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Consulting Firms for Small Business - PDF


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                           CONSULTANT INSTRUCTION

DATE:          March 27, 2000                 CODE: 00- 04           SUPERSEDES:


CONTACT PERSON: Stan Harrison Audit Questions TELEPHONE: (518) 457-3180
                          Mark Moody Contract Questions                         (518) 457-2601
This Consultant Instruction provides background information and eligibility guidance for the
establishment of interim overhead rates for small firms. The objectives of this program for small
firms are:
        a.             To reduce the processing time for contracts with small firms, particularly
                       those new to Department work, and

       b.              To reduce the frequency of disputes regarding overhead rates between the
                       Department and small firms.

The Department will annually evaluate the effectiveness of the program in meeting its objectives.

The Department enters into contracts with engineering, survey and environmental firms (consultants)
to provide design, bridge inspection, construction inspection, survey and various other professional
engineering and related services. Pursuant to 23 CFR 172, compensation for services is negotiated
to provide for reimbursement of allowable costs incurred by the consultant plus a fixed/net fee.

A pre-award audit evaluation of a firm’s indirect costs and the adequacy of its accounting system is
performed by the Department’s Contract Audit Bureau during contract negotiation. Annual billing
rate reviews establish reimbursement rates for overhead for ongoing contracts. Final audits are
performed on submitted rates to close-out contracts based on actual allowable costs. Current
procedures require that the consultant maintain accounting systems and controls that provide for the
accumulation of actual allowable costs in accordance with Federal Acquisition Regulations (FAR).
Consultants are required to submit an annual overhead report (CONR 385) which is subject to review
and audit.

Most Department contracts involve a prime consultant and one or more sub-consultants. Sub-
consultants are engaged by prime consultants to provide specialized capabilities and to assist the
Department in meeting Disadvantaged/Minority/Women’s Business Enterprise goals (D/M/WBE)
goals. Although sub-consultant contracts can represent a substantial percentage of work, many
contracts are with small consulting firms for lower dollar amounts.

Current procedures subject all consultants and sub-consultants to the same accounting system and
reporting/audit requirements, regardless of the size of the firm, the amount of work to be performed
or the firm’s experience with government contracting. For smaller firms, doing business with the
Department for the first time, conformance with the FAR requirements can be burdensome and can
affect processing of initial agreements. In many cases, serious compliance issues arise on pre-award
and close-out audit that can affect:
2.      The Department’s ability to advance new contract awards in a timely manner,

3.      The prime-sub relationship in advancing work under these contracts, and,

4.      Cash flows for reimbursement of ongoing work and at close-out.

This Consultant Instruction will enable the Department to negotiate and pay smaller consulting firms
a fixed overhead rate during the eligibility period on their contracts. The fixed rate is not subject to
audit. The consultant and the Department will be certain what the overhead reimbursement rate will
be and there will be no rate adjustments on the final audit. The fixed rate gives the consultant
adequate time to develop an understanding of the Federal Acquisition Regulations (FAR) rules and
implement accounting systems and procedures that are in compliance for future contract work.

With the exception of sole owner/employee firms, all small firms taking advantage of this program
are expected to:
1.     Take immediate steps to implement adequate accounting for overhead in accordance with
       FAR Part 31 (see DOT web site:, “Doing Business with DOT”,
       “Consultants' Publications, Forms, and Instructions”),

2.     Submit the CONR-385 Contract Service Firm Annual Financial Ownership and Accounting
       Practices report (see web site) on the normal annual basis, and

3.      Notify the Contract Audit Bureau and the Contract Management Bureau when their systems
        and procedures are in place.

Only small consulting firms may participate in this program. The period of time in which a firm is
eligible to participate is as follows:

4.     For sole owner/employee businesses there is no time limit.

5.     For those firms that are not sole owner/employee businesses, eligibility is time-limited once
       the first contract with the firm has been executed with a fixed overhead rate set in accordance
       with Consultant Instruction. In these cases, additional contracts may be negotiated during
       the eligibility period and will be written using the already established fixed overhead rate.
       The fixed overhead rates set under this procedure may no longer be used on any newly
       designated work or supplemental contracts after the eligibility period has ended. The
       eligibility period will end:

        a.     no later than six months after the end of the firm’s first full fiscal year subsequent to
               execution of the firm’s first contract with the fixed overhead rate,
       b.      in no case more than 30 months after execution of the first contract using the fixed
               overhead rate.

       c.      automatically once the status described in #3 (below) are reached.

3.     The Department will proceed to negotiate a specific overhead rate with the consultant on
       both new and supplemental contracts, regardless of the size of the business, based on audit
       upon completion of any FAR based pre-negotiation audit or overhead audit, by the
       Department or any other governmental agency, that finds the accounting system adequate for
       establishing costs in accordance with FAR.

Please see Appendix 1 for detailed eligibility information.

Any firm that wishes to avail itself of the interim overhead rate for small firms should complete,
execute and submit the attached affidavit to the Contract Management Bureau within 10 days of
notification of designation. The Department will make a determination as to eligibility and then
inform the firm (or the prime and the firm in the case of a subconsultant).

1. In order to be eligible for participation, small business entities must meet each of the following
   tests. The firm must:
   a.         be qualified as a small business according to the Small Business Administrations
              Section 8a criteria;

     b.         be a business with estimated total annual direct labor of $500,000 or less, or an
                established business whose total annual direct labor in their immediately preceding
                year is $500,000 or less; and,

     c.         not have been the subject of any audit or pre-negotiation audit, performed by an
                independent CPA or government auditor, in accordance with government auditing
                standards, generally accepted auditing standards or standards for attestation
                engagements of the American Institute of CPA’s (AICPA), the purpose of which
                included qualification for cost reimbursement type contracts or recommending
                reimbursement of cost reimburse work under Federal Acquisition Regulations
                Subpart 31 of Title 48 of CFR.

2.   Firms meeting the criteria in Item 1 that are designated for participation as a consultant or
     subconsultant for a Department contract, whose proposed participation is valued at less than the
     thresholds established in 23 CFR 172 for pre-award audit waivers (currently $250,000), shall
     be offered a fixed overhead rate that shall apply for pricing, billing and final payment on such
     contracts. For the purpose of determining the firm’s level of participation, the total of estimated
     direct technical labor costs, overhead, and estimated fixed/net fee shall be used.

3.   A fixed overhead rate that will be offered to firms that are not sole owner/employee firms (also
     see Item 5 below) will be ninety percent (90%) of the Department’s periodically established
     overhead rates for determining bottom line pricing on consultant contracts. Rates shall be based
     on applicable type of work, complexity, office/field and geographic location criteria used by the

     The data base provides reports of overhead rates in several different categories. First, it divides
     firm location into downstate (NYC, Long Island, Westchester, Rockland) and upstate ( all other
     counties), using the location of the firm’s primary office. The report indicates industry rates for
     office, field and combined operations. Finally, it provides industry rates at the 50th percentile
     for routine projects, 65th percentile for moderately complex projects, and 75th percentile for
     complex projects. The complexity of a firm’s work on a project is determined by the consultant
     job manager based on criteria established by the Department.

4.   Sole proprietorships and independent contractors with only a sole owner/employee, which meet
     the criteria in Item 1., shall be offered a fixed overhead rate that is 75% of the appropriate
     category rate from the overhead rate tables described above.

5.   The fixed overhead rates will be applied to the non-premium direct labor of bona fide
     employees (i.e. are on the consultant firm’s payroll, and meet the current IRS tests as

6.   Consulting firms eligible for fixed overhead rates are required to prepare and submit the CONR
     385, Annual Overhead Report, and other reporting forms for each of their fiscal years in which
     they have active contracts on Department projects.
7.   Small businesses which have been the subject of any audit or pre-negotiation audit that was
     performed by an independent CPA or a government agency within the last two years, in
     accordance with either:
     a.    government auditing standards, or

     b.    the AICPA statement of standards for attestation engagements for the purpose of
           qualifying for cost reimbursement work or recommending reimbursement of for cost
           reimburse work under Federal Acquisition Regulations Subpart 31 of Title 48 CFR,

     shall not be eligible for the fixed overhead reimbursement. Such firms shall promptly submit
     the audit to the Department for review. If such audit discloses material accounting system
     weaknesses, the Department may determine that it is in its best interests to use these procedures
     until the cited deficiencies are corrected or the two year eligibility period ends, whichever is

8.   Direct non-salary costs for normal business operation will generally not be allowed for
     consulting firms who participate in the fixed rate procedures. Exceptions may be granted by
     the Director of the Contract Management Bureau in cases where direct non-salary costs are
     purchases required by the scope of the project, or when they represent a substantial percentage
     of estimated direct labor on the project.

9.   Consulting firms will be advised of the requirements to maintain adequate systems, procedures
     and documentation to support time charged and payroll rates paid. Guidelines are available from
     the American Consulting Engineers Council (ACEC) in a document entitled, Financial
     Management for Design Firms. Firms should also access the NYSDOT Web Site at, Doing Business with DOT, Consultant Section for Part 31 of the
     FAR, the AASHTO/FHWA Consultant Overhead Audit Guide and other information. Time
     charged and actual hourly rates will continue to be subject to pre-award and post audit, as are
     any direct non-salary cost (see above) or sub-contractor costs.

10. This procedure does not apply in cases where an eligible consultant has a current or active
    blanket pre-award audit derived overhead rate on file with the Department, or if any other
    governmental entity, CPA firm or prime consultant has performed recent pre-award audit work.
    If there is a Department pre-award audit available, it will be used regardless of the amount of
    the contract.

11. If the consultant’s actual participation on the contract exceeds the 23 CFR 172 threshold
    (currently $250,000), the overhead rates are subject to pre-award review and audit.

12. Participation by consultants who are not sole proprietors or independent contractors with no
    other employees is limited to contracts negotiated before a date that is six months after the
    firm’s first full fiscal year has elapsed (not to exceed 30 months) after execution of the first
    NYSDOT contract. For contracts negotiated after the expiration of the eligibility period, pre-
    award audits of the adequacy of the firm’s accounting system for cost reimbursement work and
    actual FAR based overhead submitted rates will be required.

13. The Department will evaluate the effectiveness of the plan in meeting the stated objectives of
    reducing processing time for contracts and minimizing disputes within the first and second year
    after implementation.
I,                                , in my capacity as                                     with the firm of
           Name                                             Title

_________________________, located at ______________________________________,

______________________________, do hereby affirm that the following responses are true
and accurate:
                                                                        True    False

14. This firm has been in existence for less than one year.                                      ____   ____

15. The annual direct labor base of the firm is less than or equal to $500,000.                  ____   ____

16. The firm has not been and is not now being subjected to a FAR compliant
    audit.                                                                                       ____   ____

17. I am the sole owner/employee of the firm.                                                    ____   ____

18. The firm has a time sheet system as part of its accounting system                            ____   ____
    (Please attach a blank copy of the firm’s time sheet form to this affidavit)

I recognize that this affirmation is submitted for the express purpose of inducing the State of
New York Department of Transportation to award a contract; acknowledges that the Department
may in its discretion, by means which it may choose, determine the truth and accuracy of all
statements made herein; acknowledges that intentional submission of false or misleading
information may constitute a felony or misdemeanor as defined in the Penal Law or may be
punishable by fine according to applicable sections of the United States Code; and states that
the information submitted in this affirmation and any attached pages is true, accurate and

Sworn to before me this

_____day of _______________,________.                   __________________________
                                                                Signature of Principal/Officer

__________________________________                      __________________________
                  Notary Public                                              Title

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