FHWA Finalizes Guidance on New “Safe Harbor” Indirect Cost Rate Policy for New and Small Firms

Advocacy / Industry News

June 24, 2019

FHWA Finalizes Guidance on New “Safe Harbor” Indirect Cost Rate Policy for New and Small Firms

The Federal Highway Administration (FHWA) is expanding and making permanent a “Safe Harbor” Indirect Cost Rate policy for state departments of transportation.

The agency had conducted a 3-year pilot study of a safe harbor rate in 10 states. Based on reported positive results, the program will be made available to every state. The basic concept is to allow new, small, and DBE firms without a compliant FAR overhead rate to voluntarily use an artificially low rate while they develop a cost history and adequate accounting systems. The policy is designed to enable more firms to compete for work and eventually transition to a FAR-compliant rate. It also allows DOTs to allocate limited audit resources to more complex, higher risk contracts.

The FHWA notice is not a change in the underlying regulations; it is policy guidance issued to State DOTs. A safe harbor indirect cost rate policy would be one component of a DOT’s risk-based oversight process. Agencies using the Safe Harbor indirect cost rate would be required to develop written policies establishing the program and oversight procedures designed to provide reasonable assurance of consultant compliance with the Federal cost principles in accordance with 23 CFR 172.11(c). The use of the safe harbor indirect cost rate is voluntary for both the contracting agency and for eligible firms. While the pilot program sets the safe harbor rate at 110%, the final guidance gives states discretion to set their own rate.

FHWA acknowledged and responded to the input that ACEC provided on the initial proposal. FHWA accepted the Council’s recommendation that a safe harbor rate could be available for field-based contracts. The guidance also repeatedly makes clear that acceptance and use of a safe harbor rate is voluntary for firms, a point that ACEC strongly emphasized, and that agencies must also still comply with all federal, state, and local laws and regulations on federally funded projects. FHWA decided not to establish a single nationwide safe harbor rate, as in the pilot program, or to set a floor, which ACEC recommended. According to the notice, “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.”

The Federal Register notice is available here.

Matt Reiffer is ACEC’s senior director transportation programs.

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