Managing the Award
Direct Costing on Sponsored Projects | Monitoring Expenses | Expanded Authorities | Rebudgeting Requests
Direct Costing on Sponsored Projects
Direct costs are those costs that can be identified specifically with a particular sponsored project, or that can be directly assigned to such activity relatively easily with a high degree of accuracy. The federal government has established regulations regarding the charging of direct costs to government sponsored projects at educational institutions. Many government agencies publish additional cost guidelines specific to those agencies. Non-governmental agencies may also have cost guidelines, although they are generally not as stringent as government requirements. In accepting funds for sponsored projects (grants, contracts, and other types of assistance agreements) CDU agrees to abide by all of these regulations and guidelines.
COST ACCOUNTING STANDARDS – OVERVIEW
With regard to federally sponsored projects, the relevant cost accounting standards are established by the Cost Accounting Standards Board (CASB), an independent, legislatively-established board within the executive branch of the federal government. The regulations published and updated by the CASB are referred to as Cost Accounting Standards. In 1994, CASB imposed four standards on universities receiving significant awards from federal agencies. In 1996, OMB Circular A-21 (later relocated to 2 CFR Part 220) was revised to include the four CAS standards, and these standards became applicable to all types of federal awards. CASB imposed these standards to prevent the charging of unallowable costs to federal awards, to standardize university costing practices, and to standardize requirements for recipients of federal funds.
OMB Circular A-21 states: "The tests of allowability of costs under these principles are:
- costs must be reasonable;
- costs must be allocable to sponsored agreements under the principles and methods provided herein;
- costs must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances; and
- costs must conform to any limitations or exclusions set forth in these principles or in the sponsored agreement as to types or amounts of cost items."
These four CAS standards are further defined and explained as follows:
- The cost must be reasonable. The item/service charged must be generally recognized as necessary for the performance of the project and the cost must be consistent with the same amount a prudent person would consider reasonable given the same set of circumstances.
- The cost must be allocable to the sponsored project. A cost is allocable to a particular sponsored project if the goods or services involved are chargeable or assignable to the sponsored project. Specifically, a cost is allocable if:
- it solely benefits the project;
- it benefits the project and other work of the institution in proportions that can be approximated using reasonable methods.
- The cost must be treated consistently with other similar costs incurred in like circumstances in accordance with generally accepted accounting principles. Expenses for similar purposes must be treated the same way throughout the university under like circumstances.
- The cost must conform to any limitations or exclusions stated in generally accepted accounting principles or in the sponsored agreement. The cost must be "allowable" and not specifically designated as unallowable by regulation or grant/contract specific award conditions.
COST ACCOUNTING STANDARDS - DETAILED
A cost may be considered reasonable if the nature of the goods or services acquired or applied, and the amount involved, reflect the action that a prudent person would have taken under circumstances prevailing at the time the decision to incur the cost was made. Major considerations involved in the determination of the reasonableness of a cost are:
- Whether or not the cost is of a type generally recognized as necessary for the performance of the sponsored agreement;
- The restraints or requirements imposed by such factors as arm's-length bargaining, federal and state laws and regulations, and sponsored agreement terms and conditions;
- Whether or not the individuals concerned acted with due prudence in the circumstances, considering their responsibilities to the institution, its employees, its students, the federal government, and the public at large; and,
- The extent to which the actions taken with respect to the incurrence of the cost are consistent with established institutional policies and practices applicable to the work of the institution generally, including sponsored agreements.
Direct charges must be assignable to a sponsored project "in accordance with benefits received." If the sponsored project could not have reasonably benefited from the items purchased, then the cost would not be allocable to the sponsored project.
A cost is allocable to a federally sponsored agreement if:
- It is incurred solely to advance the work under the sponsored agreement; or
- It benefits both the sponsored agreement and other work of the institution, in proportions that can be approximated through use of reasonable methods.
If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost should be allocated to the projects based on the proportional benefit. If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, then the costs may be allocated or transferred to benefited projects on any reasonable basis. However, this allocation cannot be used to eliminate cost overruns.
***Exception to General Allocability Rule: Certain Capital Equipment
Where the purchase of equipment or other capital items is specifically authorized by the sponsor [note: "authorized" means approved by the sponsor (or internally approved, if such internal approvals are allowed by the sponsor)], the amounts thus authorized for purchase are assignable to the sponsored agreement regardless of the use that may subsequently be made of the equipment or other capital items involved.
Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or Facilities and Administrative (F&A) costs. CDU has established formal review processes to determine if certain types of costs are allowable as direct charges to federal awards. In general, the following types of costs are treated as Facilities and Administrative costs and may not be directly charged to federal awards unless:
- at the time of proposal submission these costs have been specifically identified in the proposal budget and budget narrative;
- the federal sponsor has approved the budget; and,
- CDU has formally approved these costs through the Facilities and Administrative Exception Approval process.
Costs normally charged as F&A:
- Salaries of clerical and administrative personnel engaged in routine departmental or administrative work that benefits all activities of the department (instruction, research, training, public service, etc.), i.e., there is no direct relationship to a specific sponsored project's scope of work.
- Supplies and materials for routine departmental or administrative activities of the department that benefit all activities of the department (instruction, research, training, public service, etc.), i.e., there is no direct relationship to a specific sponsored project's scope of work.
- Other costs such as travel, repairs, fees and services, local and long distance telephone expenses, copying and postage that are for routine departmental or administrative use, and do not have a direct relationship to a specific sponsored project's scope of work.
- General office items with multi-functional use such as computers, fax machines, answering machines, staplers, hole punches, filing cabinets, chairs, desks, calculators, waste baskets, etc., that do not have a direct relationship to a specific sponsored project's scope of work.
Justification and approval are required in proposals that budget certain costs as direct costs. For costs that a layperson may consider routine and administrative in nature, specific written justification as to the relationship between the cost and the proposed project's scope of work should be completed as a part of the proposal’s budget narrative and submitted to OSP as a part of the proposal to the sponsoring agency. (Also Pre-Award)
The documentation should explain the direct benefit relationship between these cost items and the proposed scope of work. OSP may notify the PI that these costs have been included in the budget and that a formal internal exception and approval process will be required if the project is funded.
Upon award, appropriate exception forms for both administrative salaries and non-salaried items must be completed, signed by the PI and the Deans (COM/COSH), department business manager, and approved by OSP.
If the administrative items have not been included in a proposal budget, re-budgeting to include these items in the funded budget may be requested. A Re-budgeting Request Form should be completed that also includes justification for the clerical/administrative expense. These forms should be signed by the PI and sent to OSP for approval.
Section J of 2 CFR Part 220 (OMB Circular A-21) provides a detailed listing of costs that may be charged to federal awards (with the disclaimer that these costs must not be deemed unallowable under a specific award notice from the federal sponsor). Typically, the following costs meet the standard of allowability. Please keep in mind that these costs must be necessary to perform the project's stated scope of work.
Typically allowable as direct costs:
- Salaries and fringe benefits of faculty, technicians, post docs, graduate research assistants and other personnel directly engaged in performing sponsored project's scope of work
- Laboratory supplies and materials necessary for performing sponsored project's scope of work
- Other costs such as travel, subcontracts, scientific/specialty equipment repairs and maintenance, long distance telephone expenses, and other directly related costs necessary for performing sponsored project's specific scope of work
- Capital equipment that is approved by the sponsor (or internally approved if allowed by the sponsor)
- Service/maintenance agreements on capital equipment approved by the sponsor (or internally approved if allowed by the sponsor)
- Identification with the sponsored work (i.e., the scope of work) rather than the nature of the goods or services is the determining factor in determining direct costs.
Typically unallowable as direct costs on federal awards:
- Advertising for general promotion of the University, including printed materials, promotional items, memorabilia, gifts, and souvenirs
- Advertising for recruitment purposes that includes color or is excessive in size
- Alcoholic beverages
- Alumni or fund-raising activities
- Bad debt write-offs
- Donations or Contributions
- Commencement expenses
- Cost Overruns; any costs allocable to a particular sponsored agreement may not be shifted to other sponsored agreements in order to meet deficiencies caused by overruns or other fund considerations, to avoid restrictions imposed by law or by terms of the sponsored agreement, or for other reasons of convenience.
- Costs on Industry, Foreign Government or Other Non-Government Grants/Contracts; any costs allocable to activities sponsored by industry, foreign governments or other sponsors may not be shifted to federally-sponsored agreements.
- Decorative objects for private offices
- Entertainment (meals/food-unless to disseminate technical information)
- Fine/original art
- Fines and penalties
- First-class/business-class air travel differentials
- Gifts, prizes, and awards
- Goods or services for personal use
- Memberships in airline travel clubs
- Memberships in civic, social, community organizations or country clubs
- Faculty and exempt staff salary in excess of base rates paid by the institution.
- Selling or marketing products or services of the University
- Social events
- Other limitations may apply, such as the Public Health Service salary cap.
Charges for work performed on sponsored agreements by faculty members will be based on the individual faculty member’s regular compensation for the continuous period which, under the policy of the institution concerned, constitutes the basis of his salary. Charges for work performed on sponsored agreements during all or any portion of such period are allowable at the base salary rate. In no event will charges to sponsored agreements, irrespective of the basis of computation, exceed the proportionate share of the base salary for that period. This principle applies to all members of the faculty at an institution.
Charges for work performed on sponsored agreements by faculty members having only part-time appointments will be determined at a rate not in excess of that regularly paid for the part-time assignments. For example, an institution pays $5000 to a faculty member for half-time teaching during the academic year. He devoted one-half of his remaining time to a sponsored agreement. Thus, his additional compensation, chargeable by the institution to the agreement, would be one-half of $5000, or $2500.
ADMINISTRATIVE AND CLERICAL SALARIES
OMB Circular A-21, Section F.6.b., states: "The salaries of administrative and clerical staff should normally be treated as Facilities and Administrative (F&A) costs. Direct charging of these costs may be appropriate where a major project or activity explicitly budgets for administrative or clerical services and individuals involved can be specifically identified with the project or activity."
This provision is intended to establish the principle that the salaries of administrative and clerical staff should usually be treated as F&A costs, but that direct charging of these costs may be appropriate where the nature of the work performed under a particular project requires an extensive amount of administrative or clerical support which is significantly greater than the routine level of such services provided by academic departments. The costs would need to meet the general criteria for direct charging in Section D.1. of Circular A-21, i.e., "be identified specifically with a particular sponsored project ... relatively easily with a high degree of accuracy," and the special circumstances requiring direct charging of the services would need to be justified to the satisfaction of the awarding agency in the grant application or contract proposal.
Administrative/Clerical costs may be allowable as direct costs if appropriately justified and if the charges meet all of the following criteria:
- Costs are required by the project’s scope of work;
- Costs can be specifically and easily identified to the project; and
- Costs represent a special need which is clearly different from costs typically charged as F&A.
- Large complex programs such as research centers, program projects, resource grants, etc., that entails assembling and managing teams of investigators from a large number of institutions.
- Projects that involve extensive data accumulation and entry, surveying, tabulation, cataloging and reporting.
- Projects that require making substantial travel and meeting arrangements for large numbers of program participants.
- Projects that are geographically inaccessible to normal departmental administrative services.
AVAILABILITY OF FUNDS
If sponsor funds are available, appropriate direct cost items must be charged to the appropriate sponsored activity fund code. If sponsor funds are not available and it is determined that the scope of work of the project cannot be modified to eliminate the need for the item, then the direct cost item must be charged to an appropriate cost-share account (note: internal approvals for cost sharing are required) and reflected as a cost of the project, but one borne by CDU. Note that costs reflected as cost-share must meet the same allowability standards as costs directly charged to a federal fund code.
DISCOUNT OR REBATES
In the event that a discount, rebate or other similar adjustment is realized, the amount charged directly to the federal award cannot exceed the resulting discounted/reduced cost. Typical examples of such transactions are: purchase discounts, rebates, or allowances; recoveries or indemnities on losses; and adjustments of overpayments or erroneous charges. This term also includes educational discounts on products or services provided specifically to educational institutions, such as discounts on computer equipment, except where the arrangement is clearly and explicitly identified as a gift by the vendor.
One of the elements most critical to successful financial administration of sponsored projects is the assignment of appropriate accounts to budget line items and expense transactions. This is true for the following reasons:
- Miscoded expenses can result in incorrect F&A cost charges. The coding determines whether or not the cost will be included in "modified total direct cost" and therefore subject to F&A or indirect cost.
- Failure to identify capital equipment purchases can result in noncompliance with internal and external property management regulations. Federal regulations require that all capital equipment purchases be added to the central inventory system. The account used on the capital equipment requisition is one method used by accounting to identify capital equipment purchases to be added to central inventories.
- Errors in account coding can result in inappropriate conclusions by the principal investigator and/or sponsor regarding financial status.
- Improperly coded expenses can result in inappropriate conclusions by auditors and can adversely impact CDU's ability to effectively monitor for compliance with federal regulations regarding allowability. In an internal or external review or audit, the account determines the type of review or audit procedure to which the expense is subjected, and whether the expense is viewed initially as allowable or unallowable.
- The account distinguishes between costs funded by the agency and those cost-shared by CDU. Failure to use a cost sharing account on cost-shared expenditures will understate CDU's contribution to the project.
For this reason, all funded proposals must have budgets at the account level (cp. OMB Circular A-21, Section C.10., "Consistency in estimating, accumulating and reporting costs").
Responsibility for following these cost accounting principles lies primarily with Principal Investigators. CDU administrative offices such as OSP and Finance are responsible for guidance and training and for ensuring compliance through periodic internal and external audits.
In order to ensure compliance with OMB Circular A-21, all transactions (Personnel Action Forms, Check Requests and Purchase Requests) involving charges to restricted accounts (sponsored projects) will be reviewed by OSP. Once OSP has approved that the proposed expenses are reasonable, allocable, consistently treated, and allowable, according to the accounting principles and requirements set forth in OMB Circular A-21, OSP will forward the transaction (PAF, CR or PR) to the Office of Finance for determination of availability of funds. Only transactions that have been reviewed and approved by OSP and Finance will be permitted to move forward to accounts payable or payroll for processing.
PIs are responsible to monitor expenses for their grant or contract project funds.
There are two main aspects to monitoring expenses:
Determine if charges are appropriate and allowable.
- Make sure expense transactions and amounts posted are correct.
- Review encumbrance balances. If there are no outstanding obligations, you should lift the encumbrances.
- Make sure expenses comply with applicable agency, CDU, and federal guidelines.
- Research questionable charges and correct errors:
- Process timely expenses transfers to move expenses incorrectly posted.
- Resolve incorrect recharges with the department that originated the charge (Telecommunications, Reprographics, etc.).
- Remove overdrafts
Make sure that expenses fit within required categories and budget amounts. Most awards restrict spending to the categories and amounts budgeted as well as the amount authorized to spend in an annual period.
- Review expense categories.
- Compare the approved award budget to cumulative expenses for each expense category.
- Determine the current ending budget balance for each expense category.
- Determine or estimate future expense requirements for each budgeted category.
- Determine which budgeted categories will be overspent per your projections.
- Rebudget or transfer expenses as needed.
- Rebudgeting: In the event of a budget overdraft (expense categories will be overspent, but the total awarded amount will not be exceeded), request a revision to the award budget per agency guidelines. If the request is denied by the agency, remove the expense from the account.
Note: Timely approval from the agency is important! Otherwise, rebudgeted expenses could be disallowed by the agency.
- Expense transfers (cost transfers): In the event of an award overdraft, process expense transfers to move the overdraft from the account.
Note: Be sure to review overdrafts for each expense category, keeping in mind not only the approved budget but also expense limitations and items that may not be allowed. Move unallowable or questionable expenses first when clearing an overdraft. Do not transfer expenses that would have been allowed by the agency or reported as subsequent expenses on the final report.
- Determine if the award will be under spent at the end of the budget or project period.
- No-cost extension: If approval is required to continue the project and spend beyond the termination date, request an extension to the budget or project termination date.
- Carryover: If approval is required to spend the balance in a separately funded period or transfer the balance to an award continuation, process a request to carryover the balance to the new period.
Expanded authorities grant certain allowances to some research grants. Expanded Authorities waive the requirement for NIH approval of specific actions under most award mechanisms unless restricted or otherwise specified in the Notice of Grant Award. The mechanisms that currently do NOT have routine automatic carryover of unobligated balances are centers (P50, P60, P30 etc.); cooperative agreements (U’s); National Research Service Awards (T’s and F’s); and Phase I SBIR and STTR (R43, R41); and clinical trials (regardless of mechanism). Grantees must exercise proper stewardship over Federal funds and ensure that the costs charged are allowable, allocable, reasonable and consistently applied regardless of the source of funds.
If you are managing an expanded authority’s award, refer to the information below for common terms and conditions.
Rebudgeting: In general, grantees are allowed some latitude to rebudget within and between budget categories. The degree of discretion varies by the type of grant, the grantee, and coverage by a special initiative.
Prior approval: Some awards may require agency approval of budget and project changes. If so, it must be granted before any change or obligation of funds.
- Prior Approval Requirements for NIH/ PHS (National Institutes of Health/ Public Health Service) awards
- If Prior Approval is required, please contact the Office of Sponsored Programs for a Prior Approval Request Form.
Most agencies require a rebudgeting request if you exceed certain expense categories in your account. A rebudgeting request is an amendment to the award agreement and must be formally submitted to the agency for official approval by the Office of Sponsored Programs (OSP).
- Review expenditure balances per the budget.
- Review your expense projections.
- Plan your rebudgeting needs, making sure the request will cover expenses for the entire budget or project period.
- Determine expense categories that need to be increased and categories that can be reduced.
- Determine if the Facilities and Administration rate (F&A) are affected by your rebudgeting and increase or decrease accordingly.
- Prepare a letter to the agency's project administrator to include:
- Amount to be reduced/increased for each expense category
- Justification for change (e.g., why you did not use funding as budgeted or how rebudgeting will benefit the project)
- The principal investigator must sign the letter which will include the signature of the Authorized Institutional Official. Keep a copy for your files.
- The letter will be forwarded by the OSP:
When official approval from the agency is received OSP w