Why does a Consultant have to have an indirect cost rate (overhead rate)?

The proper compliance with accounting and auditing standards is essential to government accountability to the public. Government officials entrusted with public resources are responsible for implementing public functions legally, effectively, efficiently, economically, ethically and equitably. Legislators, government officials and the public need assurances that:

  • Government manages public resources and uses its authority properly and in compliance with laws and regulations.
  • Government programs are achieving their objectives and desired outcomes.
  • Government managers are held accountable for their use of public resources.

One of the ways these assurances are made is by requiring contracts of a certain value to include an indirect cost rate. Through the development of this rate, the firm (or their CPA) assures the MDT that there are no unallowable charges as defined in the Federal Acquisition Regulation (FAR).

The MDT Internal Audit Unit administers a comprehensive program of audits and investigations to ensure MDT’s conformance with the applicable laws, regulations and policies that govern the MDT program. This includes helping to determine if Consultants comply with contract requirements and ensuring that all charges to the Department are reasonable and allowable per State and Federal laws and regulations.

Why does it have to be an audited rate?
As described in Appendix A of the Consultant Services Manual, not all rates have to be audited. When it is determined that a contract has enough risk for non-compliance with State and Federal laws and regulations, an audited rate is required to provide assurance that the requirements of these laws and regulations are met.
What does it have to look like?
An indirect cost rate should be developed in accordance with the AASHTO Uniform Audit & Accounting Guide.
Why can’t a loaded rate be used?
Depending on the contract size, a loaded, or fully burdened, rate is acceptable. The rate must include all charges, including direct labor, indirect costs, and profit. This rate must be approved by MDT for reasonableness, and the firm must submit certification that the rate does not include any unallowable charges under the Federal Acquisition Regulation (FAR).
How is an overhead rate developed if there is a parent company over a subsidiary company, and MDT is doing business with the subsidiary company?
The method selected to allocate overhead rates is up to the company to decide on. As long as that rate is consistently applied, meets the cost objectives of the company and complies with FAR, it would acceptable to MDT. The consulting firm decides on the rate structure and it is up to the consulting firm to propose an indirect cost rate(s). There may be multiple rates for a single firm; however, once the firm develops its indirect cost rate(s), the rate(s) must be consistently and fairly applied. While a firm may choose its accounting practices, those practices must meet applicable Federal requirements, including the FAR cost principles and applicable cost accounting standards. Specifically, a firm’s indirect cost rate structure must result in an allocable distribution of indirect costs to the benefiting cost objectives on the basis of relative benefits received (as specified in 48 CFR 31.201-4).
What are common audit issues to remain aware of when billing MDT for direct costs?
  • Travel Expenses. Travel expenses can include: lodging, meals and mileage. These expenses must be itemized by type, quantity and rate. Consultants should bill actual costs for meals and lodging not to exceed the maximum per diem rate as allowed by the Federal limits. Lodging, meals and mileage travel expenses are not to exceed the Federal or GSA rates. Federal GSA rates are set by federal fiscal year and can be found on the www.gsa.gov website.
  • Pay Rates. When pay rates change and take effect between pay periods many times we find the employee’s old pay rate is billed, rather than the new pay rate. Double-check employees that receive rate changes for the pay cycle in which the change occurs to ensure it is billed appropriately.
  • Unsupported Direct Expenses. Direct expenses include expenses directly related to the project. Direct expenses must be itemized by type, quantity and rate. We find many direct expenses that are not adequately supported with a receipt, invoice, log, etc. Direct expenses billed to MDT must be adequately supported in order for it to be an allowable cost.