Thursday, July 19, 2018

Safe-Harbor Indirect Expense Rate for Transportation Projects

The Federal Highway Administration (FHWA) is proposing to expand the use of a "safe harbor" indirect rate beyond the 10-state pilot program.

The FHA (as well as state transportation departments) have long recognized that the process of establishing indirect rates is costly and a barrier to for firms wanting to participate in engineering and design service contracts.

Contractors providing services under cost-reimbursable contracts using FAHP (Federal-aid Highway Program) funds are required to account for, and bill, costs in accordance with FAR cost principles. In addition, Federal law and regulations for the FAHP require contracting agencies to accept indirect cost rates for the purposes of contract estimation, negotiation, administration, reporting, and contract payment. As such, contractors are required to develop indirect cost rates in accordance with the Federal cost principles on an annual basis. Similarly, contracting agencies must provide reasonable assurance that consulting firm costs are allowable in accordance with the Federal cost principles.

Adhering to these accounting requirements can place a significant burden on some consulting firms and may create a barrier for otherwise eligible and qualified firms to compete for FAHP-funded contracts. For example, small firms, including many disadvantaged business enterprise firms, may lack the financial expertise to develop an indirect cost rate that would be acceptable to a cognizant Federal or State government agency, or lack the resources to hire a Certified Public Accountant to conduct an audit to provide assurance as to the development of an indirect cost rate compliant with Federal requirements. Often, a CPA audit is cost-prohibitive given the size and scope of the federally funded contracts for which the firm could compete. In addition, new or start-up firms generally do not have a contract-related cost history to use as a base for development of an indirect cost rate. Other well-established firms may not have previous experience with federally funded contracts for which a compliant indirect cost rate could be developed. Currently, these firms are prohibited from participating in FAHP-funded contracts without the development and application of a provisional indirect cost rate for the specific contract, which is adjusted based upon a contracting agency conducted final audit at the completion of the contract. Even the smallest final audit requires a significant commitment of contracting agency audit resources.

To remove these barriers, the FHWA developed the Safe Harbor Indirect Cost Rate Test and Evaluation pilot giving firms the option of using a rate of 110 percent in lieu of establishing their own rate. The 110 percent rate is significantly lower than the industry average rate which means most companies would lose money by using the safe harbor rate. FHWA's logic here is that the safe-harbor rate provides an incentive for firms to develop their actual rate in accordance with Federal cost principles.

The FHWA is now looking to adopt the safe-harbor rate as a permanent tool in its oversight process and is seeking public comment on the expansion. Specifically, FHWA is interested in receiving quantifiable estimates of the burden associated with the annual development of an indirect cost rate, hiring a CPA to conduct necessary audits, and any other costs that owuld be avoided by a firm (or contracting agency) in utilizing a safe-harbor indirect cost rate.

Instructions for submitting comments can be found here.

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