Guidance on Safe Harbor Rate Streamlining for Engineering and Design Services Consultant Contracts |
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Nicole R. Nason
Department of Commerce
21 June 2019
[Federal Register Volume 84, Number 120 (Friday, June 21, 2019)]
[Notices]
[Pages 29277-29280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13241]
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DEPARTMENT OF TRANSPORTATION
Federal Highway Administration
[FHWA Docket No. FHWA-2017-0023]
RIN 2125-ZA11
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.
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SUMMARY: This Notice announces and outlines the final guidance for the
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.
DATES: This guidance is effective June 21, 2019.
ADDRESSES: This document, the request for comments, and the comments
received may be viewed online through the Federal eRulemaking portal
at: http://www.regulations.gov. An electronic copy of this document may
also be downloaded from the Office of the Federal Register's website
at: https://www.federalregister.gov and the Government Publishing
Office's website at: http://www.gpo.gov/fdsys.
FOR FURTHER INFORMATION CONTACT: Mr. John McAvoy, Consultant Services
Program Manager, Office of Infrastructure, Federal Highway
Administration, 1200 New Jersey Avenue SE, Washington, DC 20590-9898,
(202) 853-5593. For legal questions: Mr. Steven Rochlis, Office of the
Chief Counsel, Federal Highway Administration, 1200 New Jersey Avenue
SE, Washington, DC 20590-9898, (202) 366-1395. Office hours are from
8:00 a.m. to 4:30 p.m. E.T., Monday through Friday, except for Federal
holidays.
SUPPLEMENTARY INFORMATION:
Summary Discussion of Comments
The FHWA published a Federal Register Notice on July 17, 2018, at
83 FR 33288, seeking public 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. In
preparing this guidance to assist in the implementation of a Safe
Harbor program, FHWA considered all public comments submitted to the
Federal Register Notice.
Based on the comments received, FHWA is finalizing the guidance.
Since compliance with this guidance is voluntary for both the
contracting agency and the consulting firm, it is not anticipated to
impose any costs. Entities that choose to use this guidance would do so
only if they anticipate a net positive impact. In particular,
consulting firms that voluntarily comply could experience expanded
business opportunities because they become eligible to work on
contracts funded by a Federal grant, which they previously were not.
This guidance may also result in cost savings due to a reduction in
resources needed to conduct oversight and audits of small consulting
firms.
Commenters included several State departments of transportation
(State DOT), the American Council of Engineering Companies, and one
individual. The respondents were in favor of the implementation of a
Safe Harbor indirect cost rate program. Several commenters provided
suggestions on how to make the program operate most efficiently. The
following summarizes the comments and FHWA's response.
General Comments
Multiple commenters expressed support for expansion of the
Safe Harbor indirect cost rate program beyond the 10 States that are
currently piloting the program. Multiple commenters noted that they
were a pilot State for the Safe Harbor Indirect Cost Rate Experiment
and Test and that the program is effectively meeting its stated goals.
One commenter suggested that each State DOT implement its
own Safe Harbor indirect cost rate, and that the rate apply to
agreements within the respective State DOT only. If a Safe Harbor firm
does work for multiple State DOTs, the Safe Harbor indirect cost rate
for the respective State DOT would take precedence.
The FHWA agrees with the suggestion that each State DOT implement
its own Safe Harbor indirect cost rate and that the rate apply to
agreements within the respective State DOT only. The Safe Harbor
indirect cost rate is applicable to individual specific contracts, and
if a Safe Harbor firm does work on multiple contracts in multiple
States, the Safe Harbor indirect cost rate for the respective State DOT
should take precedent.
Multiple commenters made recommendations regarding the
indirect cost rate to be used in the Safe Harbor Program. One suggested
a nationwide rate of 110 percent as was tested in the pilot program.
Another suggested that States determine their own rate with a floor of
110 percent.
The FHWA disagrees with the recommendation that one nationwide Safe
Harbor indirect cost rate be established. The FHWA believes that State
DOTs should be able to determine their policy for accepting eligible
firms into their program, applying the Safe Harbor indirect cost rate,
and graduating firms into a cognizant agency approved indirect cost
rate. This would be consistent with current indirect cost rate
procedures where contracting agencies develop their own policy
pertaining to application of cognizant agency approved indirect cost
rates. A rate that is set too low will not achieve the desired result
of incentivizing new, small, or disadvantaged business enterprises into
the professional services market. A rate that is set too high is at
risk for overpaying consultant actual costs.
Multiple commenters suggested that once a firm has
established a cognizant agency indirect cost, that firm should be
allowed to immediately start using the new rate on existing contracts.
The FHWA agrees that the State DOT should be allowed to develop
criteria for transitioning firms out of the program based on its own
risk assessment.
Multiple commenters suggested that the guidance should
clearly indicate the Safe Harbor indirect cost rate program is
voluntary for both the contracting agency and consultant and temporary
in nature, intended to provide the consultant a window to work on
Government contracts while developing its cost accounting procedures.
The FHWA agrees that use of the Safe Harbor indirect cost rate is
voluntary for both the contracting agency and consultant. Existing
regulations found at 23 CFR 172.11(b)(1)(iii) allow for the
[[Page 29278]]
use of other methods to contract with firms that do not have a
cognizant agency approved indirect cost rate and do not volunteer to
use the Safe Harbor indirect cost rate.
Multiple commenters suggested a consultant firm should be
able to transition from the Safe Harbor indirect cost rate to a
cognizant agency approved indirect cost rate within 3 years of entering
the program.
The FHWA agrees that provided a relatively consistent contract
workload, a consulting firm should be able to transition from the Safe
Harbor indirect cost rate to a cognizant agency approved indirect cost
rate within 3 years of entering the program.
Some commenters recommended that a consulting firm have
the option to utilize the Safe Harbor indirect cost rate indefinitely.
The FHWA disagrees with the recommendation to authorize an
indefinite Safe Harbor indirect cost rate. Provided a relatively
consistent contract workload, a consulting firm should be able to
transition from the Safe Harbor indirect cost rate to a Federal
Acquisition Regulation (FAR) indirect cost rate within 3 years of
entering the program. However, FHWA agrees that the State DOT should be
allowed to develop criteria for determining eligible firms and for
transitioning firms out of the program based on its own risk
assessment.
Multiple commenters suggested the guidance should include
the option for a field or project office indirect cost rate.
The FHWA sees the potential for benefit when applied to a field-
based indirect cost rate as part of a State DOT's risk-based oversight
process to provide reasonable assurance of consultant compliance with
Federal cost principles. Ultimately, it is up to the State DOT to
include a field or project office indirect cost rate option when
developing their Safe Harbor indirect cost rate program.
One commenter recommended that if a consulting firm has
not developed an accepted indirect cost rate within the past 3 years,
it should be eligible for the Safe Harbor indirect cost rate program.
The FHWA agrees that a contracting agency could, as part of their
risk-based oversight process, decide to make their Safe Harbor indirect
cost rate available to a firm that has had their cognizant agency
approved indirect cost rate lapse. However, contracting agencies should
understand that participation in the program is voluntary and requiring
a firm to use a Safe Harbor indirect cost rate because of a lapsed
approved indirect cost rate may have the effect of imposing a de facto
ceiling on an indirect cost rate, which is prohibited by statute.
Existing regulations found at 23 CFR 172.11(b)(1)(iii) allow for the
use of other methods to contract with firms that do not have a
cognizant agency approved indirect cost rate.
One commenter wrote to strongly support the existing
statutory and regulatory framework governing the procurement,
contracting, and administration of engineering and design-related
services on Federal-aid highway projects, stating that the laws and
regulations have brought a measure of uniformity and consistency to
State transportation programs and help to ensure that Federal funds are
administered efficiently and effectively. The commenter further stated
that education and training of engineering firms and State DOT
officials on compliance, interpretation, and implementation of Federal
rules in a fair and consistent manner protects the business interests
of the firms and, more importantly, promotes transparency and
accountability for taxpayer funds and protects against waste, fraud,
and abuse.
The FHWA agrees that the existing statutory and regulatory
framework governing the procurement, contracting, and administration of
engineering and design-related services on Federal-aid highway projects
promotes quality engineering services, provides transparency and
accountability for taxpayer funds, and protects against waste, fraud,
and abuse. Note that FHWA is not creating any new rules or regulations
through this Federal Register notice. The FHWA is acknowledging that
existing rules in 23 CFR 172 allow contracting agencies to develop
their own risk-based oversight process, approved by FHWA, to provide
reasonable assurance of consultant compliance with Federal cost
principles and that a contracting agency-developed Safe Harbor indirect
cost rate program can be a component of that process.
One commenter expressed concern that the proposed Safe
Harbor indirect cost rate program could be a step backwards if not
implemented carefully. The notice gives broad latitude to State DOTs to
set the parameters and procedures for such a program resulting in a
wide array of approaches that treat firms differently from State to
State. Such an outcome could undermine the coordinated efforts of FHWA,
American Association of State Highway and Transportation Officials, and
American Council of Engineering Companies over the last 10+ years.
The FHWA recognizes that regional variances do exist and
contracting agencies will have the opportunity to develop policies and
procedures that reflect the needs of operating in different markets. We
also note that FHWA is not creating any new rules or regulations nor
are we amending current policy through this Federal Register notice. We
acknowledge that existing rules in 23 CFR 172 allow contracting
agencies to develop their own risk-based oversight process, approved by
FHWA, to provide reasonable assurance of consultant compliance with
Federal cost principles and that a contracting agency-developed Safe
Harbor indirect cost rate program can be a component of that process.
The FHWA believes that a continuing dialogue between the State DOTs and
engineering firms are instrumental to development of policies and
procedures that are compliant with 23 CFR 172.
One commenter recommended strengthening the language in
the notice to require adherence to the parameters of the work plan
utilized in the pilot program. The commenter further recommended that
the guidance be updated to require compliance with the policies and
procedures outlined in the pilot program.
A Safe Harbor program developed by a contracting agency would be
part of that agency's written policies and procedures compliant with 23
CFR 172.5(c) and subject to approval by FHWA. Participation in the Safe
Harbor indirect cost rate program is voluntary for the contracting
agency and the consultant. If both entities do not agree on the
parameters of the Safe Harbor indirect cost rate implementation,
existing regulations provide guidance on how to proceed when the
indirect cost rate has not been established by a cognizant agency.
Actions that administratively limit or cause de facto ceilings on
indirect cost rates are prohibited.
One commenter suggested FHWA should include instructions
to be sure that any State that implements a Safe Harbor indirect cost
rate has a detailed plan in place for educating the firms of their true
cost structure and moving the participating firms out of the program
and into a cognizant agency approved indirect cost rate. The commenter
theorized that, without the proper knowledge, setting a Safe Harbor
indirect cost rate that is too low will have the effect of locking a
firm into a money losing venture that will hamper the ability of the
firm to mature to a formally recognized, properly formulated indirect
cost rate.
The FHWA believes that a contracting agency should be able to
determine their policy for educating and accepting eligible firms into
their program, applying the Safe Harbor indirect cost
[[Page 29279]]
rate, and graduating firms into a cognizant agency approved indirect
cost rate. This would be consistent with current indirect cost rate
procedures where contracting agencies develop their own policy
pertaining to application of cognizant agency approved indirect cost
rates. A rate that is set too low will not achieve the desired result
of incentivizing new, small, or disadvantaged business enterprises into
the professional services market. A rate that is set too high is at
risk for overpaying consultant actual costs.
Guidance on Safe Harbor Rate Streamlining for Engineering and Design
Services Consultant Contracts
Applicability and Purpose
This guidance applies to consulting firms providing engineering and
design related services under a contract reimbursed with Federal-aid
highway program (FAHP) funds and contracting agencies receiving FAHP
funds. Consulting firms 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 the FAR of 48 CFR part
31. To do so, consulting firms develop indirect cost rates in
accordance with the Federal cost principles. At the same time,
contracting agencies shall provide reasonable assurance to FHWA that
consulting firm costs claimed under FAHP-funded contracts, including
indirect costs, are allowable in accordance with the Federal cost
principles. 23 CFR 172.11(c)(1).
Adhering to these accounting requirements can place a significant
burden on some consulting firms and may create a barrier for otherwise
qualified firms to compete for FAHP-funded contracts. Many small firms,
including Disadvantaged Business Enterprise firms, lack the financial
expertise or financial resources to either develop an indirect cost
rate themselves or hire a Certified Public Accountant firm to do it for
them. 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.
These firms are typically prohibited from participating in FAHP-funded
contracts without the development and application of a provisional
indirect cost rate for each specific contract, which is adjusted based
upon a labor intensive, contracting agency-conducted final audit at the
completion of the contract.
Background and Pilot Program
To remove these barriers and to enhance contracting agency
oversight of compliance with Federal cost principles, FHWA developed
the Safe Harbor Indirect Cost Rate Test and Evaluation pilot. Ten
contracting agencies participated in a test where new or small
consulting firms were given the option of applying a Safe Harbor
indirect cost rate to specific contracts. The selected Safe Harbor
indirect cost rate was conservatively lower than the industry average
rate, allowing the firms to participate in the engineering services
market without an audit of their costs while providing an incentive for
the firms to develop an actual rate when allowed by their cost history.
Test results showed 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. Following
a risk-based approach allowed contracting agency oversight and audit
resources to prioritize their efforts on more complex, higher risk
contracts.
The use of a Safe Harbor indirect cost rate is voluntary for both
the contracting agency and the consulting firm. During the test and
evaluation, a consulting firm was considered eligible to use a Safe
Harbor indirect cost rate if it had not had an indirect cost rate
previously accepted by a cognizant agency. Consulting firms with an
audited, or otherwise accepted, actual indirect cost rate, developed in
accordance with the Federal cost principles, were not considered
eligible to participate in the Safe Harbor Indirect Cost Rate Program.
The FHWA's test and evaluation pilot used a nationwide Safe Harbor
indirect cost rate of 110 percent of a firm's direct salary rate. This
rate 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 will expand the use of the Safe Harbor
indirect cost rate, beyond the 10 pilot States, to allow other
interested contracting agencies receiving FAHP funds to develop and
implement a self-administered Safe Harbor Indirect Cost Rate Program,
under a risk-based approach compliant with 23 CFR 172.11(c).
Beyond the Pilot--Guidance on Use of the Safe Harbor Indirect Cost Rate
This guidance replaces the Safe Harbor Indirect Cost Rate Test and
Evaluation pilot by expanding the scope of the program beyond the ten
contracting agencies that participated in the pilot.
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.
While the original test of the Safe Harbor indirect cost rate only
applied to an office-based indirect cost rate, FHWA sees the potential
for benefit if a contracting agency elects to apply a field-based
indirect cost rate as part of the agency's risk-based oversight process
to provide reasonable assurance of consultant compliance with Federal
cost principles.
If agreed to by both the contracting agency and the consulting
firm, the 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. 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.
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'' or ``specific rate of compensation'' 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 of the procurement,
management, and administration of engineering and design-related
services contract. Contracting agencies using the Safe Harbor indirect
cost rate must first prepare and maintain written policies and
procedures establishing the
[[Page 29280]]
program in accordance with 23 CFR 172.5(c)(10), then 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 DOT 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. 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.
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.
Contracting agencies using FAHP funds must comply with all Federal,
State, and local laws and regulations to remain eligible for
reimbursement.
This guidance is not legally binding in its own right and will not
be relied upon by the Department as a separate basis for affirmative
enforcement action or other administrative penalty. Conformity with
this guidance document is voluntary only, and nonconformity will not
affect rights and obligations under existing statutes and regulations.
Issued on: June 13, 2019.
Nicole R. Nason,
Administrator, Federal Highway Administration.
[FR Doc. 2019-13241 Filed 6-20-19; 8:45 am]
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