Prepare for Management Compensation and Bonus Reviews

If you serve government clients, you should be prepared to support your management compensation and bonuses as the year end approaches.

There is increased concern among various segments of our public sector clients over compensation and bonuses in A/E firms. Even if you have not encountered any scrutiny of these issues in past years, you should expect that increased attention will be paid to these areas through the remainder of 2010 and in 2011 proposals.

• The revised American Association of State Highway and Transportation Officials (AASHTO) Audit Guide, made effective January 1, 2010, contains specific guidance on what constitutes reasonable costs for firms. This guidance applies to both prime and subconsultants for state Departments of Transportation (DOTs).
  
• U.S. DOT is increasing their scrutiny of Local Project Administrators (LPAs) and expecting these administrators of federal grant funds to adhere to the same guidance as in the AAAHTO Guide. This applies to highway grant funds passed from a state to a local government, transit grants and airport grants.
• The Defense Contract Audit Agency (DCAA) has acnowledged the issue raised by the Office of Inspector General (OIG) report on transportation firms, and has stated their intent to apply increased oversight on federal agency contracts.
• Several states have committed to adhering to the AASHTO Audit Guide requirements even if design fees are funded by the state and federal rules are not a requirement.

You should expect that many of your government clients will devote more attention to management compensation and bonuses, starting with your 2010 records.

It is your firm management’s responsibility— not the contracting or audit group— to have documentation of the following:

1. Support for management salaries to demonstrate they are reasonable given your firm’s size, location and types of services provided. Generally, this requires that you have survey support for base salaries paid.

2. Written position descriptions that indicate all of the duties of individuals or staff categories.

3. Compensation testing for reasonable compensation and the remove of any excess compensation from your cost submissions. Auditors should no longer do this— they should only review and accept or reject your proposed costs.

4. A written bonus plan that includes the following:

• How the total bonus pool is determined.
  
• Employees (at least by staff type) that are eligible to participate in the bonus plan.
  
• The factors that are considered in determining bonuses. These may be either objective (such as chargeability, project profits, etc) or subjective (such as client satisfaction). You do not need to prioritize or weight these factors, but you must list the factors that will be considered.
  
• How the plan is administered — who determines bonuses and when the bonuses are paid.

Note that owners (principals) may participate in bonus pools, but you should have a separate explanation for any awards that are distributed based on ownership, as these are unallowable distributions of profits. The owner rewards do not have to be cash— they can be stock appreciation or other long-term gains, but you need to distinguish owner rewards separately from employee bonuses.

The biggest issue is likely to be documentation that can be reviewed. Many firms have long-established bonus plans that are followed every year but are not formally written. Unwritten plans are no longer acceptable under the AASHTO Audit Guide.

If you are a superior performing firm, having surveys that demonstrate that your compensation is reasonable is not enough. In order to qualify as a superior performing firm— and qualify for above average compensation— you will need to document your superior performance, as compared to other firms.

Was this news to you? If so, there’s a whole lot more you may not know about working with a government client! For starter, your accounting practices must be compliant with the Federal Acquisition Regulation accounting requirements. Failure to comply could result in the loss of future business, reduced fees, and even criminal penalties in extreme cases!

Join PSMJ this spring for Jail Time for Overhead Rate Errors to learn all you need to know to ensure your firm is 100% compliant with the regulations set forth in the AASHTO Audit Guide. Don’t risk lost projects and significant jail time by being non-compliant – register today!