Understanding Federal Acquisition Regulation (FAR 31) audit and Far Overhead Rat

Posted by Daryl Joyce on April 29th, 2019

Falling prey to the economic downturn, it’s quite trending amongst several engineering and architectural firms to seek out majorly for government contracts in comparison to other development projects. This trend has mandated these firms to have their overhead rate calculated in compliance with the FAR i.e. Federal Acquisition Regulation. The firms are lesser acknowledged and thoughtful about the FAR audit’s requirements and more concerned about the profitability that government contract promises. Late and less knowledge of FAR makes them prone to unwanted audits and lesser profitability where many CPA’s are also unfamiliar about this particular field of accounting. In recent years it has become mandatory for a firm to have an accurate FAR overhead rate calculation instead of an estimated FAR overhead rate used by the firms.

Which FAR obligations are put forward by government agencies in the contract?

In their contract Government can impose varied obligations as per established by FAR. Thus these agencies can be either demanding contract bids or can even insist upon the firm’s overhead rate in accordance with FAR part 31. In addition, it can be the company’s schedule for audited overhead or parallel footnotes; which they will look out for.

What are the pre-requirements for FAR Overhead Rate Calculation?

 Accounting software:

While numerous firms find government contracts desirable; what they oversee is the information they are obligated to produce during FAR audits. They even miss out on having a proper report of the contract and the cost that is involved. It is thus essential for a firm to own a submissive system to manage the accounting per se. It can be time-consuming and quite a struggle in the beginning but proves beneficial for a firm in long run. For a smooth accounting, the concerned accounting firm can cater to the services of software execution.

Job Costing System:

Job Costing System is enforced while working on a government contract so as to avoid the double billing which prevails in many cases. While auditing, it is required by the accounting system to acknowledge only the allowable government billing. To calculate that; recognizing the definite cost of employees is essential which is calculated according to the pay rate of each worker. While calculating this you can’t count the cost of working hours as per your hourly rate. Salaried employee’s hourly rate is thus calculated on the basis of the time put forth by him in the project. You can even have an overview on whether Job Costing System is functioning rightly because the job costing is reunited with the direct cost of general ledger only.

Identifying Direct and Indirect Costs:

For FAR Overhead Rate Calculation the firms are required to have befitting knowledge of the firm’s expenses. These expenses are to be differentiated as general overhead expenses and the once that are existing due to the government contracts.

Discarding Unallowable Costs:

FAR Overhead Rate Calculation demands a review of the expenses so as to divide the unallowable and allowable expenses and time to avoid unnecessary billing of the expenses.

Thus for Architectural/Engineering firms, Government contracts stand as befitting opportunity if they properly perceive the complexities that come along with it as per the directions of several Government entities. The complexities being the need of a CPA firm to handle the firm’s Overhead Rate Calculation and to have the audit in accordance with FAR.

To know more about FAR 31 and overhead rate audits, please visit http://joycecpallc.com.