The prior cost principles that an organization followed were dependent upon the type of organization. For state, local and American Indian tribal governments, the prior rules were contained in Circular A-87; for educational institutions, the guidance was found in Circular A-21; and for nonprofit entities, Circular A-122 had previously applied. The new uniform grants guidance consolidates these three cost circulars into one document that will now apply to all entities. The cost principles are found in Subpart E of the uniform grants guidance and in several appendices, which contain guidance on indirect costs and cost allocation plans for different entities.
The final guidance clarifies and strengthens cost principles across many functional areas. The cost principles subpart applies to non-Federal entities receiving Federal awards, such as local units of government, higher education institutions, and not-for-profits. Although hospitals do have to comply with the other aspects of these new uniform requirements, for the time being, they will continue to follow the prior cost principles standards rather than these new cost rules. The main areas addressed by these cost principles relate to:
- Allowable cost
The uniform guidance reemphasizes the need for costs to be necessary in the performance of a Federal award, be adequately documented, and be reasonable. Sections 200.420 through 200.475 provide principles to be applied in establishing allowance of select items of cost — from advertising to trustee expenses. As you might imagine, OMB could not address every possible type of cost within these standards, so just because a particular cost item is not specifically listed does not mean it is by default either allowable or not allowable. This is where judgment comes into play!
- Direct and indirect (facilities and administrative) costs
In this section, OMB tries to distinguish between direct and indirect costs but does acknowledge that there is no universal rule for identifying a cost as either direct or indirect. Direct costs are those "that can be identified specifically with a particular final cost objective, such as a Federal award or other internally or externally funded activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy." If you treat an item as a direct cost in one instance, you must treat it as direct in all similar circumstances.
- Prior written approval
If you have a selected item of cost and need help determining its reasonableness and allocability, in order to avoid problems with possible disallowance further down the line, you may obtain prior written approval in advance of incurring the cost. In addition, there are specific circumstances where you are required to obtain prior approval. Section 200.407 provides non-Federal entities with a comprehensive list of the areas in the reformed rules where non-Federal entities need to seek prior approval from the Federal awarding agency.
- Indirect cost rates and cost allocation plans
These still exist under the new reforms. Be careful, however, because this is one area where the requirements differ depending upon your type of organization. The appendices go into much more detail on these requirements, which seem to be very similar to the current standards.
- Time and effort reporting
This area related to documenting and substantiating employee compensation might be perhaps one of the biggest changes made by the new standards. The shift is from a more rules-based approach that required employee activity reports (and the like) to standards that are much more principles-focused. The focus of the standard is on an organization's system to capture and charge time and effort. In fact, this is such a significant area that we have dedicated an entire article to discussing these concepts >>
Key items of importance
- Administrative costs:
- In order to clarify the prior rules, the OMB added a provision that administrative costs, like salaries of administrative and clerical staff, now can be charged as direct costs in certain circumstances.
- Direct charging of these costs is allowed when all of the following conditions are met:
- The administrative or clerical service is integral to the project or activity.
- Individuals involved can be specifically identified with the project or activity.
- The administrative or clerical costs are budgeted or have the prior written approval of the Federal awarding agency.
- The costs are not also recorded as indirect costs.
- The new grants guidance includes a new 10 percent de minimus rate for indirect costs for those that have never received a negotiated indirect cost rate in the past, thereby eliminating a potential administrative barrier to receiving and effectively implementing Federal awards. This is particularly valuable for smaller organizations, which don't have the capacity to conduct full negotiations with the Federal government, to otherwise obtain an indirect cost rate. No documentation needs to be maintained to support the use of this rate. This de minimus rate may be used indefinitely, but it must be applied across the board to all grants for which indirect costs are charged. Unfortunately, if you already have a negotiated rate and that negotiated rate is lower (or higher), you cannot choose to use the new 10 percent de minimus threshold.
- Federal agencies are also now required to accept the negotiated indirect cost rate from another Federal agency unless an exception is required by statute or regulation.
- A Federally approved, negotiated indirect cost rate may be extended, on a one-time basis, for a period of up to four years. This extension is not automatic; you must obtain the approval of the negotiating Federal agency.
- For state and local governments, there have been a few changes in determining (1) who needs to get approval of the cost allocation plan or indirect cost rate proposals and (2) how to determine the cognizant agencies. We have put together a table that can be used by all organizations as a guide to better understand who is required to get approvals and from which Federal agencies:
*If your organization is not required to obtain approval, because the plans or rates are still subject to audit by either your external audit organization or at-will by a Federal agency, you must still maintain the plan and related supporting documentation.
- Required certifications (200.415): Several certifications are required under the cost principles contained in the uniform grant guidance:
- Such certifications make for better non-Federal accountability by providing for explicit and consistent language in required certifications. In addition, these certifications now make clear the potential ramifications of false representations.
Remember, the grants reform requires written procedures for determining the allowability of costs in accordance with the revised cost principles. Such written procedures should address how allowability is determined and approved. Various other written procedures are required by the grants reform rules, too, so be on the lookout for those requirements as you read the other sections of these reforms.
Overall, the changes made to the cost principles were designed to ensure that the Federal awards bear their fair share of costs; however, these principles do not in any way guarantee the extent of Federal government participation in a project. Federal dollars are still limited!
These cost principles will apply to new awards and to additional funding increments to existing awards made after Dec. 26, 2014. Existing Federal awards will continue to be governed by the terms and conditions of the existing Federal award.