Understanding andComplying with

OMB Cost Principlesfor Grants and

Other Agreementsto State and Local

Governments

Charles W. HesterCPA, FCPA, CFF, CFE, CFS, CGFM

1

5/27/2012 1

This course will cover

• Cost principles

–Determining Allowable Costs

–Cost Allocation Plans

–Indirect Cost Proposals

5/27/2012 2

OMB GuidelinesSTATE & LOCAL EDUCATION NON-PROFIT

TITLE GOVERNMENTS INSTITUTIONS ORGANIZATIONS

UniformAdministrative A-102Requirements for “Common Rule” A-110 A-110

Cost Principles for A-87 A-21 A-122

Cost AllocationPlans and IndirectCost Rates for ASMB C-10 OASC-1 OASMB-5

Audits of A-133 A-133 A-133

5/27/2012 3

Organization of C.F.R. Title 2

• Subtitle A – Government-wide Guidance for Grants and Agreements

– Chapter I – [Reserved]

– Chapter II – Office of Management and Budget Circulars and Guidance• Subchapter A – General Matters

– Part 1 – General

• Subchapter B – OMB Circulars

• Subchapter C – Other Guidance Documents

• Subtitle B – Federal agency regulations for grants and agreements

– Chapter III and following – Each Federal agency will establish a chapter under Subtitle B for its regulations on grants and agreements

2

5/27/2012 4

Revised OMB Guidelines

Title

State & Local

Governments

Educational

Institutions

Non-Profit

Organizations

Uniform

Administrative

Requirements for:

A-102

“Common Rule”

2 CFR TBD

2 CFR

Part 215

2 CFR

Part 215

Cost Principles

for:

2 CFR

Part 225

2 CFR

Part 220

2 CFR

Part 230

Cost Allocation

Plans and Indirect

Cost Rates for:ASMB C-10 OASC-1 OASMB-5

Audits of:

A-133

2 CFR TBD

A-133

2 CFR TBD

A-133

2 CFR TBD

5/27/2012 5

OMB Uniform

Cost Principles Under

Federal Grants and

Other Agreements to

State and Local Governments

Charles W. HesterCPA, FCPA, CFF, CFE, CFS, CGFM

5/27/2012 6

OMB Circular A-87

• Cost principles for state and local

governmental units

– Revision dated May 4, 1995

– Amended August 29, 1997

– Revised May 10, 2004

3

5/27/2012 7

A-87 has five attachments

• A - General Principles

• B - Selected Items of Cost

• C - State/Local Central Service Cost

Allocation Plans

• D - Public Assistance Cost Allocation

Plans

• E - State/Local Indirect Cost Rate

Proposals

5/27/2012 8

OMB Circular A-87,

Attachment A

General Principles for

Determining

Allowable Costs

5/27/2012 9

Establishes general principles

• Grants, cost-type contracts

• Indirect cost rates/allocations

• Does not mandate Federal funding

• Does not cover profit

4

5/27/2012 10

Basic premises

• Grantees must manage efficiently

• Grantees must administer Federal

funds in accordance with rules

• Grantees set their own organization

• Agencies will work with grantees to

test new systems

5/27/2012 11

Test of Allowability

• Necessary and reasonable

• Allocable

• OK under state/local laws

• Consistent treatment

• OK under GAAP

• Not cost sharing/matching

• Net of applicable credits

• Adequately documented

5/27/2012 12

Reasonableness

• Prudent person rule

• Ordinary and necessary

• Sound business practices

• Arms-length bargaining

• Use established practices

5

5/27/2012 13

Allocability

• Charges relate to benefits

• All activities are charged a fair share

• Cannot reallocate to avoid restrictions

• Can reallocate if OK under either

program

• Indirect costs, use proper attachment

5/27/2012 14

Applicable Credits

• Reductions of expenses (discounts,

credits, insurance refunds, etc.)

• Must reduce costs claimed

• Some amounts received from Federal

agencies may be credits

• Credits do not include income items

5/27/2012 15

Total costs

• Direct + Indirect (less

credits)

• No one rule for classification

• Must be consistent

6

5/27/2012 16

Direct costs

• Identified with final cost objective, such as:

–Salaries of persons working on project

–Materials acquired for project

–Materials used on project

–Approved capital expenditures

5/27/2012 17

Indirect costs

• Common or joint purpose

• Not readily assignable

• Minor items, if treated consistently

• Allocation plan can be simple or

complex

• May be limited by law

5/27/2012 18

Interagency services

• Services provided by one agency

to another

• May include indirect costs

• Can use standard 10% rate

7

5/27/2012 19

Grantee must certify cost

allocation plan

• Certify costs are acceptable

• CFO or higher certifies

• If not certified:

–Agency can disallow all indirect

–Agency can develop its own rate

5/27/2012 20

OMB Circular A-87,

Attachment B

Selected Items of Cost

5/27/2012 21

Covers 43 cost categories

• Lists them individually

• Excellent reference

• We will not discuss every item

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5/27/2012 22

Always unallowable costs

• Alcohol

• Bad debts

• Contingencies

• Contributions

• Entertainment

• Fund raising

• Under-recovery on other Federal grants

5/27/2012 23

Compensation for personnel

services

• Rules changed in 1995 revision

• Salary plus fringe benefits

generally OK

• Must be reasonable, treated

consistently

5/27/2012 24

Fringe benefits include time

not worked• Cash basis - charge when paid

• When employment terminates,

payments for leave are indirect

costs

• Can accrue leave costs:

– Must conform to GAAP

– Allowable is lesser of accrued or funded

9

5/27/2012 25

Pension plan costs

• Pay-as-you-go is OK

• Accrual is OK too, provided:– Use actuarial method

– Fund within 6 months of year-end

– Agency can extend 6-month period

• Can convert to accrual if amortize the unfunded liability

• Agency gets share of credits

5/27/2012 26

Post-retirement health benefits

• Similar rules to pensions

• Current funding must be paid to

insurer or trustee

5/27/2012 27

Severance pay

• Must be required by law,

agreement or policy

• Charged as general indirect cost

• Mass severance pay allowable only

if approved

10

5/27/2012 28

Support for salaries

• Work only on single indirect cost activity

– Regular payroll records sufficient

• Work only on single Federal project

– Semi-annual certification

– Signed by employee or immediate supervisor

• Work on multiple activities

– Requires more extensive support

5/27/2012 29

Work on multiple activities• After-the-fact distribution

• Consider total work time

• Report every month, signed by

employee

• Budget estimates only for interim

charges

• Agency can approve statistical

techniques

5/27/2012 30

Donated services

• Unallowable as direct or indirect

• Can meet cost sharing

• Indirect costs allocated to them

• Same kind of support as salaries

11

5/27/2012 31

Depreciation and

use allowance

• Compensate for use of fixed assets

• Use acquisition cost or use FMV if

donated

• Must be supported by property

records

5/27/2012 32

Depreciation• Must analyze data to determine rate

• Can separate components from

building

• Cannot change method without

approval

• Can claim use allowance on fully

depreciated assets

5/27/2012 33

Use allowances

• Real property - allowance is 2%

–Cannot separate components from

building

• Equipment - allowance is 6-2/3%

–Can separate affixed equipment from

building

12

5/27/2012 34

General governmental costs

are unallowable

• Governor, state legislature,

judiciary, etc.

• Agency may approve travel costs

related to specific award

5/27/2012 35

Insurance costs

• Generally OK

• Self-insurance fund OK

–But must be properly set up

• Uninsured losses are unallowable

–Deductible amounts are OK

5/27/2012 36

Interest• Generally unallowable

• Building-related interest after October

1, 1980, is OK

• Negotiation required if interest plus

depreciation exceeds grantee

disbursements

• Interest on equipment is OK

13

5/27/2012 37

Rental costs

• Generally OK

• Only cost of ownership allowed

– Sale and leaseback arrangements

– Less-than-arms-length lease

5/27/2012 38

Taxes

• OK if legally required to pay

• Effective January 1, 1998:

–Not OK if self-assessed and

disproportionate effect on

Federal programs

5/27/2012 39

Travel

• Generally OK

• Must conform to grantee’s policies

• If no policy, use Federal rules

• First or business class unallowable

• Costs limited to commercial rates

14

5/27/2012 40

OMB Circular A-87,

Attachment C

State/Local-Wide

Central Service

Cost Allocation Plans

5/27/2012 41

What are central service

CAPs?

• Some units serve other units

– For example, motor pool, computer

center, etc.

• CAP provides process to distribute charges

• Plan based on agency’s accounting records

• OMB and DHHS guide available

5/27/2012 42

Submission requirements

• Prepare annually, 6 months after

year-end

• Submit to Cognizant Federal Agency

• Show actual for last year

• Show estimates for next year

• Grantees monitor sub-grantees

15

5/27/2012 43

Presentation is complex

• Obtain OMB and DHHS guide

• Obtain training in cost allocation

plans

• Contact Cognizant Agency

representative

• CFO or higher must certify

5/27/2012 44

OMB Circular A-87,

Attachment D

Public Assistance

Cost Allocation Plans

5/27/2012 45

Allocates cost of state public

assistance agency

• Agency administering public assistance

programs

• Programs include Child Welfare Services,

Family Preservation & Support Services,

Food Stamps, etc.

• Plan covers all administrative costs

• DHHS sets the rules

16

5/27/2012 46

Plan submission and approval

• State agencies submit to DHHS

• DHHS acts for all Federal agencies

• DHHS approves or disapproves

• State updates as necessary

• Support is primarily narrative (logic)

• “Single Audit” should cover CAPs

5/27/2012 47

OMB Circular A-87,

Attachment E

State and Local

Indirect Cost Rate

Proposals

5/27/2012 48

Indirect costs

• Not assignable to individual

function

• Include costs of department or

agency

• Include costs from central service

CAP

• Usually charged via a rate

17

5/27/2012 49

Developing indirect cost rates

• Complex process

• OMB and DHHS have issued a guide

• Obtain training before you try one

• Objective is to allocate costs reasonably

5/27/2012 50

Two possible methods

• Simplified method

–Unit has one major function, or

–All major functions benefit proportionally

• Multiple allocation base method

–Indirect costs benefit major functions in varying degrees

5/27/2012 51

Simplified method• Classify all costs as direct or indirect

• Exclude capital expenditures and

unallowable costs

• Divide indirect costs by equitable base

• Base can be total direct costs, total

direct salaries and wages, etc.

• Apply rate to each program

18

5/27/2012 52

Multiple allocation base method

• Group costs that can be allocated together

• Use as many groups as necessary

– But keep to practical limits

• Allocate each group by appropriate measure

• Base must be equitable

• Base must be common to all functions

5/27/2012 53

Develop a single

indirect cost rate• Allocate each pool to every major

function

• Total the indirect costs for each

function

• Determine the overall base (see

simplified method)

• Divide pool by base

5/27/2012 54

Special indirect cost rate

• Sometimes a program is unique, e.g.:

– It uses special services

– It is located in unusual facilities

– It requires unusual level of support

• If so, a special rate may be best

• May be required because of legal limits

– Restricted rate

19

5/27/2012 55

Submission of proposal

• Submit it to cognizant agency

• Due 6 months after year-end

• Otherwise maintain proposal until

requested

• “Common Rule” establishes

retention period

5/27/2012 56

Documentation of proposal• Reconcile all data to formal accounting

records

• Central service costs should tie to CAP

• Provide support for the allocation

base(s)

• Provide organization chart and

functional statements

• CFO or higher must certify

5/27/2012 57

Negotiation and approval of rates

• Cognizant agency reviews and

negotiates

• All other Federal agencies will accept

rates

• Results of negotiations will be written

• Can be reopened if major problem

found

• Fringe benefit rates can be negotiated

20

5/27/2012 58

Summary

• Indirect cost rates can be complex

• Get training before you try to

develop them

• With training, you can do it

• Remember, use your common

sense

5/27/2012 59

Audit Requirements for

Agreements

• Selected definitions

• Audit threshold requirements

• Allowable audit costs

• Program-specific audits

• Cognizant agency responsibilities

So what is different under

ARRA?

• American Recovery and Reinvestment Act

of 2009 (Pub. Law 111-5)

– Division A – Appropriations Provisions

– Division B – Tax, Unemployment, Health,

State Fiscal Relief, and Other Provisions

• 407 pages – about $790 billion in discretionary and

formula-based program funds!

• Effective April 23, 2009

5/27/2012 60

21

Purpose of ARRA

• Increase or extend certain benefits payable

under Medicaid, unemployment

compensation and nutrition assistance

programs.

• Spur clean energy, encourage science and

technology research.

• Modernize transportation infrastructure,

expand health care and improve

education.5/27/2012 61

Other unique provisions of

ARRA• Established an oversight board of inspectors

general called the Recover Accountability

and Transparency Board (RAT Board)

– To ensure recipients of Recovery Act funds are

transparent and accountable.

• Created Recovery.gov, a searchable Web site

that will allow the public to see how

Recovery Act funds are spent.

– Unlike USASpending.gov.

5/27/2012 62

ARRA funds must be issued and

spent quickly

• Recipients must obligate all formula and

discretionary fund within one year from the

date the funds become available for obligation.

– Must expend at least 60 percent of grant funds

within two years of the date they become available.

– Must expend 100 percent of the funds within one

additional year.

• Awarding agencies will recapture any funds that fail

to be obligated or expended with these time limits.

5/27/2012 63

22

White House mandate to Federal

Agencies

• Develop and use merit-based selection criteria

to choose grant projects.

– Projects that deliver programmatic results; achieve

economic stimulus by creating and saving jobs;

achieve long-term public benefits; and satisfy

transparency and accountability objectives.

• Funds may not be used for “imprudent projects,”

such as a casino, aquarium, zoo, golf course or

swimming pool.

5/27/2012 64

Office of Management and

Budget (OMB) Guidance• M-09-21 – Implementing Guidance for the Reports on

Use of Funds Pursuant to the ARRA, June 22, 2009

• M-09-18 – Payments to State Grantees for

Administrative Costs of ARRA Activities, dated May

11, 2009

• M-09-16 – Interim Guidance Regarding

Communications With Registered Lobbyists About

ARRA Funds, dated April 7, 2009

• M-09-15 – Updated Implementing Guidance for

ARRA, dated April 3, 20095/27/2012 65

ARRA requirements differ from

traditional grant management practices.

• Grant objectives – must provide measurable

outcomes and promote ARRA goals of job

creation and preservation.

• Competition – promote to the maximum extent

practicable.

– Also maximize local hiring and opportunities for

small businesses.

• Existing grants – may consider, but must track

and account for Recovery funds separately.5/27/2012 66

23

ARRA requirements differ -

continued

• Award timeliness – applicants and sub-

recipients must obtain Dun and Bradstreet

Universal Number System (DUNS)

numbers and register with the Central

Contractor Registration (CCR).

• Catalog of Federal Domestic Assistance

Numbers – Recovery Act projects must

have new CFDA numbers (ARRA prefix).

5/27/2012 67

One additional difference!

• The terms and conditions of Recovery Act grants

must state that each grantees and sub-grantees

should promptly refer to an appropriate inspector

general “any credible evidence that a principal,

employee, agent, contractor, sub-grantee, sub-

contractor or other person submitted a false claim

or has committed a criminal or civil violation of

laws pertaining to fraud, conflict of interest,

bribery, gratuity or similar misconduct involving

Recovery Act funds.”

5/27/2012 68

Federal Agencies Awarding Stimulus

Funds Must Meet New Rules -

Immediately

• Federal agencies have already begun

posting Recovery Act grants on Grants.gov.

• Federal agencies have developed agency-

wide and program-specific plans.

• Federal agencies must issue weekly

financial reports for Recovery Act funds.

5/27/2012 69

24

Grantees Receiving Stimulus Funds

Must Meet New Rules - Immediately• New terms and conditions, which are being located in

a newly created 2 CFR Part 176, require recipients to

provide the following information:

– The name of the project or activity;

– The total amount of recovery funds received;

– The amount of recovery funds spent on the project or

activity;

– A description of the project or activity;

– An estimate of the number of jobs created and/or retained;

and

– The purpose, total cost and rationale for State and local

governments making infrastructure investments.

5/27/2012 70

Sub-Grantees Receiving Stimulus Funds Must

Meet New Rules - Immediately

• Data includes elements required to comply with the Federal

Funding Accountability and Transparency Act (P.L. 109-282)

including:– Sub-recipients name;

– Amount of the award;

– Transaction type;

– Funding agency;

– CFDA number;

– Program source;

– Location of the entity receiving the award and the primary place of performance;

– A unique identifier of the entity receiving the awarded and the parent entity of the

recipient; and

– Names and total compensation for the five most highly compensated officers of the

entity.

• If the entity received 80% or more of its annual gross revenue in Federal awards and $25

million or more in annual gross revenue from Federal awards.

5/27/2012 71

Other New Rules that Must be

Met Immediately

• Recipients involved in public buildings or

public works projects:

– Use American iron, steel and manufactured

goods, unless specified exemptions applies

(non-availability of materials, unreasonable

costs or inconsistent with public interest).

– Payment of Davis-Bacon wage rates to laborers

and mechanics, unless specified exemptions

applies.

5/27/2012 72

25

Administrative Requirements

• OMB Circular A-102 Common Rule for State,

local governments and Pacific Insular Area

and OMB Circular A-110 (2 CFR Part 215) for

educational institutions, non-profit

organizations and hospitals.

– But remember, certain deadlines, such as financial

reporting due dates differ under ARRA.

– Also Recovery Act waives some matching and

cost-sharing requirements.

5/27/2012 73

Other Provisions

• ARRA funds shall be used to supplement,

not supplant, current program funding.

• Federal agencies may adjust limits on

administrative expenditures for Federal

awards to help recipients defray the cost of

data collection and oversight.

• Environmental reviews under the National

Environmental Policy Act must be

completed5/27/2012 74

Single Audit Requirements

• Grantees and sub-grantees that expend

$500,000 or more annually in Federal financial

assistance must have a single audit or program-

specific audit performed under OMB Circular

A-133 and the Compliance Supplement.

– Federal agencies will perform risk analysis of

Recovery Act programs and request the OMB to

designate any high-risk program as a major

program requiring a single audit.

5/27/2012 75

26

Remember the RAT Board

• Inspectors general will use risk assessment

techniques to identify high-risk programs and

entities to be targeted for priority audits,

inspections, and investigations.

– AGA’s Financial and Administrative Monitoring

Tool, February 2009

– AGA’s Risk Assessment Monitoring Tool,

February 2009

– ACFE’s Fraud Prevention Check-up

5/27/2012 76

ARRA Recipient Reporting

• Prime recipients are responsible for

reporting on their use of funds as well as

any sub-awards they make.

– Requirements only apply to prime recipients

funds through discretionary appropriations, not

those receiving funds through entitlement or

other mandatory programs.

5/27/2012 77

Devil is always in the details?

• Recipients of ARRA funds are required to

submit reports to the centralized Federal

reporting portal (federalreporting.gov) by

October 10, 2009, followed by quarterly

reports due 10 days after the end of each

calendar quarter.

– Recipients must also have their July 10th quarterly

financial reports data ready for the October

submission.

5/27/2012 78

27

Report Contents

• Recipients must report on the number and

types of jobs created and retained by the

program, using full-time equivalent estimates.

– “Jobs created” is defined as those new positions

created or filled, or previously existing unfilled

positions that are filled, as a result of ARRA

funding.

– “Jobs retained” is defined as these previously

existing filled positions that are retained as a result

of ARRA funding.

5/27/2012 79

So, where is OMB going?

• OMB is seeking suggestions for modifying

grant rules

– Requested in Federal Register on February 28,

2012

– Submit comments by March 29, 2012

– Request covered many areas

5/27/2012 80

Request can be found at:

www.federalregister.gov/articles/

Purpose is to improve grant

administration

• Strengthen oversight of Federal grant dollars

• Increase efficiency and effectiveness by

eliminating unnecessary and duplicative

requirements

• OMB has developed a number of ideas for

reform that could impact virtually all Title

2 requirements and OMB Circulars that

affect grants and other agreements

5/27/2012 81

28

Refers to Executive Order 13563• Intended to improve regulation and regulatory

review

• Agencies should confer with stakeholders

before proposing new rules

• Agencies should coordinate efforts

• Agencies should try to reduce burdens on the

public

• Agencies should review existing rules to see

which should be eliminated or changed

5/27/2012 82

OMB presents reform ideas for

comment in three areas

• Audit Requirements

• Cost Principles

• Administrative Requirements

5/27/2012 83

Ideas for modifying Single

Audits

• Change threshold

– No audits required if Federal funds are

below $1 million

– More focused Single Audit for entities

expending less than $3 million

• Review allowable costs

• Plus one other compliance requirement

5/27/2012 84

29

Additional ideas for Single

Audits

• Streamlining requirements

• Emphasizing

– Improper payments

– Waste, fraud, and abuse

– Program performance

5/27/2012 85

Strengthening guidance for audit

follow-up

• Establish senior position for audit resolution

• Require agencies to develop audit-risk

metrics

• Encourage agencies to take a pro-active

approach

5/27/2012 86

Reducing burdens on pass-

through entities

• Require Federal agencies to follow up on

findings that are not specific to sub-

awards

• Pass-through entities would no longer have

to resolve financial and internal control

issues

5/27/2012 87

30

Ideas for reforming Cost

Principles

• Consolidating Cost Principles into a single

document

– Some variations by entity

• Using flat rates instead of negotiated rates

for indirect costs

– OMB seeks input of an approach that would

prevent “gaming” the system

5/27/2012 88

More ideas for Cost Principles

• Exploring alternative to time-and-effort

reporting

• Expanding application of Utility Cost

Adjustment for research at universities

• Charging directly allocable administrative

support as a direct cost

• Allowing some computing devices as direct

cost supplies5/27/2012 89

Even more ideas for Cost Principles

• Clarifying threshold for residual value of

supplies

• Eliminating requirement to conduct cost

studies for large research facilities

• Eliminating restrictions on use of indirect cost

recovered for depreciation

• Providing non-profits with examples of

indirect cost proposals

• And many more ….5/27/2012 90

31

Ideas for reforming

Administrative Requirements

• Creating one set of Administrative

Requirements

• Agencies must consider each proposal’s merit

and applicant's financial risk

• Require agencies standard format and 90-day

notice of funding opportunities

• Reiterate that information collection requests

are subject to Paperwork Reduction Act

5/27/2012 91

OMB raised some overarching

questions

• Which suggestions would increase or

decrease your workload?

• Which would be most or least valuable to

you?

• Any ideas you don’t want implemented?

• Any other reform ideas that OMB should

consider?

5/27/2012 92