OVERHEAD RATE AUDITS
Our Experience
Architects and engineers operating under government contracts are required to conduct an annual audit of their overhead rates and indirect costs in accordance with the Federal Acquisition Regulation Part 31 (FAR).
Gray, Gray & Gray can help you comply with this requirement through our proven overhead audit process. We have conducted hundreds of successful FAR audits for architecture, engineering, design and construction firms of all types and sizes. Our special expertise in architectural firms, engineering firms and construction companies working on government funded projects results in every audit meeting all guidelines. We are well versed in the provisions of FAR Part 31, Generally Accepted Government Audit Standards (GAGAS), Cost Accounting Standards and the guidelines and recommendations in the AASHTO Uniform Audit and Accounting Guide.
In addition to federal overhead audits, we have extensive experience working with various state agencies, which frequently have their own unique audit requirements and deadlines.
Our Services
Our overhead rate services include:
- Perform audit of overhead rates for submission to federal and state agencies
- Review of historical FAR overhead rates and disallowed expenses
- Review of internal controls and policies to ensure compliance with regulations
- Calculation of reasonable compensation
- Calculation of facilities cost of capital
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Frequently Asked Questions (FAQ)
For architecture, engineering, design, or construction firms working on government-funded projects, fees are regulated by the Federal Acquisition Regulation (FAR). An overhead rate audit verifies that indirect costs in your billing rate, such as administrative salaries, rent, utilities, and insurance, are allowable, allocable, and reasonable under FAR Part 31. Without an audited overhead rate, many state and federal agencies will not award contracts or process final billings. This audit is a mandatory requirement for government business.
FAR distinguishes between allowable overhead costs and the firm’s business expenses. Common disallowed costs include entertainment and alcohol, interest expense, certain advertising and public relations, contributions and donations, and compensation exceeding FAR’s reasonableness standards. Fines and penalties are also disallowed. Some costs, such as travel, are partially allowable up to specified per diem rates. Understanding these distinctions before the audit is preferable to discovering them during the process.
The overhead rate is calculated as a percentage of direct labor cost by dividing total allowable indirect costs (overhead expenses not billed directly to projects) by total direct labor. For example, $1 million in allowable overhead divided by $2 million in direct labor results in a 50% overhead rate. This rate is applied when billing the government, in addition to direct labor charges. Accurate calculation is essential for compliance and profitability; errors can lead to lost revenue or risky overbilling.
Possibly. While FAR Part 31 governs federal contracts, state agencies often have distinct audit requirements, deadlines, and cost standards. Some states closely follow FAR; others, especially state DOTs funding infrastructure projects, have their own frameworks. Firms operating in multiple states may face several audit requirements with different timelines. We are experienced with the specific agencies you contract with, offering more value than a firm learning the requirements alongside you.
Most government contracts and state agencies require an annual overhead rate audit covering the prior fiscal year. The audited rate is usually submitted before new contracts are awarded or final billings processed. Beyond compliance, updating your rate annually protects your firm: if costs rise, an outdated rate means billing below actual costs, eroding margins. Maintaining a current rate is both a regulatory and business management necessity.