[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]
 BILLING CODE 4910-22-P