Indirect Cost Rate Audits and Reviews
In compliance with 23 U.S.C. 112(b) (2)(B), any contract or subcontract awarded for engineering and design services by state transportation departments, whether funded in whole or in part with Federal-aid highway funds, shall be performed and audited in compliance with cost principles contained in the Federal Acquisition Regulations (“FAR”) of part 31 of title 48, Code of Federal Regulations (“CFR”). As such, consulting firms who anticipate that they will perform services for the Virginia Department of Transportation (“VDOT”) are required to submit documentation which includes an indirect cost rate audit report (“Indirect Cost Rate Audit”) to the Assurance and Compliance Office (“ACO”) for the most recent fiscal year.
The indirect cost rate audit must meet the following requirements:
- The audit shall be conducted by an independent Certified Public Accountant (“CPA”), an agency of the federal government, another state transportation agency or similar independent audit organization.
- The audit shall be conducted in accordance with Generally Accepted Government Auditing Standards (“GAGAS”) issued by the U.S. Government Accountability Office (GAO).
- The audit shall be conducted in accordance with the cost principles and procedures as set forth in 48 CFR, Chapter 1, Part 31.
- For audits performed by a CPA or State DOT, the audit shall follow the most recent American Association of State Highway Transportation Officials Uniform Audit and Accounting Guide for Audits of Architectural and Engineering Consulting Firms (“AASHTO Audit Guide”).
A new or small consulting firm which does not have a relevant contract cost history to use as a base for development of an indirect cost rate or has not had a recent indirect cost rate audit may be eligible for a safe harbor indirect cost home rate of 110% and/or a field rate of 75%. Please refer to the Indirect Cost Rate Submission and Review Process described below, if you are interested in obtaining these rates.
Treatment of Paycheck Protection Program (PPP) Loan Proceeds
FHWA issued authoritative guidance on the Treatment of Paycheck Protection Program Funds for Architectural and Engineering Consultants on March 24, 2021 (See ‘Resources’ section below). VDOT’s review and evaluation of applied PPP loan forgiveness credits will be consistent with said guidance. The consultant is required to apply the credit as a cost reduction to their indirect cost pool or issue a cash refund. Firms that select to apply the credit as a cost reduction to their indirect cost pool are agreeing to use the reduced rate until the credit owed is recaptured based on comparing contract billings with the reduced rate to what the contract billings would have been if the non-reduced rates were used or until following year rates are issued. Once a firm has fully repaid/recaptured their PPP loan forgiveness credit, they may seek approval for the use of their indirect cost rate (without the credit applied) by completing and submitting for consideration the following statement to VDOT’s Professional Services Procurement Office (PSPO):
This is to advise VDOT that (Firm Name) has fully repaid/recaptured its PPP loan forgiveness credit of (Amount), as of (Date), in accordance with FHWA Memorandum HCFB-30. The following contracts are currently subject to the reduced Indirect Cost Rate in the calculation of fully loaded labor rates: (List of Contracts with ID #s)
(Firm Name) hereby requests that the current reduced indirect cost rates on the aforementioned contracts be revised to reflect the firm’s indirect cost rates, without the credit applied, of (RATE), as referenced in the Department’s FAR Rate acceptance letter issued on (DATE).
This statement must be certified with the signature of an executive or financial officer, at a level no lower than a Vice President or Chief Financial Officer, who has authority to bind the firm. Once completed, the signed statement, including the list of any affected contracts (with identification numbers), and the applicable Department FAR Rate acceptance letter must be emailed to: PSPO@VDOT.Virginia.gov. The PSPO office will follow up with each firm with additional guidance. The rate revision should be implemented within the next billing cycle of approx.30 to 60 days.
VDOT Indirect Cost Rate Submission and Review Process
The VDOT Indirect Cost Rate Submission and Review Process policy is effective for any submittal to VDOT ACO on or after January 1, 2019.
Annual Indirect Cost Rate Submittal Requirements
In addition to the indirect cost rate audit report, the consulting firm shall submit additional documents to support compliance with FAR, Federal Highway Administration (“FHWA”), the AASHTO Audit Guide and VDOT policy. The indirect cost rate submittal is due within six months of the consulting firm’s fiscal year end.
The following documents, identified in the checklists, shall be submitted electronically via email in the consulting firm’s annual indirect cost rate submittal to ACO@VDOT.Virginia.gov:
The following checklist will assist firms in submitting the required documents needed for a complete submittal for their non-cognizant indirect cost rate review. When completing the checklist, please do not leave any boxes blank. The checklist is required for each submission to VDOT ACO.
Indirect Cost Rate Acceptance-Checklist for Non-Cognizant Submission (Other than Safe Harbor) Updated April 13, 2021.
The following checklist will assist firms in submitting the required documents needed for a complete submittal for their cognizant reviewed indirect cost rate review submissions. When completing the checklist please do not leave any boxes blank. The checklist is required for each submission to VDOT ACO.
Indirect Cost Rate Acceptance-Checklist for Cognizant Review Submission Updated April 13, 2021.
The following checklist will assist firms in submitting the required documents needed for a complete submittal for Safe Harbor Rates. When completing the checklist please do not leave any boxes blank. The checklist is required for each submission to VDOT ACO.
Indirect Cost Rate Acceptance-Checklist for Safe Harbor Submission ACO-EXT-03, January 21, 2021 .
ACO's Indirect Cost Rate Acceptance Risk Process
The level of review effort to be applied to Architectural and Engineering (A/E) Consultants’ Indirect Cost Rates (ICR), is determined by an established risk assessment process and ACO approved written policies and procedures as specified in 23 CFR 172.5 (c ) and in 23 CFR 172.11 (c ) (2).
ACO conducts an annual assessment of risks for noncompliance with the Federal cost principles (48 CFR, Chapter 1, Part 31.) and considers factors which include the following:
(A) Consultant's contract volume within the State (dollar volume);
(B) Number of States in which the consultant operates;
(C) Experience of consultant with FAHP contracts;
(D) History and professional reputation of consultant;
(E) Audit history of consultant (the date of the last audit);
(F) Type and complexity of consultant accounting system;
(G) Size (number of employees or annual revenues) of consultant;
(H) Relevant experience of certified public accountant performing audit of consultant;
VDOT ACO evaluates consultant risk based on risk factors listed in 23 CFR 172.11, as outlined above. Each risk factor is assigned a weighting which is scaled and measured as approved by ACO management. The scores are accumulated for each consultant, sorted in descending order, categorized into High, Medium, and Low and summarized by category and level of effort.
Assurance and Compliance Office
Virginia Department of Transportation
Forms and Guides
- Internal Control Questionnaire for Consulting Engineers
- Internal Control Questionnaire for Safe Harbor Submission
- Current National Compensation Matrix Tool
- Contractor cost certification form
- FHWA Memorandum - Treatment of Paycheck Protection Program Funds
- AASHTO Internal and External Audit Subcommittee
- Federal acquisition regulations
- Generally accepted government auditing standards (GAGAS)
- Generally Accepted Accounting Principles (GAAP)
- Prompt Pay interest rate history
- Manual for the Procurement and Management of Professional Services
- Locally Administered Project Manual