Top Risks in Sponsored Projects
Financial Compliance:
A Specific Focus on Direct Costs vs. F&A Costs
Barbara Siegel, Acting Deputy Director of Grant and Contract
Administration
Tracy R. Walters, Director of Grant and Contract Financial
Administration
Overview
 Top Audit and Compliance Risks
 Institutional Fiscal Requirements
 Challenges to University Compliance
 Consequences of Noncompliance
 On the Horizon
Top Compliance Risks
Source: Huron Consulting
 Cost Transfers
 Effort Reporting
 Subrecipient Monitoring
 Direct Charging of Administrative Costs
 Charging Costs at End of Award Period
 Appropriate Cost Charging
 Recharge Centers / Service Center Rates
 Fixed Price Agreements
 Financial Status Reports
 Mandatory Cost Sharing
Institutional Fiscal Requirements
 Meet federal cost accounting standards and
comply with federal regulations in order to
transact business with federal agencies.
 Federal government wants assurance and
verification that colleges and universities
expend federal awards efficiently and
effectively.
Institutional Fiscal Requirements
 The Disclosure Statement (DS-2) is a document that explains
(fiscal roadmap) how the University performs its cost accounting
practices. The federal government wants to know how Yale
treats direct costs and facilities & administrative costs (F&A),
also referred to as direct & indirect costs, and complies with
Cost Accounting Standards (CAS). In addition, it wants an
assurance that institutions actually follow their disclosed
practices.
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DS-2 provides formal guidelines for:
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Charging direct & F&A costs
Tracking & reporting cost sharing
Tracking & reporting time & effort
Accounting for Service Centers
Without an approved DS-2, future federal funding is at risk.
 Required by Office of Management & Budget (OMB) Circular A-
21.
Institutional Fiscal Requirements
Disclosure Statement (DS-2)
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Educational institutions subject to OMB Circular A-21 that
received aggregate sponsored agreements totaling $25 million
or more during their most recently completed fiscal year shall
disclose their cost accounting practices by filing a Disclosure
Statement.
Institutional Fiscal Requirements
Cost Accounting Standards (CAS) Applicable to
Educational Institutions

OMB Circular A-21, Subsections C.10-14 impose 4 of the 19
CAS on educational institutions:
 CAS 501 – Consistency in estimating, accumulating and
reporting costs
 CAS 502 – Consistency in allocating costs incurred for
the same purpose
 CAS 505 – Accounting for unallowable costs
 CAS 506 – Cost accounting period must coincide with
Institution’s fiscal year
Institutional Fiscal Requirements

CAS 502 – Consistency in allocating costs
incurred for the same purpose
 Requires that “…all costs incurred for the same
purpose, in like circumstances, be treated as
either direct costs only or F&A costs only with
respect to final cost objectives”
 Prohibits charging as a direct cost any cost for
which other costs incurred for the same purpose,
in like circumstances, have been included in any
F&A cost pool to be allocated to that or any other
final cost objective.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Federal OMB Regulations Circular A-21
A cost is allocable to a sponsored agreement if
(1) it is incurred solely to advance the work under the sponsored
agreement;
(2) it benefits both the sponsored agreement and other work of the
institution, in proportions that can be approximated through use of
reasonable methods; or
(3) it is necessary to the overall operation of the institution and, in light
of the principles provided in this Circular, is deemed to be assignable
in part to sponsored projects
Where the purchase of equipment or other capital items is
specifically authorized under a sponsored agreement, the
amounts thus authorized for such purchases are assignable to
the sponsored agreement regardless of the use that may
subsequently be made of the equipment or other capital items
involved.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Federal OMB Regulations Circular A-21 cont’d
Any costs allocable to a particular sponsored agreement under the
standards provided in this Circular 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.
Any costs allocable to activities sponsored by industry, foreign
governments or other sponsors may not be shifted to federally
sponsored agreements.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Health and Human Services (HHS) Policy
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A “direct cost” is any cost that can be specifically identified with a
particular project, program, or activity or that can be directly assigned to
such activities relatively easily and with a high degree of accuracy. Direct
costs include, but are not limited to, salaries, travel, equipment, and
supplies directly benefiting the grant-supported project or activity.
Most organizations also incur costs for common or joint objectives that,
therefore, cannot be readily identified with an individual project, program,
or organizational activity. Facilities operation and maintenance costs,
depreciation, and administrative expenses are examples of costs that
usually are treated as F&A costs.
The organization is responsible for presenting costs consistently and
must not include costs associated with its F&A rate as direct costs.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Application of Federal Regulations:
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Costs charged to sponsored projects must be
allowable, that is,
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Allowable: To be allowable, costs must be reasonable and
necessary; be allocable to federally sponsored projects under the
principles and methods provided in OMB Circular A-21; be given
consistent treatment; and conform to any limits or exclusions set
forth in A-21 or the terms and conditions of the award (defined
specifically in OMB Circular A-21 Section J General Provisions of the
cost principles).
Reasonable and Necessary: A cost may be considered reasonable
if the nature of the goods or services acquired or applied, and the
amount involved therefore, reflect the action that a prudent person
would have taken under the circumstances prevailing at the time the
decision to incur the cost was made.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Application of Federal Regulations cont’d:
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Costs charged to sponsored projects must be
allocable, that is,
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Allocable: A cost is allocable to a particular cost objective (i.e., a
specific function, project, sponsored agreement, department, or the
like) if the goods or services involved are chargeable or assignable
to such cost objective in accordance with relative benefits received
or other equitable relationship.
Consistently treated: All costs incurred for the same purpose, in
like circumstances, are either direct costs only or F&A costs only
with respect to final cost objectives.
Conform to any limitations or exclusions: 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.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Application of Federal Regulations cont’d:
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Direct costs of sponsored projects must be incurred solely to
advance the work of the project (or interrelated projects) and be
reasonable and necessary for the performance of the project
Costs must be allowable as either an indirect or direct cost only,
not both
Cost accounting standards require institutions to be consistent
in the way that costs are estimated, accumulated and reported
and in the treatment of costs as either direct or indirect
Institutions must exercise caution when direct charging costs
normally considered as facilities and administration (F&A) types
of expenses
Challenges to University Compliance
Direct Costs vs. F&A Costs
Yale Policies

Under federal regulations and sponsor requirements,
departmental types of expenses (including but not limited to
administrative or clerical salaries, office supplies, postage, local
telephone costs, photocopy costs, network charges, cell phones,
etc) should normally be treated as an F&A cost and recovered
through the F&A cost rate.
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In unlike circumstances where the nature of the work performed
on a project requires extensive departmental support, some
administrative-type expenses may be treated as direct costs.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Yale Policies
Federal vs. Nonfederal:
 Many non-federal sponsors do not fully reimburse the University for its
Facilities and Administrative (F&A) costs (commonly referred to as
indirect costs) on sponsored awards. In recognition of this practice,
Yale expects these non-federal sponsored projects to directly pay for
costs which are normally F&A costs if:
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the terms and conditions do not specifically prohibit such costs; and
a benefit exists to the sponsored project.
 While some state awards appear to be state funded, Yale Federal pass-
through awards received from a state agency must be treated as
Federal Funded (may not be easily identifiable)
 State contracts that stipulate the University must comply with OMB
Circular A-21 regulations within the contract must be treated as a
Federal Funded Award.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Common F&A Type Expenses:
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Administrative and Clerical Salaries
ITS Communications Charges
Local Telephone and Internet Charges
Cellular Telephone Charges
Dues and Memberships
Office Equipment (Facsimiles, Copiers, Printers)
Computer Desktop/Laptop Purchases
Books and Periodicals
Paper Supplies and Envelopes
Lab Coats and Laundering
Annual Safety Cabinet/Hood Certifications
Malpractice Insurance
Entertainment
Challenges to University Compliance
Direct Costs vs. F&A Costs
Key Concepts:
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Ensure that costs directly charged to an award are for
the direct benefit of the project.
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Use and follow University guidelines on proper cost
allocation methodologies.
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Ensure accountability and fiscal integrity of expenses.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Key concepts
 “Unlike
circumstances”: A cost normally treated as an
F&A cost may be appropriate as a direct cost on a
federally sponsored project if:
 The cost is allowable (defined as necessary, reasonable,
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and allocable) and permissible under the law, terms and
conditions of the award, and the circumstances are “unlike”
Unlike circumstances may be determined by the nature of
the project (see examples in OMB A-21, Exhibit C)
The project is considered a “major project”
(Note: There are some projects that are not considered
“major” but may still qualify as “unlike circumstances.”)
Challenges to University Compliance
Direct Costs vs. F&A Costs
Key concepts
 Examples of "major project" where direct charging of
administrative or clerical staff salaries may be
appropriate:
 Large, complex programs such as General Clinical Research
Centers, Primate Centers, Program Projects, environmental
research centers, engineering research centers, and other
grants and contracts that entail assembling and managing
teams of investigators from a number of institutions.
Challenges to University Compliance
Direct Costs vs. F&A Costs
 Major Project Examples cont’d
 Projects which involve extensive data accumulation,
analysis and entry, surveying, tabulation, cataloging,
searching literature, and reporting (such as
epidemiological studies, clinical trials, and
retrospective clinical records studies).
 Projects that require making travel and meeting
arrangements for large numbers of participants, such
as conferences and seminars.
 Projects whose principal focus is the preparation and
production of manuals and large reports, books and
monographs (excluding routine progress and technical
reports).
Challenges to University Compliance
Direct Costs vs. F&A Costs
 Major Project Examples cont’d
 Projects that are geographically inaccessible to normal
departmental administrative services, such as research
vessels, radio astronomy projects, and other research fields
sites that are remote from campus.
 Individual projects requiring project-specific database
management; individualized graphics or manuscript
preparation; human or animal protocols; and multiple projectrelated investigator coordination and communications.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Non Personnel Examples
 ITS Communications Charges
 Dedicated line used to conduct a telephone survey or 24 hour
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“Hot-line” specified within a project’s scope.
T-1 Line used exclusively for computational analysis or
constant transmission of study data associated with a
specified project.
Toll-free (i.e., 1-800) line for study participants to contact
researchers regarding a study.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Non Personnel Examples (cont’d):
 Computer Desktop/Laptop Purchases
 May be allowable as a direct cost in specific situations where
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the nature of the research requires a computer, e.g., the
computer is attached to a piece of equipment and is required
for collection and/or analysis of information/data for the
sponsored project or the computer needed to record data
while in the field, such as an archaeological site.
Because a computer is potentially used for many different
activities (instruction, research, and administration), it may not
easily be assigned to any one of these activities. Thus,
computer costs are normally an F&A expense and included in
the University’s F&A rate calculation.
There are some sponsors that prohibit the purchase of
computers while others require that the computer must be
exclusively used for the research. Yet other sponsors state
“primarily”.
Challenges to University Compliance
Direct Costs vs. F&A Costs
Non Personnel Examples (cont’d):
 Cellular Telephone Charges
 Dedicated specifically and exclusively for safety measures
involving project staff required to work in high crime areas or
potentially dangerous populations
 Dues and Memberships
 Not typically allowable as a Direct cost
 Books and Periodicals
 Books and subscriptions not available in the University or
departmental library and specifically identifiable to a project.
 Paper Supplies and Envelopes
 Project surveys, mailings and return metered envelopes
supporting projects involving human participants.
Challenges to University Compliance
Direct Costs vs. F&A Costs
 “Exceptional Circumstances” Proposals
 The project scope of work must qualify as a
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major project under which exceptions could be granted
The budget should include “exceptional” costs
The budget justification must describe the rationale for the
exceptional costs.
The project narrative should also describe the exceptional
circumstances
Institutional approval and Sponsor’s acceptance is required;
Provided that the expense is budgeted, justified and not
specifically denied in the notice of award.
Challenges to University Compliance
Direct Costs vs. F&A Costs
 Challenges of policy/procedure Implementation:
 Yale Policy/Procedures and Departmental Training
 Understanding what is treated as a direct cost and when
there may be acceptable exceptions for the direct charging
of F&A type expenses
 Breaking old habits and routines
Consequences of Non-Compliance
 Disallowance of costs
 Published and publicly available audit findings
 Greater audit oversight
 Adverse effects on Facilities & Administrative rate
negotiations
 Loss of future funding
 Loss of University credibility
On the Horizon
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Increasing number of federal desk reviews, federal onsite visits and cost reviews.
Tougher A-133 compliance supplements and audits.
Greater emphasis placed on the Statement on
Auditing Standards No. 112 (SAS112)
 Substantially increases policy and procedural
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documentation of institutions’ internal control processes.
Lowers the bar on audit findings
 An inappropriate or disallowed charge may result in
findings regardless of materiality of charges.
Resources
OMB Circular A-21
(http://www.whitehouse.gov/omb/circulars/a021/a21_2004.html)
OMB Circular A-133
(http://www.whitehouse.gov/omb/circulars/a133/a133.html)
Understanding SAS 112
(http://www.aicpa.org/Professional%2BResources/Accounting%2Band%2BAuditin
g/Audit%2Band%2BAttest%2BStandards/Practice%2BAids%2Band%2BTools/Un
derstanding%2BSAS%2BNo%2B112.htm)
NIH Grants Policy & Guidance
(http://grants.nih.gov/grants/policy/policy.htm)
NSF Proposal and Award Policies and Procedures Guide (New and
Effective January 2009)
(http://www.nsf.gov/pubs/policydocs/pappguide/nsf09_1/index.jsp)
Resources
NSF Proposal and Award Policies and Procedures Guide
(http://www.nsf.gov/pubs/policydocs/pappguide/nsf08_1/index.jsp)
Policy 1403 Charging of Administrative or Clerical Salaries and
Certain Other Expenses to Federal Funds
(http://www.yale.edu/ppdev/policy/1403/1403.pdf)
Policy 1405 Charging of Facilities and Administrative Type Expenses
to Non-Federal Sponsored Projects
(http://www.yale.edu/ppdev/policy/1405/1405.pdf)
Procedure 1305 PR.04 Unallowable Costs
(http://www.yale.edu/ppdev/Procedures/gc/1305PR.04UnallowbleCosts.pdf)
Direct Charging of Network and Certain Other Administrative Costs to
Sponsored Awards
(http://www.yale.edu/researchadministration/documents/NetworkChargingCentra
lCampus041007.pdf
Questions……
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