Proposed Guidance on Safe Harbor Rate Streamlining for Engineering and Design Services Consultant Contracts |
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Brandye L. Hendrickson
Federal Highway Administration
17 July 2018
[Federal Register Volume 83, Number 137 (Tuesday, July 17, 2018)]
[Notices]
[Pages 33288-33290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15231]
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DEPARTMENT OF TRANSPORTATION
Federal Highway Administration
[FHWA Docket No. FHWA-2017-0023]
Proposed Guidance on Safe Harbor Rate Streamlining for
Engineering and Design Services Consultant Contracts
AGENCY: Federal Highway Administration (FHWA), U.S. Department of
Transportation (DOT).
ACTION: Notice; request for comment.
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SUMMARY: The FHWA is soliciting comments regarding proposed guidance on
implementation of a Safe Harbor indirect cost rate for certain
engineering design service firms that find establishing such rates to
be costly and a barrier to participating in engineering and design
service contracts reimbursed with Federal-aid Highway Program (FAHP)
Funds. The FHWA seeks comment on its proposed implementation of a Safe
Harbor indirect cost rate and its intention to notify all contracting
agencies receiving FAHP funds that an agency-developed Safe Harbor
indirect cost rate for eligible consulting firms may be used as a
component of a risk-based oversight process to provide reasonable
assurance to FHWA that consultant costs on FAHP-funded contracts are
allowable in accordance with the Federal regulations.
DATES: Comments must be received on or before August 16, 2018. Late-
filed comments will be considered to the extent practicable.
ADDRESSES: Mail or hand deliver comments to the U.S. Department of
Transportation, Dockets Management Facility, Room W12-140, 1200 New
Jersey Avenue SE, Washington, DC 20590, or fax comments to (202) 493-
2251. Alternatively, comments may be submitted to the Federal
eRulemaking portal at: http://www.regulations.gov. All comments must
include the docket number that appears in the heading of this document.
All comments received will be available for examination and copying at
the above address from 9 a.m. to 5 p.m., ET, Monday through Friday,
except Federal holidays. Those desiring notifications of receipt of
comments must include a self-addressed, stamped postcard, or you may
print the acknowledgment page that appears after submitting comments
electronically. Anyone can search the electronic form of all comments
in any one of our dockets by the name of the individual submitting the
comment (or signing the comment, if submitted on behalf of an
association, business, or labor union). Anyone may review DOT's
complete Privacy Act Statement in the Federal Register published on
April 11, 2000 (Volume 65, Number 70, Pages 19477-78).
FOR FURTHER INFORMATION CONTACT: For questions about the program
discussed herein, contact John McAvoy, Consultant Services Program
Manager, FHWA Office of Program Administration, (202) 853-5593 or via
email at john.mcavoy@dot.gov. For legal questions, please contact Steve
Rochlis, Office of the Chief Counsel, (202) 366-1395, or via email at
steve.rochlis@dot.gov. Office hours are from 8:00 a.m. to 4:30 p.m.,
ET, Monday through Friday, except Federal holidays.
SUPPLEMENTARY INFORMATION:
Electronic Access and Filing
You may submit or retrieve comments online through the Federal
eRulemaking portal at: http://www.regulations.gov. The website is
available 24 hours each day, 365 days each year. Please follow the
instructions. Electronic submission and retrieval help and guidelines
are available under the help section of the website. An electronic copy
of this document may also be downloaded from the Office of the Federal
Register's home page at: http://www.archives.gov and the U.S.
Government Publishing
[[Page 33289]]
Office's web page at: http://www.access.gpo.gov/nara.
Purpose of This Notice
The FHWA is requesting comment on its proposed guidance for
implementation of a Safe Harbor indirect cost rate and its intention to
notify all contracting agencies receiving FAHP funds that an agency-
developed Safe Harbor indirect cost rate for eligible consulting firms
may be used as a component of a risk-based oversight process to provide
reasonable assurance to FHWA that consultant costs on FAHP-funded
contracts are allowable in accordance with the Federal regulations.
Comments received through this notice will be considered by FHWA to
assess implementation of a Safe Harbor indirect cost rate.
Background
Consulting firms and contractors providing services under a
contract reimbursed with FAHP funds are required to account for, and
bill, costs in accordance with the Federal cost principles of 48 CFR
part 31. In addition, Federal law and regulations for the FAHP require
contracting agencies to accept indirect cost rates developed in
accordance with the Federal cost principles and to apply those rates
for the purposes of contract estimation, negotiation, administration,
reporting, and contract payment (as specified in 23 U.S.C. 112(b)(2)
and 23 CFR 172.7). As such, consulting firms providing engineering and
design-related services to a contracting agency under a contract funded
by the FAHP are required to develop indirect cost rates in accordance
with the Federal cost principles on an annual basis. Similarly,
contracting agencies must provide reasonable assurance that consulting
firm costs claimed under FAHP-funded contracts, including both direct
and indirect costs, are allowable in accordance with the Federal cost
principles.
Adhering to these accounting requirements can place a significant
burden on some consulting firms and may create a barrier for otherwise
eligible and qualified firms to compete for FAHP-funded contracts. For
example, small firms, including many Disadvantaged Business Enterprise
firms, may lack the financial expertise to develop an indirect cost
rate that would be acceptable to a cognizant Federal or State
government agency, or lack the resources to hire a Certified Public
Accountant (CPA) to conduct an audit to provide assurance as to the
development of an indirect cost rate compliant with Federal
requirements. Often, a CPA audit is cost-prohibitive given the size and
scope of the federally funded contracts for which the firm could
compete. In addition, new or start-up firms generally do not have a
contract-related cost history to use as a base for development of an
indirect cost rate. Other well-established firms may not have previous
experience with federally funded contracts for which a compliant
indirect cost rate could be developed. Currently, these firms are
prohibited from participating in FAHP-funded contracts without the
development and application of a provisional indirect cost rate for the
specific contract, which is adjusted based upon a contracting agency
conducted final audit at the completion of the contract. Even the
smallest final audit requires a significant commitment of contracting
agency audit resources.
To remove these barriers for otherwise qualified consulting firms,
and to enhance contracting agency oversight of compliance with Federal
cost principles, in 2012, the FHWA developed the Safe Harbor Indirect
Cost Rate Test and Evaluation pilot. Ten contracting agencies
representing a diversity of location and size participated in the test.
Eligible consulting firms with whom the contracting agencies do
business have the option of applying a Safe Harbor indirect cost rate
to contracts in instances where the firm does not have an established
rate for the reasons stated above. The selected Safe Harbor indirect
cost rate is significantly lower than the industry average rate,
providing an incentive for firms to develop an actual rate, when able
to do so and consistent with their cost experience, in accordance with
the Federal cost principles as required in Federal law and regulation.
Test results have shown a reduction in the financial management
barriers that prevented new, small, or disadvantaged but qualified
consulting firms from entering the federally funded engineering
services market, and creation of a framework for these consulting firms
to establish a cognizant agency approved indirect cost rate.
Contracting agencies report that 17 consulting firms have graduated
from the program after developing a cost history leading to an approved
indirect cost rate. In addition, following a risk-based approach allows
contracting agency oversight and audit resources to shift focus from
those firms opting to apply a Safe Harbor indirect cost rate (which are
generally employed on fewer contracts or on smaller contracts) to those
firms with multiple, higher dollar contracts and more complex
accounting structures.
The test and evaluation of the Safe Harbor indirect cost rate was
conducted by the following contracting agencies and respective FHWA
Division Offices: Alabama DOT, California Department of Transportation,
Michigan DOT, Missouri DOT, North Carolina DOT, North Dakota DOT, Ohio
DOT, South Carolina DOT, Texas DOT, and Washington State DOT. In these
States, eligible consulting firms have the option of using a Safe
Harbor indirect cost rate on contracts executed within the established
test period. A consulting firm is considered eligible if it has not had
an indirect cost rate previously accepted by a cognizant agency (i.e.,
a governmental agency that has performed or reviewed an audit in
accordance with generally accepted government auditing standards
(GAGAS) to test compliance with the requirements of the Federal cost
principles (as specified in 48 CFR part 31) and issued an audit report
of the consultant's indirect cost rate, as described in 23 CFR 172.3).
Consulting firms with an audited, or otherwise accepted, actual
indirect cost rate, developed in accordance with the Federal cost
principles, are not considered eligible to participate in the Safe
Harbor Program. Contracting agencies are given discretion to determine
the eligibility of consulting firms for a Safe Harbor indirect cost
rate for use on a case-by-case basis and are required to document their
decision.
Through collaboration with the test contracting agencies, FHWA's
test and evaluation pilot used a nationwide Safe Harbor indirect cost
rate of 110 percent of a firm's direct salary rate. The test
contracting agencies agreed that this rate was conservative and
significantly lower than the industry average of typically claimed
indirect cost rates. As such, while still providing for reimbursement
of a significant portion of basic overhead costs, the use of this
conservative rate incentivized consulting firms to develop an actual
indirect cost rate when able to do so. The Safe Harbor indirect cost
rate also provided a minimal risk to contracting agencies for
overpayment to those consulting firms participating in the program.
Based on FHWA's experience with this pilot, FHWA is proposing to expand
the use of the Safe Harbor indirect cost rate, beyond the 10 pilot
States, to allow eligible consulting firms to use a State contracting
agency-developed indirect cost rate.
A Safe Harbor indirect cost rate is not intended for use on field-
based contracts involving field overhead rates. Other direct costs that
are not
[[Page 33290]]
considered to be included within the Safe Harbor Program include:
Travel costs (airfare, rental car, mileage, lodging, per diem, etc.),
external printing and reproduction costs, mailing and shipping costs,
equipment rental fees, sub-consultants, and other direct costs as
appropriate to the contracted services.
A Safe Harbor indirect cost rate is applied to new contracts
executed with a contracting agency, or subrecipient. Once applied to a
contract, the Safe Harbor indirect cost rate should be used for the
duration of the contract. It is not uncommon for new or start-up firms
to show large fluctuations in an indirect cost rate in the initial
years of operation, before contract workload normalizes. Using the Safe
Harbor indirect cost rate for the duration of a contract provides cost
certainty in estimating the total contract amount and helps reduce the
risk of costly contract modifications, necessary due to a significant
fluctuation of an indirect cost rate. Similarly, a Safe Harbor indirect
cost rate may be used in the determination of the fixed fee portion of
the contract, which would not be subject to adjustment unless warranted
by changes to the scope of work or duration of the contract.
Eligible consulting firms that use the Safe Harbor indirect cost
rate, and do not have established salaries or wage rates for employees
or classes of employees, use negotiated, fixed hourly labor rates for
the direct labor portion of the contracted services. The negotiated
direct labor rate should meet the reasonableness provisions as set
forth in 2 CFR 200.404, considering the nature of the services to be
provided. Where appropriate for the scope of services under contract, a
``fully loaded'' hourly rate could be established utilizing a
reasonable hourly direct labor rate, a Safe Harbor indirect cost rate
as the overhead rate component, and an appropriate amount of fixed fee
that considers the complexity and risk involved.
The Safe Harbor indirect cost rate is intended to be a component of
a contracting agency's risk-based oversight process. Contracting
agencies using the Safe Harbor indirect cost rate must first develop
written risk-based oversight procedures designed to provide reasonable
assurance of consultant compliance with the Federal cost principles in
accordance with 23 CFR 172.11(c)(2). The use of the Safe Harbor
indirect cost rate is voluntary for both the contracting agency and for
eligible firms. In reviewing the eligibility of a consulting firm
opting to use the Safe Harbor indirect cost rate, it may be necessary
to contact the State department of transportation in the home State of
the consulting firm to verify the audit history of the firm and ensure
the firm does not have an audited or otherwise accepted indirect cost
rate developed in accordance with the Federal cost principles. Use and
application of the Safe Harbor indirect cost rate by eligible firms is
one component of this risk-based oversight process. Some evaluation of
the accounting system of the consulting firms choosing to use the Safe
Harbor indirect cost rate may be necessary to verify the capability of
accumulating and tracking direct labor for applying the Safe Harbor
indirect cost rate, as well as for billing other direct costs by
contract, segregating indirect costs, etc. The Internal Control
Questionnaire provided in Appendix B of the AASHTO Uniform Audit and
Accounting Guide (2016 Edition) may be used by contracting agencies as
a tool for assessing the accounting system capabilities of firms opting
to use the Safe Harbor indirect cost rate. A contracting agency may
wish to conduct post contract audits or other evaluations to verify
accurate accumulation and billing of direct contract costs. However, an
audit of indirect costs is not necessary for Safe Harbor indirect cost
rate contracts, as the rate should be applied for the duration of the
contract, and retroactive adjustments to indirect costs incurred on
these contracts is not necessary.
If a contracting agency elects to use a Safe Harbor indirect cost
rate program as an element of a risk-based oversight process in
compliance with 23 CFR 172.11(c)(2), the agency shall prepare and
maintain written policies and procedures establishing the program in
accordance with 23 CFR 172.5(c)(10). In conjunction with the
development of written risk-based oversight procedures, the contracting
agency should consider any actions necessary to comply with State
regulation, policy, and/or procedures, as well as any revisions needed
in boilerplate contract language or cost certifications on contracts
applying the Safe Harbor indirect cost rate.
The FHWA Division Office will serve as the primary point of contact
and liaison for the contracting agency. The FHWA Division Offices also
will monitor the respective contracting agency's use of the Safe Harbor
indirect cost rate in accordance with the approved, written risk-based
oversight procedures.
Request for Comment
Federal regulations require contracting agencies to provide
reasonable assurance to the FHWA that consultant costs on contracts
reimbursed with FAHP funding are allowable in accordance with the
Federal cost principles. The FHWA is seeking public comment on
expanding the use of the Safe Harbor indirect cost rate, beyond the 10
pilot States, to allow other interested contracting agencies to use a
self-administered Safe Harbor Program, under a risk-based approach
compliant with 23 CFR 172.11(c), to provide that reasonable assurance.
A self-administered Safe Harbor Program would involve, but not be
limited to, the following:
(1) A contracting agency developed risk-based analysis compliant
with 23 CFR 172.11(c)(2);
(2) Written policies and procedures (Work Plan) consistent with the
pilot program detailed above; and
(3) Approval from the FHWA Division Office in the relevant State.
The workplan used in the test evaluation has been posted on the
docket as an example of the elements that should be included in a risk-
based oversight procedure submitted to FHWA for approval.
Commenters are encouraged to address any or all the areas listed
above. The FHWA encourages commenters to submit any information or data
demonstrating the benefits, costs, and cost-savings of this program.
For example, FHWA would be interested in receiving quantifiable
estimates of the burden associated with the annual development of an
indirect cost rate, hiring a CPA to conduct necessary audits, and any
other costs that would be avoided by a consulting firm or contracting
agency in utilizing this Safe Harbor indirect cost rate. Commenters are
also encouraged to focus on matters within the control of FHWA. The
FHWA will consider public comment before adopting its final guidance on
the application of a Safe Harbor indirect cost rate under a risk-based
stewardship approach.
Authority: 23 U.S.C. 112, 145 and 315; 23 CFR 1.32, and 172; 49
CFR 1.85.
Issued on: July 9, 2018.
Brandye L. Hendrickson,
Acting Administrator, Federal Highway Administration.
[FR Doc. 2018-15231 Filed 7-16-18; 8:45 am]
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