ODOT Railroad Audit Circular No. 1

Transcription

1 Definitions, Audit Authority, and Guidance for Computing Overhead Rates for Railroads Release Date: January 1, 2010 Application: Unless and until revised by ODOT, this Circular is effective for actual costs incurred by railroads on projects authorized by ODOT or ORDC on or after January 1, 2010.

2 RAILROAD AUDIT CIRCULAR No. 1 OHIO DEPARTMENT OF TRANSPORTATION CENTRAL OFFICE, 1980 W. Broad St., 4 th Floor, COLUMBUS, OHIO SUBJECT: Definitions, Audit Authority, and Guidance for Computing Overhead Rates Last Updated: December 2, 2009 I. DEFINITIONS As used in these Ohio Department of Transportation (ODOT) Railroad Audit Circulars 1. AASHTO refers to the American Association of State Highway and Transportation Officials. 2. Active Warning Devices refers to traffic control devices activated by the approach or presence of a train, such as flashing light signals, automatic gates, and similar devices, as well as manually operated devices and crossing watchmen, all of which display to motorists positive warning of the approach or presence of a train. 3. A cost is allocable if it is assignable or chargeable to one or more cost objectives (projects) on the basis of relative benefits received or other equitable relationship. A cost is allocable to a Government contract only if it is incurred specifically for the contract; benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown. 4. Betterment refers to additions or improvements which provide for higher quality or increased service capability of the operating facility which are provided solely for the benefit of the company. 5. The Code of Federal Regulations (CFR) is the codification of the general and permanent rules published in the Federal Register by the executive departments and agencies of the Federal Government. The CFR is divided into 50 titles that represent broad areas subject to Federal regulation. 49 CFR Chapter 18 sets forth the general guidelines used by Departments of Transportation. 6. Compensation is the total amount of wages, salaries, bonuses, deferred compensation, taxable fringe benefits, and employer contributions to defined contribution pension plans for the fiscal year, whether paid, earned, or otherwise accruing, as recorded in the railroad s cost accounting records for the fiscal year. 7. Construction or Construction Engineering refers to the actual physical construction to improve or eliminate a railroad grade crossing or accomplish other railroad involved work. 8. Cost Accounting Standards (CAS) are issued by the Cost Accounting Standards Board (CASB), a section of the Office of Federal Procurement Policy within the U.S. Office of Management and Budget. The CASB has the exclusive authority to issue and amend cost accounting standards and interpretations designed to achieve uniformity and consistency in the cost accounting practices governing the measurement, assignment, and allocation of costs to contracts that involve Federal funds. The CAS are codified at 48 CFR Chapter 99. Cost objective generally means a contract for

3 Page 3 which cost data are desired and for which provision is made to accumulate and measure the cost of associated processes, products, or jobs. 9. The DCAA Contract Audit Manual (CAM) is the definitive interpretation of FAR Part 31. The CAM is published semiannually by the Defense Contract Audit Agency (DCAA). 10. The Federal Acquisition Regulation, Part 31 (FAR). The FAR is codified at 48 CFR Part 31. The FAR is the primary regulation that governs the acquisition of supplies and services with Federal funds. 11. The term Federal-Aid Contracts refers to agreements for the acquisition of supplies and services that are partially- or fully-funded from federal sources. Note: In determining the allowability of costs, the treatment of State-funded contracts is identical to that of Federal-Aid contracts. 12. The Federal Travel Regulation (FTR) is contained in 41 CFR Chapters 300 through 304. The FTR implements statutory requirements and Executive branch policies for travel by Federal civilian employees and others authorized to travel at the Federal Government s expense. Certain FTR provisions are incorporated into the FAR and apply to contract costs charged by railroads. 13. The Federal Railroad Administration (FRA) is one of ten intermodal agencies within the U.S. Department of Transportation, whose primary purposes are to promulgate and enforce rail safety regulations; administer railroad assistance programs; conduct research and development in support of improved railroad safety and national rail transportation policy; provide for the rehabilitation of Northeast Corridor rail passenger service; and consolidate government support of rail transportation activities. 14. FHWA refers to the Federal Highway Administration. 15. Force Account Work refers to work performed by or provided on behalf of the railroad. 16. Government Auditing Standards, also known as Generally Accepted Government Auditing Standards (GAGAS), are issued by the U.S. Government Accountability Office (GAO). 1 GAGAS prescribe general procedures and professional standards that must be applied when performing audits, reviews, or attestation examinations of commercial entities that conduct business with governmental entities. 17. Grade Separation refers to the separation of levels at which roads, highways, railroads, and other paths cross one another in order to prevent conflicting rows of traffic or the possibility of accidents. 18. Incurred Cost refers to the various elements of total cost on Railroads submitted Statements of Direct Labor, Fringe Benefits, Liability Insurance, and General Overhead; invoices; or other claims for reimbursement. Incurred costs include direct and indirect (overhead) charges, as well as related projects costs such as costs associated with subconsultants and materials. 19. An incurred cost audit involves an examination of the accounting records and source documents that support submitted costs billed against Federal-aid contracts. The examination also includes an assessment of the auditee s internal controls, timekeeping practices, and general operating policies. 20. Internal Controls are policies, procedures, and activities designed to help an organization achieve its management objectives, safeguard resources, report reliable information, and comply with applicable laws. While internal controls cannot completely eliminate the risk of error, fraud, or mismanagement, well-conceived procedures and a good control environment can minimize the potential for abuse. 1 Government Auditing Standards, GAO G (Washington, D.C.: July 2007). This document is commonly referred to as the GAO Yellow Book.

4 Page Memorandum of Understanding (MOU) refers to an agreement effective June 23, 1997, between ODOT and the ORDC, which outlines the duties and responsibilities of each agency in the joint administration of programs related to highway-railroad safety and construction projects. 22. ODOT refers to the Ohio Department of Transportation. ODOT may also be referred to as the State. 23. ODOT Contract Audit Circulars (CACs) are clarifications and interpretations of Part 31 of the Federal Acquisition Regulation (FAR) and related laws, regulations, and policies. The Circulars are available on the Internet at The Circulars have been adopted as official ODOT policy. 24. The Ohio Rail Development Commission (ORDC) was created in 1994 by the Ohio General Assembly under Ohio Revised Code Chapter 4981 as an independent commission within the Ohio Department of Transportation (ODOT). The ORDC uses Federal Highway Administration funds allocated by ODOT to fund at-grade crossing safety improvements. 25. Passive Warning Devices refers to traffic control devices, including signs, markings and other devices, located at or in advance of grade crossings to indicate the presence of a crossing but which do not change aspect upon the approach or presence of a train. 26. Preliminary Engineering, also know as PE, refers to the work necessary to produce construction plans, specifications, and estimates to the degree of completeness required for undertaking construction thereunder, including locating, surveying, designing, and related work. 27. Railroad refers to all rail carriers, publicly-owned, private, and common carriers, including line haul freight and passenger railroads, switching and terminal railroads and passenger carrying railroad such as rapid transit, commuter and street railroads. For the purposes of these circulars, the railroad is the owner of the affected rail line and provides services under Federal-Aid contracts. 28. Salvage refers to materials not accepted by the Railroad for reuse by the company, yet holds a net sale value. 29. Scrap refers to discarded materials that hold no resale value. 30. A Statement of Direct Labor, Fringe Benefits, Liability Insurance, and General Overhead is a schedule that shows details regarding a railroad s actual total incurred costs for an accounting period. For enhanced readability, in these Railroad Audit Circulars the term overhead schedule is used synonymously with Statement of Direct Labor, Fringe Benefits, Liability Insurance, and General Overhead, Additive Rate, Burden Rate, or Surcharge Rate. A sample railroad overhead schedule is presented in Attachment Title 23 of the Code of Federal Regulations, Part 140, Subpart I (23 CFR 140) is the codification of regulations pertaining to Railroad Reimbursement. This subpart prescribes policies and procedures on railroad work done on projects undertaken pursuant to the provisions of 23 CFR 646. FAR Part 31 and 23 CFR 646 are incorporated by reference into 23 CFR Title 23 of the Code of Federal Regulations, Part 646, Subpart B (23 CFR 646) is the codification of policies and procedures for advancing Federal-aid projects involving railroad facilities. 33. The total cost that may be billed against a Federal-aid project is the sum of allowable direct and indirect costs allocable to the contract, less any allocable credits.

5 Page 5 II. AUTHORITY ODOT s authority to conduct incurred-cost audits is granted by 23 U.S.C. sections 112(b)(2)(C) and (D) as well as 23 CFR (c), which provides that contracts or subcontracts funded in whole or in part with Federal-aid highway funds shall be audited in compliance with the cost principles contained in FAR Part 31 and 23 CFR 140. Through a Memorandum of Understanding between ODOT and the ORDC, ODOT is granted the authority to conduct final audits of ORDC projects. III. ISSUE During an incurred-cost audit, the auditor must determine whether the direct and indirect costs proposed by a railroad are allowable. IV. ALLOWABILITY FAR Part 31 and 23 CFR 140 establish minimum requirements regarding the allowability of total costs charged against Federal-aid contracts. This includes provisions for direct project costs, as well as indirect project costs that are used to establish an overhead rate. In conjunction with the FAR requirements, the Ohio Department of Transportation (ODOT) has the authority to establish additional, more restrictive guidance, as appropriate. Such ODOT requirements, if different from the FAR, will be discussed in subsequent Railroad Audit Circulars. Pursuant to 23 CFR (a), a state may elect to reimburse the railroad company for its overhead and indirect construction costs. ODOT has elected not to reimburse railroads for these indirect costs. Therefore, any indirect cost rate proposed by the railroad may not include these costs. Indirect costs associated with engineering or construction services acquired by the railroad through continuing contract or low bid are subject to the provisions set forth in ODOT Railroad Circular No. 4, Subcontracted Costs. However, the State may reimburse subcontracted engineering and construction services for overhead and indirect construction costs. Refer to ODOT Railroad Audit Circular No. 4 for further guidance. To be considered allowable contract charges, costs submitted by the railroad must be: 1. reasonable; 2. allocable either directly or indirectly to specific contracts; 1 3. allowable in accordance with the FAR, 23 CFR 140, 23 CFR 646, and ODOT policies; 4. in compliance with terms of the contract; and 5. in compliance with Generally Accepted Accounting Principles (or Cost Accounting Standards, when applicable). V. APPLICATION Upon request, a railroad may be required to prepare and submit a proposed overhead rate in accordance with the FAR, ODOT Railroad Audit Circulars, ODOT Contract Audit Circulars, and State regulations. To effect the preparation of its overhead schedules, the railroad must maintain accounting records that properly accumulate, segregate, and allocate costs as required by the FAR. Accounting systems with adequate segregation of costs exhibit the following characteristics: Direct and indirect expenses are recorded in separate accounts. 1 See definition I.3 above for more details.

6 Page 6 Logically-titled accounts are maintained within each major category of expense. Commingling of items is kept to a minimum. Allowable and unallowable costs are maintained in separate, dedicated accounts. Per FAR (a), the railroad is required to substantiate that the overhead or loaded labor rates charged are in compliance with all applicable Federal regulations, including FAR Part 31 and all ODOT Contract Audit Circulars. If the railroad is unable to meet the required burden of proof, ODOT may elect to enforce the rates established in the latest edition of the ODOT Construction and Material Specifications Manual, section (C)(2), Extra Work. Enforcement of this policy is solely at the discretion of ODOT. Refer to ODOT Railroad Audit Circular No. 4 for additional guidance and application. If the home office of a railroad is located outside Ohio, ODOT will accept rates approved by the railroad s home state and the FHWA. In the absence of home state and FHWA approval, overhead schedule submission may be required. In the event that the overhead rate(s) of a railroad or its subcontractors/subconsultants has been updated and approved by ODOT or its home state, rate adjustments must be reflected on subsequent invoices within a reasonable time frame. Use of rates not currently approved and in effect is prohibited. VI. OVERHEAD-ALLOCATION BASE ODOT advocates the use of total labor cost (TLC) as the primary allocation base for overhead. TLC is the preferable allocation base because TLC data are readily available, and computation of the overhead rate is a simple and economical process for the railroad. Additionally, the use of TLC greatly facilitates comparability among railroads, and audit verification of claimed overhead costs is relatively straightforward. This is the case because labor costs usually are controlled by payroll records and the general books of account. Note: All direct labor costs incurred for, and associated with, specific projects must be included in the labor base regardless of whether the labor is billed directly to a client. The shifting of unbilled direct labor costs to overhead is prohibited by FAR (b). Additionally, the shifting of DLC between or among different projects is prohibited by FAR (a). In cases where TLC fails to provide an adequate causal link between the incurrence and allocation of costs, it may be permissible to use a secondary allocation base for a portion of the overhead costs. For example, costs associated with storage of materials may be more equitably assigned to contracts through the use of an allocation base tied to the total stock value of all materials housed in said facility rather than through a TLC base. Thus, for special cost items, deviations from the TLC base will be considered on a case-by-case basis. VII. OVERHEAD-RATE COMPUTATION To compute annual overhead rates, railroads must divide total allowable overhead costs (i.e. the sum of all allowable and allocable fringe-benefit and other costs) excluding general and administrative costs by total labor cost. A sample overhead schedule is presented in Attachment 1-1. Additional guidance is available in ODOT Railroad Audit Circular No. 4 regarding the preparation of overhead schedules for subcontractors and subconsultants.

7 Page 7 VIII. AUDIT TESTING ODOT auditors will examine proposed overhead costs to determine allowability. Any costs that are prohibited by the FAR, ODOT Railroad and Contract Audit Circulars, or State regulations will be disallowed. In the event that allowable and unallowable costs are commingled in a single account, the auditors will arrive at a disallowance percentage based on a test sample of the account s underlying transactions. This percentage will be applied to the total account balance to arrive at a proposed disallowed dollar amount. Note, however, that this procedure only will be performed in the first overhead audit of the railroad. If the same type of commingling occurs in a subsequent year, the entire account balance will be disallowed unless the railroad prepares a complete, detailed schedule that discloses each allowable and unallowable cost contained within the account in question. IX. REFERENCES FAR (Determining Reasonableness) FAR (Determining Allocability) 23 CFR 140, Subpart I (Railroad Reimbursement) 23 CFR 646, Subpart B (Railroads) ODOT Contract Audit Circulars Memorandum of Understanding between ODOT and the ORDC For further guidance, see Titles 23 and 48 of the Code of Federal Regulations and subsequent ODOT Railroad Audit Circulars

8 ODOT Railroad Audit Circular Attachment 1-1: Sample Overhead Schedule Sample Railroad Company, Inc. Statement of Labor, Fringe Benefits, and Liability Insurance: Maintenance of Way For the Year Ended December 31, 2008 Total Costs Per Account No. Account Description General Ledger/Income Statement Unallowable Costs Note(s) Allowable Costs Percentage of Direct Labor 1000 Total Labor: Maintenance of Way 5,300,000-5,300, % Allocable Fringe Benefits and Other Allowable Overhead: Maintenance of Way 2001 Vacation and Other Paid Leave 237, , % 2002 Holiday Pay 165, , % 2003 Supplemental Sickness 47,000-47, % 3001 FICA 397, , % 3002 Workers' Compensation 565, , % 3003 FUTA 51,000-51, % 3004 SUTA 371, , % 4001 Health and Welfare Insurance 1,015,000-1,015, % 4002 Railroad Retirement and Unemployment Insurance 1,130,000 (200,000) 1 930, % 5001 Small Tools 61,150 (1,350) 2 59, % 5002 Training and Safety 72,350-72, % Total Fringe Benefits 4,112,800 (201,350) 3,911, % Allocable Liability Insurance: Maintenance of Way 5001 Liability Insurance Expense 848, , % Overhead Rates (as a percentage of total labor cost) Fringe Benefits 73.80% Liability Insurance 16.00% Notes: (1) Pension costs assigned to the accounting period but not funded during the same accounting period are disallowed per FAR (J)(2)(i). (2) Small tools charged directly to projects are disallowed per FAR