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									ODOT Contract Audit Circular No. 10

   Interest and Other Financial Costs and
       Facilities Capital Cost of Money

           Effective Date: January 1, 2005

           Last Updated: March 24, 2006
            CONTRACT AUDIT CIRCULAR No. 10

            OHIO DEPARTMENT OF TRANSPORTATION
                  CENTRAL OFFICE, 1980 W. Broad St., 4th Floor, COLUMBUS, OHIO 43223


SUBJECT:                 Interest and Other Financial Costs and Facilities Capital Cost of
                         Money


Effective Date:          January 1, 2005

Last Updated:            March 24, 2006


I. ISSUES


During an incurred-cost audit, the auditor may encounter interest costs that are included in a consultant’s
overhead. Additionally, as part of the overhead-submission process, a consultant may propose a charge
rate for Facilities Capital Cost of Money (FCCM).


II. ALLOWABILITY


A. Interest and Other Financial Costs

The Federal Acquisition Regulation (FAR) provides that interest costs associated with the borrowing of
money (however represented), costs of financing or refinancing of capital (including interest associated
with capital leases), legal and professional fees paid in connection with preparing prospectuses, and
costs of preparing and issuing stock rights are unallowable.


B. Facilities Capital Cost of Money (FCCM)

Although interest costs associated with the financing of capital are unallowable, some costs associated
with the consultant’s investment in fixed assets are allowable. Specifically, FCCM is an imputed cost that
is allowable in lieu of interest. FCCM is not required to be recorded in the consultant’s formal accounting
records; instead, FCCM is computed as a charge rate based on the following factors:

    •   The average annual net book value of the consultant’s investments in the fixed assets used for
        allowable business activities as established by the Cost Principles of FAR Part 31,
    •   The prorated average Prompt Payment Act Interest Rate determined by the Secretary of the
        Treasury for the accounting period in question, and
    •   The consultant’s direct labor base used to determine overhead rates.

FCCM may be considered to be an indirect expense associated with the general indirect cost pool;
however, FCCM should be a separately identified charge rate.
ODOT Contract Audit Circular No. 10
Re: Interest and Other Financial Costs and Facilities Capital Cost of Money
Page 3
Effective Date: January 1, 2005

III. COMPLIANCE REQUIREMENTS


Consultants who propose an FCCM rate must submit a completed schedule with detailed computations
supporting the rate. An acceptable format for the FCCM schedule is provided in Circular Attachment
10.1-1. All submitted information is subject to verification by ODOT auditors.


IV. EXAMPLES


Example 10-1. Consultant W financed a new machine under a capital lease agreement. The lease
terms provide for Consultant W to make annual year-end payments of $35,000 for all 8 years of the
machine’s useful life. Each payment includes 9 percent interest. At the end of 8 years, the firm has the
option to purchase the machine for $100.

Analysis: Although the yearly depreciation associated with leased equipment may be included in
overhead, the entire $35,000 yearly payment must be excluded from overhead. (Note: Interest is
unallowable, and the amortization of the capital lease results in a reduction to a liability account—not an
expense.)


Example 10-2. Consultant X constructed a new building to be used exclusively on Government
contracts. The firm obtained a loan, the proceeds of which were used to finance the construction of the
building.

Analysis: The interest costs incurred throughout the life of the loan must be excluded from overhead.
However, note that Consultant Y is entitled to include the net book value of the building in its Facilities
Capital Cost of Money (FCCM) computation, and therefore will be entitled to some cost recovery in lieu of
interest.


Example 10-3. Consultant Y recovered $100,000 in FCCM on its Government contracts. The firm’s
actual interest costs related to the cost of its capital assets was $120,000.

Analysis: Although the firm’s actual interest expense exceeded FCCM cost recovery by $20,000, no
portion of the excess is allowable in overhead.


Example 10-4. For the year ended December 31, 2003, Consultant Z incurred $700,000 of direct labor
costs. At beginning of the 2003, the net book value (NBV) of the fixed assets (property, plant, and
equipment) used by the firm was $135,000. By the end of 2003, the NBV of the fixed assets increased to
$175,000.

Analysis: As detailed in Circular Attachment 10.1-1, Consultant Z is entitled to charge FCCM at a rate of
0.82 percent. Thus, the firm may charge $0.0082 for each dollar of direct labor incurred in the
performance of ODOT contracts.
ODOT Contract Audit Circular No. 10
Re: Interest and Other Financial Costs and Facilities Capital Cost of Money
Page 4
Effective Date: January 1, 2005

Example 10-5. An audit of Consultant Z’s year-2003 overhead costs revealed that 20 percent of the
miles driven in automobiles owned by firm related to personal commuting and/or unallowable marketing
activities. Accordingly, the firm must adjust its FCCM rate. As a result of the adjustment, the net book
values for the fixed assets at the beginning and end of 2003 were $118,000 and $165,500, respectively.

Analysis: Only the portion of fixed assets used for allowable business activities within the meaning of FAR
Part 31 may be included in the FCCM computation. Accordingly, Consultant Z must disallow 20 percent
of the automobiles’ carrying value. As detailed in Circular Attachment 10.1-2, Consultant Z is entitled to
charge FCCM at a rate of 0.75 percent. Thus, the firm may charge $0.0075 for each dollar of direct labor
incurred in the performance of ODOT contracts.


V. REFERENCES


•   FAR 31.205-10 (general Cost of Money clause), see also 48 CFR 9904.414 (also known as CAS
    414; includes criteria for measurement, assignment, and allocation of Cost of Money; FAR 31.205-10
    makes CAS 414 applicable to all contracts, even contracts which are not CAS-covered or are subject
    to modified CAS coverage).
•   FAR 31.205-20 (Interest and Other Financial Costs).
•   Prompt Payment Act (Public Law 97-177) (sets interest rate to be used for Cost of Money
    Computations).
•   DCAA Contract Audit Manual § 8-414 (Cost of Money as an Element of the Cost of Facilities Capital).
•   ODOT Contract Audit Circular No. 1 (definitions, audit authority, and general guidance regarding the
    computation of overhead rates).
ODOT Contract Audit Circular Attachment 10.1-1: COST OF MONEY COMPUTATION

EXAMPLE 10-4: Detailed Computation

Enter the name of the consultant/auditee:                                                                                       Consultant Z
Enter the consultant/auditee's latest fiscal year end:                                                                           12/31/2003
Enter the calendar year end of the latest year being audited (MM/DD/YY):                                                         12/31/2003
Enter the consultant/auditee's direct labor base:                                                                                 $700,000
Does the consultant/auditee's fiscal year end on December 31? (Automatically calculated.)                                           Yes


                                                          Facilities Capital Cost of Money
             This form is to be used only for buildings and equipment owned by the consultant/auditee.

                                                                                 Consultant Z
                                                                        For the Year Ended 12/31/2003


                        Fill in                                                         Yellow cells.


                                                                                        Balances: End of Current Year       Balances: End of Prior Year
                                                                                                     12/31/03                              12/31/02

           ENGINEERING EQUIPMENT                                                                              $70,000.00                                $45,000.00
           AUTOMOBILES                                                                                       $115,000.00                               $145,000.00
           OFFICE FURNITURE AND FIXTURES                                                                      $40,000.00                                $50,000.00
           LEASEHOLD IMPROVEMENTS                                                                             $95,000.00                                $15,000.00
           COMPUTER HARDWARE AND SOFTWARE                                                                    $305,000.00                               $280,000.00
           LESS: ACCUMULATED DEPRECIATION                                                                   ($450,000.00)                             ($400,000.00)
Total Net Book Value                                                                                          $175,000.00                               $135,000.00



                                                                                        Net Book Value-          12/31/03            $175,000.00
                                                                                        Net Book Value-          12/31/02            $135,000.00
                                                                                                  Total                              $310,000.00

                                                                   DIVIDED BY 2 EQUALS: Average Net Book Value                       $155,000.00
                                                                      MULTIPLIED BY: Average U.S. Treasury Rate                        3.68750% (n1)
                                                                        EQUALS: Facilities Capital Cost of Money                       $5,715.63

                                                                                            DIVIDED BY: Direct Labor Base            $700,000.00

                                                                 EQUALS: Facilities Capital Cost of Money Factor                           0.82%

             n1. Use the Treasury Rates worksheet for this computation; companies that do not have a calendar year end must prorate the U.S. Treasury Rates.
ODOT Contract Audit Circular Attachment 10.1-2: COST OF MONEY COMPUTATION

EXAMPLE 10-5: Detailed Computation

Enter the name of the consultant/auditee:                                                                                        Consultant Z
Enter the consultant/auditee's latest fiscal year end:                                                                            12/31/2003
Enter the calendar year end of the latest year being audited (MM/DD/YY):                                                          12/31/2003
Enter the consultant/auditee's direct labor base:                                                                                  $700,000
Does the consultant/auditee's fiscal year end on December 31? (Automatically calculated.)                                            Yes


                                                          Facilities Capital Cost of Money
             This form is to be used only for buildings and equipment owned by the consultant/auditee.

                                                                                 Consultant Z
                                                                        For the Year Ended 12/31/2003


                        Fill in                                                         Yellow cells.


                                                                                        Balances: End of Current Year        Balances: End of Prior Year
                                                                                                     12/31/03                               12/31/02

           ENGINEERING EQUIPMENT                                                                              $70,000.00                                 $45,000.00
           AUTOMOBILES                                                                                        $92,000.00 (n2)                           $116,000.00 (n2)
           OFFICE FURNITURE AND FIXTURES                                                                      $40,000.00                                 $50,000.00
           LEASEHOLD IMPROVEMENTS                                                                             $95,000.00                                 $15,000.00
           COMPUTER HARDWARE AND SOFTWARE                                                                    $305,000.00                                $280,000.00
           LESS: ACCUMULATED DEPRECIATION                                                                   ($436,500.00) (n3)                         ($388,000.00) (n3)
Total Net Book Value                                                                                          $165,500.00                                $118,000.00



                                                                                        Net Book Value-          12/31/03             $165,500.00
                                                                                        Net Book Value-          12/31/02             $118,000.00
                                                                                                  Total                               $283,500.00

                                                                   DIVIDED BY 2 EQUALS: Average Net Book Value                        $141,750.00
                                                                      MULTIPLIED BY: Average U.S. Treasury Rate                         3.68750% (n1)
                                                                        EQUALS: Facilities Capital Cost of Money                        $5,227.03

                                                                                            DIVIDED BY: Direct Labor Base             $700,000.00

                                                                 EQUALS: Facilities Capital Cost of Money Factor                            0.75%


             n1. Use the Treasury Rates worksheet for this computation; companies that do not have a calendar year end must prorate the U.S. Treasury Rates.
             n2. The carrying value of the automobiles was reduced by 20% to adjust for personal commuting and travel associated with unallowable marketing activities.
             n3. Aggregated depreciation costs were reduced to adjust for the depreciation associated with personal commuting and travel associated with unallowable
             marketing activities. This example uses 3% as an estimate of the disallowed depreciation. In actual practice, consultants must examine fixed-asset schedules to
             determine the actual amount of depreciation to disallow.
ODOT Contract Audit Circular Attachment 10.1-3: COST OF MONEY COMPUTATION


                                                                                           Cost of Money Rates

                                                                                                                                                                   Cal. year
                                       Year                        Jan - June                                   July - Dec                                         Average
                                         1990                        8.5000%                                      9.0000%                                           8.7500%
                                         1991                        8.3750%                                      8.5000%                                           8.4375%
                                         1992                        6.8750%                                      7.0000%                                           6.9375%
                                         1993                        6.5000%                                      5.6250%                                           6.0625%
                                         1994                        5.5000%                                      7.0000%                                           6.2500%
                                         1995                        8.1250%                                      6.3750%                                           7.2500%
                                         1996                        5.8750%                                      7.0000%                                           6.4375%
                                         1997                        6.3750%                                      6.7500%                                           6.5625%
                                         1998                        6.2500%                                      6.0000%                                           6.1250%
                                         1999                        5.0000%                                      6.5000%                                           5.7500%
                                         2000                        6.7500%                                      7.2500%                                           7.0000%
                                         2001                        6.3750%                                      5.8750%                                           6.1250%
                                         2002                        5.5000%                                      5.2500%                                           5.3750%
                                         2003                        4.2500%                                      3.1250%                                           3.6875%
                                         2004                        4.0000%                                      4.5000%                                           4.2500%
                                         2005                        4.2500%                                      4.5000%                                           4.3750%

                                   Note: Current Treasury rates may be obtained at: http://www.publicdebt.treas.gov.

The calendar year end of the latest year being audited.................................................................. December 31, 2003
Latest fiscal year end....................................................................................................................... December 31, 2003
The latest fiscal year began on the following date..........................................................................                     January 1, 2003
The following number of days have elapsed in the latest calendar year:                                                                                       365

Average Treasury Rate for the 12-Month Audit Period:
             January - June, 2003                   6/12                                multiplied by              4.2500%                  equals                 2.125000%
             July - December, 2003                  6/12                                multiplied by              3.1250%                  equals                 1.562500%
                                                                                                               (from table)                                        3.687500%

For calendar-year companies, verify against Treasury Rate from above table....................................................................                      3.6875%




                                                                                                                    COST OF MONEY: SUPPORTING COMPUTATIONS

								
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