 0.0%2,743,973 Emp. Stock Options 194,750 0.0%194,750 Fixes Asset Gain (Loss)2,502,081 2,502,081 100.0%0 207,318 0.0%207,318 Total General Overhead 368,616,882 50,879,905 13.8%317,736,977 35,555,979 4,096,173 11.5%31,459,806 189,559,923 5,254,481 2.8%184,305,442 145,171,561 39,133,881 Total 184,305,442 ESTIMATES: EMP. & SALES 7,772 Year 2009 $1.49B 12,000 Year 2009 $2.0B 60,000 Year 2011 $10.3B COMPARISON OF UNALLOWED OVERHEADS - 2010 HDRE PWI JACOBS NAI G&A at site & office G&A at office COMPARISON OF UNALLOWED OVERHEADS OVERHEAD RATE REVIEW 7 FY 2012 AUDIT PLAN Direct Labor Category Labor Fringe Rate Labor Fringe Rate Labor Fringe Rate Direct Labor 258,040,495 24,367,626 207,616,959 Fringes 79,434,804 30.78%10,743,849 44.09%56,276,991 27.11% HO Direct Labor (in above)Not segregated 10,814,248 Ref only Office portion of DL 151,386,509 Ref only Office portion of DL Fringes allocated between IL and DL for HDRE Category Field Office Field Office Field Office Labor Burden 30.78%44.09%44.09%27.11%27.11% G&A Overhead 69.92%69.92% General Overhead 123.13%120.74%139.59%25.85%Office occupancy Total 153.92%164.83%183.68%97.03%122.88% As Submitted Field Office Labor Burden 44.09%44.09% General & Admin.25.86%25.86% General Overhead 101.36%120.22% Total Same 171.31%190.17%Same Same Field Office Labor Burden 44.09%44.09% General & Admin.21.77%21.77% General Overhead 100.80%119.66% Total 166.66%185.52% Fringes All Labor Fringes Direct Lab.Fringes Direct Lab. Vacation 33,457,050 Total Fringe 10,743,849 Paid Time Off 21,595,806 holiday 12,484,608 Payroll 24,367,626 Payroll Taxes 16,084,226 Sick Leave 561,806 Fringe Rate 44.09%Grp. Insur.10,315,461 Payroll Taxes 32,520,606 Work Comp.479,508 Group Insurance 29,922,742 Indirect Labor Thrift Plan 4,343,777 Retirement Benefits 16,081,988 Total Fringe 4,410,503 GL Insurance 3,394,173 Ret. Benefit Adjustment 1,780,463 Payroll 10,019,366 EAP 64,040 Total 126,809,263 Fringe Rate 44.02%Total 56,276,991 Payroll Payroll 207,616,959 General Indirect Labor 114,726,318 Fringe Rate 27.11% Marketing Indirect Lab.33,179,990 Gen'l OH Office Field Computer Indirect Lab.5,987,556 Gen'l OH 31,459,806 31,459,806 Indirect Labor Direct 258,040,495 Office Occ.-2,039,425 -2,039,425 Total Fringe 15,571,093 Total 411,934,359 Net 29,420,381 29,420,381 Payroll 57,463,497 Fringe Rate 30.78%Calc. Tot. DL 120.74%Fringe Rate 27.10% Office Occ.2,039,425 General Overhead Office Office Labor 10,814,248 Gen'l OH Office Field Tot. GOH incl Disallowed 317,736,977 Calc. Off. Lab 18.86%GOH Site/Off 145,171,561 145,171,561 Total Direct Labor 258,040,495 Tot. DL 24,367,626 24,367,626 Tot. DL 207,616,959 207,616,959 Total General Overhead 123.13%Total Gen'l 139.59%120.74%Total General 69.92%69.92% Office Occup.Office GOH Office 39,133,881 Total DL Off.151,386,509 Total Office 25.85% AS SUBMITTED PWI'S ORIGINAL ESTIMATE OF FAR COMPLIANCE DIRECT LABOR RATE COMPARISON HDRE PWI NAI CALCULATIONS PWI Estimate of FAR Compliance COMPARISON OF UNALLOWED OVERHEADS OVERHEAD RATE REVIEW 8 FY 2012 AUDIT PLAN FAR sectio n Costs Type In General When Allowed When NOT Allowed HDRE Parsons W&I Jacobs NAI 31.205- 1 Public relations, marketing and advertising costs Not Allowed When required by contract or as a result of execution of contract requirements. Rarely Allowed 89.6% of marketing expenses $4,665,599 100% of advertising $26,800 86% of PR and advertising $138,320 31.205- 2 (Reserved)(Reserved)(Reserved)(Reserved) 31.205- 3 Bad Debts Not Allowed Never Allowed Never Allowed 100% $740,295 None specifically identified or included ($0 in trial balance) Identified as included in "Miscellaneous" and excluded 31.205- 4 Bonding Costs Allowed Usually allowed Not allowed if unreasonable compared to industry standard rates. None specifically identified None specifically identified None specifically identified 31.205- 5 (Reserved)(Reserved)(Reserved)(Reserved) 31.205- 6 Compensation for personal services Allowed For direct compensation costs. When in accordance with labor contract. When costs are reasonable in comparison to similar work situation. Compensation may be paid in equities provided they are priced at fair market value. Deferred payments, benefits and pensions are generally allowed.Individual severance payments are generally allowed but are subject to scrutiny. May include bonuses provided the basis for award is reasonable and is part of a documented program or is allowed by contract. Pension Costs are generally allowed but must fairly represent the cost of providing the benefit for the time period covered (Very complicated!).Early retirement buyouts are allowed but are limited to the NPV of the prior year annual salary of the employee. Fringe benefits are generally allowed provided they are reasonable and consistent with contract provisions. Post retirement benefits costs such as healthcare are allowed provided accruals are reasonable and representative of actual Retroactive adjustments not allowed unless the time period involved is entirely within the contract period.Services before or after contract time period are not allowed. Adjustments to compensation for locational tax differences are not allowed. Cost for mass severance packages are not allowed, but special allowance may be requested. Post retirement benefit costs are not allowed. Payments to indivudual owners or partners in closely held corporations must be reasonable and may not include distrubution of profits. Golden Parachute payments are not allowed costs.Employee rebate and discount costs are not allowed. Compensation for highly paid executive that exceeds limits (See regs for latest limits). 1.02% of general indirect labor, marketing labor and computer labor plus associated fringes excess compensation $3,391,607 2.7% of general indirect labor and fringes based on Parsons' federal group audit $384,000 0.26% based on benchmark to surveys. $191,277 31.205-7 Contingencies Not Allowed Only allowed for items where statistical analysis of historic data can establish a reasonable confidence in future costs. Rarely Allowed None specifically identified None specifically identified None specifically identified 31.205- 8 Contributions and charitable donations Not Allowed Never Allowed Never Allowed 100% $482,921 100% $142,773 Assumed 100%- contained in classification "Miscellaneous" and "excluded" 31.205- 9 (Reserved)(Reserved)(Reserved)(Reserved) 31.205-10 Cost of Money Allowed Imputed cost of money is allowed. (e.g., calculation of interest and equity funding costs for capital costs incurred.) Actual interest costs are not allowed, the imputed cost of money should be used.0.4196%None specifically identified None specifically identified 31.205- 11 Depreciation Allowed Generally allowed Depreciation costs exceeding booked depreciation are not allowed. 47% $4,649,889 None specifically identified None specifically identified 31.205-12 Economic planning costs Allowed Cost for strategic planning associated with contractors line of business Organizational and market development costs are not allowed.None specifically identified None specifically identified None specifically identified 31.205- 13 Employee morale, health, welfare, food service, and dormitory costs and credits Allowed Generally allowed Gift costs are not allowed. Cost for recreation that is not part of a morale or health improvement program is not allowed. 31.205- 14 Entertainment Costs Not Allowed Never Allowed Never Allowed Specifically not identifiable as disallowed but possibly a component of the disallowed "Employee Exp," "Computer Exp," "Marketing" & "Administrative" 100% $191,901 31.205- 15 Fines, penalities and mischarging costs Not Allowed Never Allowed Never Allowed Specifically not identifiable as disallowed but possibly a component of the disallowed "Miscellaneous" Not included in calculation based on trial balance, added in by BSW to simulate disallowance $1,475 31.205-16 Gains or losses on sale of equipment Allowed Limited to the impact on costs relevant to the contract. Rules are complex and should be reviewed for applicability to individual cases. Costs not relevant to contract are not allowed.None specifically identified Not included in calculation based on trial balance, added in by BSW to simulate disallowance $2,50,2081 0% 31.205- 17 Idle facilities costs Not Allowed When required by contract or when needed to accommodate varying work loads that result from execution of contract requirements. Generally not allowed.None specifically identified None specifically identified None specifically identified The following provides guidance on the allowability of indirect cost into government contracts that have Cost Accounting Standards (CAS) invoked.Unallowed Percent COMPARISON OF UNALLOWED OVERHEADS OVERHEAD RATE REVIEW 9 FY 2012 AUDIT PLAN 31.205- 18 Research, development and bid proposal costs Allowed Must be current or directly related to contract fulfillment. Rules are complex and should be reviewed for each case. Expenses incurred outside of contract period are generally not allowed. Cost compensated under another contract or program are not allowed. None specifically identified None specifically identified None specifically identified 31.205- 19 Insurance and indemnification Allowed When fairly allocated cost of insurances is applied. Unreasonable costs or costs for catastropic losses under a self insurance program are not allowed. Costs for warranty, defect and workmanship insurance are not allowed. 10.8% (difference between exp. rec'd and cash paid, plus deduct for av. over 5 yrs.) $1,256,198 0% 31.205- 20 Interest and financing costs Not Allowed Never Allowed Never Allowed 100% $879,680 0% 31.205- 21 Labor relations costs Allowed Always Allowed Always Allowed None specifically identified None specifically identified None specifically identified31.205- 22 Lobbying and Political Activity costs Not Allowed Only allowed when required by contract Rarely Allowed Specifically not identifiable as disallowed but possibly a component of the disallowed "Administrative" & "Marketing" None specifically identified 31.205- 23 Losses on other contracts Not Allowed Never Allowed Never Allowed None specifically identified None specifically identified 31.205- 24 (Reserved)(Reserved)(Reserved)(Reserved) 31.205- 25 Manufacturing and production engineering Allowed Always Allowed, provided the costs are directly associated with contract performance. Always Allowed None specifically identified None specifically identified None specifically identified 31.205- 26 Material Costs Allowed Always Allowed, provided the costs are adjusted to reflect any discounts or rebates that are applied Always Allowed None specifically identified None specifically identified None specifically identified 31.205- 27 Organization Costs Not Allowed Never Allowed Never Allowed None specifically identified None specifically identified 31.205- 28 Fiduciary costs for proxy materials, shareholder meeting, board meetings, etc. Allowed Always Allowed Always Allowed None specifically identified None specifically identified None specifically identified31.205- 29 Plant Protection Costs, including costs associated with routine commercial security, military or homeland security requirements Allowed Always Allowed Always Allowed None specifically identified None specifically identified None specifically identified 31.205- 30 Patent Costs Allowed Provided they are relevant to the contractual requirements. When not required by contract.None specifically identified None specifically identified None specifically identified 31.205-31 Plant reconversion costs. Not Allowed Cost to remove equipment required by contract and to restore resulting damage is allowed. Costs specifically covered in contract are allowed. Generally not allowed.None specifically identified None specifically identified 31.205- 32 Precontract costs Allowed Provided they would have been incurred in any case to meet contract requirements. Generally allowed None specifically identified None specifically identified None specifically identified31.205- 33 Professional and consultant services Allowed Provided the costs are reasonable and relevant. Retainer fees that are reasonable and customary are also allowed. Cost of work must be supported by documented evidence of work performance such as time tracking or invoices. Compensation that is contingent based on recovery from government is not allowed. Compensation for unethical, anticompetitive or illegal activities is not allowed (duh). 61.3% $441,858 5% $119,007 23.2% $202,415 31.205- 34 Recruitment Cost Allowed Provided the costs are reasonable and are relevant to the contract performance. Cost for postings where no specific job is defined or postings that are primarily marketing or PR materials are not allowed. None specifically identified 0%27.9% $220,042 31.205- 35 Relocation Costs Allowed When intent is to relocate employee for a period of 12 months or more.Provided they follow numerous guideline that appear to be consistent with typical corporate relocation programs. Rules are complex and should be reviewed for each case. Generally allowed Included above. 31.205- 36 Rental Costs Allowed Provided costs are reasonable and relevant to the contract. Only to the extent the lease costs fall within the contract period unless otherwise allowed by contract. Generally allowed 31.205-37 Royalties on patents used Allowed Generally allowed If the government holds the patent or the patent is invalid or has no royalties, the costs are not allowed. None specifically identified None specifically identified None specifically identified 31.205- 38 Selling costs Mixed General marketing costs are allowed. Advertising and PR required by contract or needed in order to fullfil the contract are allowed. Advertising and PR costs are generally not allowed. See public relations, marketing and advertising above None specifically identified except advertising 0.70% 31.205-39 Service and warranty costs Allowed Generally allowed Costs that duplicate embedded risk or insurance costs are not allowed.Not identified except possibly computer maintenance 31.205- 40 Special tooling or test equipment Allowed If purchase is required by contract or necessary to perform contract. For equipment purchase prior to contract, only the depreciation cost may be allocated. None specifically identified None specifically identified None specifically identified 31.205- 41 Taxes Allowed Always Allowed. Plus any cost associated with challenging taxing authority are allowed provided they are performed at direction of contract administrator. Always Allowed. However tax related penalties may not be allowed. (3%) of taxes (deferred portion of state) 0%<0.10% unallowed 31.205- 42 Contract termination costs Allowed Generally allowed. Rules are complex but sort of follow common sense for reasonableness. Rules should be reviewed for each case. Generally allowed Not applicable Not applicable Not applicable COMPARISON OF UNALLOWED OVERHEADS OVERHEAD RATE REVIEW 10 FY 2012 AUDIT PLAN 31.205- 43 Business, trade and professional association meetings, memberships, subscriptions, etc. Allowed Almost always allowed provided relevant to contract performance or for personnel involved in contract performance. Generally allowed 0.02%0% 31.205- 44 Training and Education Costs Allowed Must be employees. Must be relevant to contract or to employee performance. In general, costs for over 2 years of education for a degree program are not allowed. Hourly pay for time in class is not allowed when training is outside normal work hours.Overtime pay for training is not allowed. 31.205- 45 (Reserved)(Reserved)(Reserved)(Reserved) 31.205- 46 Travel costs Allowed Must be for business purposes. Must be documented. Limited to the amount of per- diem allowed for government contracts. See rules. Costs for private or lease plane travel costs are limited to the price of commercial airline travel. 31.205-47 Costs related to legal and other proceedings Depends If you win the case, the costs are generally allowed. Rules are complex and should be reviewed for each case. If you lose the case, the costs are generally not allowed.None specifically identified 0%None specifically identified 31.205- 48 Research and development costs Allowed To the extent spedified in contract or government grant. Costs in excess of contract or grant are not allowed. None specifically identified None specifically identified None specifically identified 31.205- 49 Goodwill Not Allowed Never Allowed Never Allowed None None None specifically identified 31.205- 50 (Reserved)(Reserved)(Reserved)(Reserved) 31.205- 51 Alcoholic beverage Not Allowed Never Allowed Never Allowed Specifically not disallowed but possibly a component of an overall amount unallowed 100% 31.205- 52 Asset valuation resulting from business combinations Allowed Valuation must follow IRS guidelines and only the allocatable portion of costs is allowable. Generally allowed None specifically identified None specifically identified None specifically identified OTHER MATTERS OVERHEAD RATE REVIEW 11 FY 2012 AUDIT PLAN We would like to thank HDRE, Jacobs NAI and PWI personnel for their excellent cooperation and assistance during this engagement. Specifically, we would like express our gratitude to the following: Anita Stotts - PWI Michael Brainard - HDRE Julie Garber - NAI This report is intended solely for the use of Metropolitan St. Louis Sewer District and is not intended to be and should not be used by any other parties without the prior written consent of MSD.