In this article, we will elaborate on the Standards for Documentation of Personnel Expenses, previously known as “time and effort reporting,” which is contained in subparagraph (i) of section 200.430 “Compensation — Personal Services” in the Cost Principles section of the new uniform guidance.
Let's start with a few overarching principles dealing with allowable employee compensation under these reforms:
- Compensation for employees engaged in work on Federal awards will be considered reasonable to the extent that it is consistent with that paid for similar work in other activities of the non-Federal entity.
- Compensation has to be for an allowable purpose.
Overall, OMB has shifted the focus toward an internal control framework as opposed to requiring specific documentation and standardized forms, like the prior requirement for personnel activity reports (PAR). All charges to federal awards for salaries and wages must have recorded evidence to accurately reflect the work performed. The guidance does not state how the documentation must be maintained, allowing organizations more freedom to tailor controls and processes to their needs.
There are several criteria that an organization's documentation of personnel expenses must follow. Note that these are more principles-based, rather than rules-based, criteria. Charges to Federal awards for salaries and wages should be reflected in documentation that must:
- Be supported by a system of internal controls that provides reasonable assurance that the time being charged to grants is accurate, allowable, and properly allocated.
- Be incorporated into the official records (payroll records or journals) of the non-Federal entity.
- Reasonably reflect the total activity for which the employee is compensated.
- Encompass both federally assisted and all other activities compensated on an integrated basis, but may include the use of subsidiary records.
- Support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award or splits time between Federal and non-Federal activities.
- Comply with already-established accounting policies and practices of the organization receiving Federal awards.
Although budget estimates can still be used for interim accounting purposes, if an organization choses to use budgetary amounts to charge federal grants, the system used to make those initial estimates must produce reasonable approximations. Significant changes in the work activity of each person must be identified and adjusted timely, and internal controls must include processes to review after-the-fact charges made based on budget estimates. In the end, organizations that use budgetary estimates must ensure that the final amounts being charged to the grants are accurate, allowable, and properly allocated.
A few implications organizations may want to consider as a result of these changes follow:
- It may be beneficial for organizations that process payroll and document effort together to use separate processes, especially if not all employees work on grants.
- The new principles-based, internal-controls-focused criteria allow organizations more flexibility to design internal control systems that suit their needs as long as they comply with the underlying criteria. However, the lack of specific requirements may make it harder for Federal agencies to determine whether an organization's internal controls are suitably designed. A double-edged sword, for sure!
- If a Federal agency determines that an organization's records do not meet the standards described above, the Federal government may require personnel activity reports, including prescribed certifications, or equivalent documentation that supports the records.
- Pass-through entities may require continued use of PARs even though the OMB does not. Because the pass-through entities must monitor subrecipients, PARs could be considered an easier method of monitoring.
- Organizations that are already utilizing personnel activity reports may not want to change systems if the use of PARs is already well-established and working well.
Compliance with this framework should not necessarily require a major overhaul of reporting systems. Many organizations may already have strong internal controls over documentation of personnel compensation. Going forward, organizations should review the criteria, determine whether the existing internal control systems meet the framework, and decide whether strengthening controls over time and effort reporting to ensure compliance with the overarching requirements is required.