First Annual FAR Overhead Audit?
How Construction & A/E Firms Can Prepare for Their First Annual FAR Overhead Audit and Pass State DOT Review
Preparing for your first annual FAR overhead audit requires construction and architecture / engineering (A/E) firms to organize their financial systems around Federal Acquisition Regulation (FAR) Part 31 cost principles and AASHTO guidelines. To successfully pass the audit, firms must scrub unallowable expenses from general ledgers, reconcile all financial records, draft a compliant Schedule of Indirect Costs, assemble complete vendor supporting documentation, and select a specialized independent CPA. Following these structured preparation steps secures a certified, defensible indirect cost rate for state Department of Transportation (DOT) contracts.
Key Takeaways
Preparing for your first annual FAR overhead audit requires construction and architecture / engineering firms to meticulously organize financial records and adhere to strict federal cost principles. Following a structured preparation process ensures your indirect cost rate is fully certified, defensible, and ready for state DOT review.
Here is a quick summary of how to prepare for your first annual FAR overhead audit:
- Scrub unallowable expenses. Review your general ledger to remove non-reimbursable costs like advertising, entertainment, and lobbying before the auditor arrives.
- Reconcile financial records and payroll. Ensure your accounting ledgers, job-cost records, and quarterly payroll tax filings match without mathematical discrepancies.
- Build a compliant Schedule of Indirect Costs. Structure your cost pools and calculate your final overhead rate in strict alignment with FAR Part 31 principles.
- Gather robust supporting documentation. Compile signed vendor invoices, lease agreements, insurance policies, and officer compensation studies for fast reviewer access.
- Select an experienced independent CPA. Partner with specialized auditors who understand AASHTO guidelines and Government Auditing Standards to streamline your review.
Scrubbing Unallowable Expenses From Your General Ledger
Internal controls must catch and isolate unallowable costs long before an independent auditor reviews your financial records. Federal regulations prohibit the government from reimbursing specific categories of firm spending under public contracts.
Start by performing an internal review of all expenses to remove clearly unallowable items like advertising and lobbying. Management bears the primary responsibility for scrubbing non-reimbursable expenses from the indirect cost pool. You must exclude alcohol, entertainment, interest charges, and political contributions from your overhead rate calculations. Segregating these items protects your firm from auditor penalties. Implementing proper FAR Part 31 unallowable cost segregation ensures your submission remains clean and fully compliant.
Reconciling Financial Records and Payroll Data
Auditors begin their review by verifying that your financial summaries match your underlying daily accounting records. Any discrepancy between payroll filings and general ledger entries raises immediate regulatory concerns.
Ensure all financial records, including general ledgers and payroll data, are reconciled and up to date. Reconcile total payroll against your quarterly tax filings to prove complete labor accounting. Maintain job-cost ledgers on an accrual basis in accordance with GAAP. Verifying these numbers eliminates mathematical discrepancies that delay audit approvals. Establishing FAR compliant general ledger reconciliation habits protects the integrity of your overall indirect cost pool.
“Thorough internal preparation—from scrubbing unallowable expenses to reconciling payroll ledgers—is the key to securing a certified, audit-ready FAR overhead rate.”
Constructing the Schedule of Indirect Costs
The Schedule of Indirect Costs serves as the primary financial document that your independent CPA reviews during an audit. This schedule establishes your final reimbursement rate on public projects.
Prepare your “Schedule of Indirect Costs” in strict alignment with the FAR Part 31 cost principles. This schedule calculates your final overhead rate by dividing allowable indirect expenses by total direct labor. Structure your cost pools logically to separate fringe benefits, facility overhead, and general administrative expenses. Proper Construction and A/E indirect cost pool allocation ensures your overhead rate reflects your firm’s actual operational costs.
Assembling Complete Vendor Supporting Documentation
State transportation auditors require concrete proof for every major financial transaction recorded in your accounting software. Incomplete files often lead to costly audit adjustments.
Gather supporting documentation for major expense categories, such as lease agreements and insurance policies. Compile signed vendor invoices, corporate tax returns, timesheets, and officer compensation studies. Organize your documents digitally in a structured audit folder for fast reviewer access. Having complete records prevents auditors from disallowing legitimate business expenses during testing.
Partnering with an Experienced A/E Industry Auditor
Not all accounting firms understand the unique regulatory environment governing architecture and engineering contracts. Selecting the wrong firm can lead to rejected submissions at the state level.
Select an independent auditor with specific experience in the A/E industry and AASHTO guidelines. Work with CPAs who perform audits according to Government Auditing Standards (GAGAS). An experienced auditor understands state DOT expectations and helps streamline the contract review process. Selecting qualified specialized CPA Construction and A/E overhead audit services protects your contract profitability and ensures long-term regulatory success.
Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.
Questions?
Jacob specializes in financial reporting, single audits, and complex regulatory compliance. He works closely with architecture, engineering, and construction firms to ensure AASHTO and FAR Overhead Rate Audit compliance. He also provides tax, audit, review, and compilation services, as well as business consulting.