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HARDESTY & HANOVER, LLC Notes to Statement of Direct Labor, Fringe Benefits and General Overhead For the Year Ended December 31, 2019 NOTE 3: DESCRIPTION OF ACCOUNTING POLICIES (Continued) Advertising The Company expenses advertising costs as incurred. During the year ended December 31, 2019, the Company incurred approximately $31,096 in advertising costs. Derivative Financial Instruments The Company has elected to use the simplified hedge accounting approach to account for interest rate swaps that are entered into for the purpose of economically converting variable-rate interest payments to fixed-rate payments. Commitments and Contingencies Loss contingency provisions are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. Subsequent Events The Company has evaluated subsequent events through June 26, 2020, the date the financial statements were available to be issued. NOTE 4: DESCRIPTION OF OVERHEAD RATE STRUCTURE Hardesty & Hanover, LLC is the design subsidiary and utilizes a company-wide overhead rate structure based on direct labor costs for the allocation of all its overhead costs. Hardesty & Hanover Construction Services, LLC and Hardesty & Hanover, LLC are wholly owned subsidiaries of Hardesty & Hanover Holding, LLC. Hardesty & Hanover, LLC pays a majority of the overhead expenses and the administrative salaries directly. Some of the overhead expenses are charged directly to Hardesty & Hanover Construction Services, LLC at the time the invoice is paid. At year-end a percentage of other overhead costs are allocated to Hardesty & Hanover Construction Services, LLC. These overhead expenses are allocated in accordance with 48 CFR Part 31 Federal Acquisition Regulation (FAR) used in the preparation of the overhead audits for the various municipalities (9.77% for 2019). Administrative salaries are allocated based upon a direct labor formula (21.12% of total administrative salaries for 2019). These cost allocation procedures are consistent with those recommended in the AASHTO audit guide. NOTE 5: DESCRIPTION OF LABOR-RELATED COSTS Project labor - The Company allocates labor to all projects based upon standard hourly rates. Paid time off – Full time and part time employees are eligible to earn and use vacation time which is paid at the employees’ base pay rate at the time the vacation is taken. The amount of paid vacation time employees receive each year increases with length of employment. Sick pay benefits are also available to both full time and part time employees. The number of days each employee receives is based on years of service. -10-