AASHTO’s New Uniform Audit and Accounting Guide: New Rules on Allowable and Reasonable Compensation
The revised edition of American Association of State Highway and Transportation Officials' (AASHTO) Uniform Audit and Accounting Guide, approved in October 2009, provides specific guidance for determining allowable and reasonable executive compensation. (See Update at end of this article.)
Consultants must determine the reasonableness of executive compensation using an approach compliant with the criteria established in Federal Acquisition Regulations (FAR) 31.205-6 and two major Armed Services Board of Contract Appeals decisions dealing with compensation. The revised audit guide recommends consultants prepare a compensation analysis and disallow costs in excess of the amount deemed reasonable.
Section 7.5.C of the revised audit guide provides a nine-step process for conducting a compensation analysis. The analysis should include the following steps:
Step 1 - Examine all elements of compensation and eliminate elements defined as unallowable under FAR 31.205-6 or other applicable FAR cost principles.
Step 2 - Prepare a schedule listing all allowable elements of compensation and the amount paid for the individual executives or classes of employees to be examined. Compensation includes wages, salary, bonuses, incentive compensation, deferred compensation, employer contributions to defined contribution pension plans, etc.
Step 3 - Obtain nationally-published compensation surveys matching the consultant in terms of revenue, industry, geographic location and other relevant factors. Consultants should make certain that survey data used to support reasonableness determinations is based on reliable and unbiased surveys and are representative of the consultant’s relevant market or industry.
The use of one survey is not sufficient to determine the market rate of pay for all positions. The guide recommends the use of a primary survey with secondary surveys used to corroborate the results of the primary survey. The consultant must match the job description and duties of each of its executives to the survey data. The guide warns against matching positions based solely on job titles as it may result in an inaccurate analysis.
Step 4 - From the surveys, develop an estimated reasonable compensation amount for each executive position.
Step 5 - Apply an appropriate escalation factor to adjust survey data to a common date of July 1 of the same year or the mid-point of the consultant’s fiscal year. The escalation factor used should be supported by survey data on trends in compensation for the years examined.
Step 6 - Develop a composite median amount by averaging the median total compensation amounts, after application of any necessary escalation factors.
Step 7 - Next, increase the composite median by 10 percent (allowing for a 10 percent range of reasonableness to be applied in developing estimated reasonable compensation).
Step 8 - Compare total actual compensation for each executive to the estimated reasonable compensation developed for that position.
Step 9 - In cases where total compensation exceeds the estimated reasonable amount, FAR allowable compensation for that executive should be limited to the estimated reasonable compensation.
Consultants can propose amounts of more than 110% of reasonable compensation, but must justify superior performance by financial performance that significantly exceeds the industry’s average. Section 7.6 of the revised audit guide explains the criteria needed to demonstrate superior performance.
In situations where consultants do not perform a compensation analysis, they may use the National Compensation Matrix (NCM). The AASHTO task force responsible for the revised audit guide recommended that the NCM be prepared initially and updated annually by the Federal Highway Administration (FHWA). Currently, the NCM does not exist, which makes it difficult to fully implement the guidance on determining allowable compensation for overhead purposes.
Until the NCM is complete, INDOT will continue its policy of adjusting the maximum hourly rate and annual compensation on an annual basis, with the next adjustment effective July 1, 2010. INDOT’s 2009 annual compensation cap is $167,031 (unchanged from 2008). INDOT’s current hourly rate cap is $59.65 for contracts signed after 7/1/2009 (unchanged from 2008).
Update: In March 2010, AASHTO posted the final version of the Uniform Audit and Accounting Guide. We have reviewed this version, and the only revisions were made to Appendix A, "Review Program for CPA Audits," and there was some correction of grammar and spelling errors throughout the guide. Download the guide here.
We are experts in government contract accounting and overhead rates and offer customized services for A/E firms ranging from consulting on government contract accounting to FAR overhead rate audits and much more. For additional information or questions, please contact Chris Mayfield.
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