ADVANCED COST PRINCIPLES –
AVOIDING COMMON PITFALLS
Mary Jean White, CGMS
MJ White Consulting
mjwhite@mjwhiteconsulting.com
www.mjwhiteconsulting.com
(954) 501-1029
Business Management Research Associates
WHAT WE WILL COVER TODAY
Cost principles applicability can be a minefield for federal agencies as well as grantees and
cooperative agreement partners. After a quick review of cost principle basics, we will
discuss common areas of risk involving items of costs, and some examples demonstrating
what can go wrong.
• Cost Principles Review
• Allowability
• Allocability
• Reasonableness
• Necessity
• Direct and Indirect Costs
• Indirect Cost Rates
WHAT WE WILL COVER TODAY
• Justifying costs – tips for reviewing budgets
• Common problem areas: Time and effort reporting, Travel, Procurement, Conflicts
of Interest
• Subawarding Issues
• Dealing with questioned costs
• Recipient responsibilities
• Federal agency and pass-through responsibilities
• Case Studies – a few examples of what can go wrong and avoiding pitfalls
• Multiple choice assessment – test your knowledge
DEFINING TERMS
§ 200.413 Direct costs
• (a)General. Direct costs are those costs 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. Costs incurred for the same purpose in like
circumstances must be treated consistently as either direct or indirect (F&A) costs.
See also § 200.405 Allocable costs.
DEFINING TERMS
§ 200.56 Indirect (facilities & administrative (F&A)) costs for “Major nonprofit
organizations
Indirect (F&A) costs means those costs incurred for a common or joint purpose benefitting
more than one cost objective, and not readily assignable to the cost objectives specifically
benefitted, without effort disproportionate to the results achieved. To facilitate equitable
distribution of indirect expenses to the cost objectives served, it may be necessary to
establish a number of pools of indirect (F&A) costs. Indirect (F&A) cost pools must be
distributed to benefitted cost objectives on bases that will produce an equitable result in
consideration of relative benefits derived.”
MORE DEFINITIONS
2 CFR 200, Subpart F, Appendix IV
Indirect cost proposal means the documentation prepared by an organization to
substantiate its claim for the reimbursement of indirect costs. This proposal provides the
basis for the review and negotiation leading to the establishment of an organization's
indirect cost rate.
Cost objective means a function, organizational subdivision, contract, Federal award, or
other work unit for which cost data are desired and for which provision is made to
accumulate and measure the cost of processes, projects, jobs and capitalized projects.
2 CFR 200 – DIRECT/INDIRECT COSTS & COST PRINCIPLES
2 CFR 200, Subpart E and 45 CFR 75 Subpart E
For-Profit Organizations - 48 CFR 31.2 (Contracts with Commercial Organizations) (FAR)
45 CFR Part 75, Appendix IX – For Profit and Non-Profit Hospitals
DETERMINING ALLOWABILITY
• Allowable – Under Cost Principles,
program statutes and regulations,
state and local law
• Allocable – Must be tied to a particular
cost objective, service or contract in
proportion to benefits received
• Reasonable - does not exceed that
which would be incurred by a prudent
person under the circumstances
prevailing at the time the decision was
made to incur the cost; ordinary and
necessary to support organization or
contribute to performance
• Necessary is important!
FACTORS AFFECTING COST ALLOWABILITY
• Be accorded consistent treatment. A cost may not be assigned to a Federal award as
a direct cost if any other cost incurred for the same purpose in like circumstance has
been allocated to the Federal award as an indirect cost
• Be determined in accordance with GAAP
• Not be included as a cost or used to meet cost sharing or matching requirements of
any other federally-financed program in either the current or a prior period
• Be adequately documented
COMMON UNALLOWABLE COSTS (BUT THERE ARE
ALWAYS EXCEPTIONS)
• Certain types of advertising and public relation costs (§200.421)
• Alcoholic beverages (§200.423)
• Bad debt expense (§200.426)
• Contingency provisions (§200.433)
• Contributions or donations (§200.434)
• Entertainment Costs (§200.438)
• Fines and penalties (§200.441)
• Fundraising and investment management costs (§200.442)
• General Costs of Government (salaries of the chief executive, salaries of the board, etc.) (§200.444)
• Goods or services for personal use (§200.445)
• Lobbying (§200.450)
• Selling and marketing (§200.467)
THINGS FOR NON-FEDERAL ENTITIES TO CONSIDER POLICIES AND PROCEDURES
• Review current policies for alignment with current regulations
• Multiple policies and procedures should be reviewed, depending on the NFE
• Have a strong policy in place that manages Conflicts of Interest, particularly for
procurement – mirroring the funding agency policy is a safe bet
• Review each line item in every budget and prior approval submitted for allowability,
allocability, and reasonableness – always think about the next monitoring visit/audit
• Training should be provided for program and financial personnel, including formal
training, job aides, process flows and decision trees
• Check for overlapping and conflicting policies and procedures – consistent treatment of
costs is paramount
• Submit a corrective action plan for all items of questioned costs, and follow it, including
timelines for correction
• Appeal procedures (if any) will vary by cognizant agency – guidance is provided by
contract or grants officer in official notice of decision
THINGS FOR AWARDING AGENCIES AND PASS-THROUGH ENTITIES
TO CONSIDER MONITORING
• Pre-Award – review initial NOFO/FOA budget submittals for allowability, allocability,
reasonableness and necessity
• Compare agreement budget to actual expenditures
• Check for costs charged as direct that are normally charged indirect
• Know any cost restrictions in the program statute
• Monitor for NFE internal controls, compliant policies and procedures – check
Conflict of Interest procedures
• Follow-up on monitoring and audit findings, along with corrective action plans
COMMON ISSUES WITH ITEMS OF COST
• Misallocation of costs
• Excessive cost transfers
• Inaccurate time and effort reporting
• Incomplete/non-existent documentation
• Inadequate subrecipient monitoring
• Lack of documentation for travel – all travel should follow non-federal
entity policies and procedures, be documented for necessity, and
provide evidence of attendance at meetings, conferences, events, etc.
COMMON TIME AND EFFORT REPORTING ISSUES
• Reporting time based on the budgeted amounts without regard to
what employee actually worked
• Lack of maintaining source documentation (Personnel Activity
Reports, or PARs) to support salary costs
• Failing to recognize a change in position, duties, or funding may result
in a change of reporting
• Entire day’s schedule not accounted for (only federal time reported)
IMPORTANT POINTS - TIME AND EFFORT REPORTING
• Personnel Activity Reports must show actual time spent working on
each award or cost activity
• Budget estimates are just that and do NOT qualify as support for
charges to Federal awards
• Back-up documentation for Time and Effort reporting must survive
audit and monitoring scrutiny
PERSONNEL ACTIVITY REPORTS (PARs)
PARs should:
• Be completed after-the-fact
• Reflect actual work performed (not budgeted)
• Account for total activity of employee
• Submitted at least monthly
• Signed and dated by employee
• Maintained for ALL staff members/employees whose compensation is
charged in part to the award
• Best practice – save other documentation (calendars, meeting agendas
and minutes, etc.) to support PARs if further documentation is needed
CASE STUDIES/EXAMPLES
Problem #1
An accountant who works for the City of Honestville reclasses several budget items
expended as part of a federally-funded park project; the accountant provides an
explanation that says “to correct an accounting error.” The city’s internal auditor has a
big problem with this. Why?
CASE STUDIES/EXAMPLES
Problem #1 Explanation
• Accounting error transfers must be supported by
documentation that fully explains how the error occurred
and a certification of the correctness of the new charge by a
responsible organization official
• Transfers of costs from one project to another or from one
competitive segment to the next solely to cover cost
overruns are not allowable
CASE STUDIES/EXAMPLES
Problem #2
Dr. Smartypants thinks she has discovered a brand new type of mycoplasma that is
way too miniscule to be studied with his current equipment. She needs a shiny, stateof-the-art microscope to continue to study this possible new cell, but the University is
in year three of a three year project, and doesn’t have the funds available. She notices
that there are some unobligated funds left from year 2, so she decides to use those to
purchase the equipment. Can Dr. Smartypants do this?
CASE STUDIES/EXAMPLES
Discussion of Problem #2
The answer is quite possibly!
• Review the Notice of Award (NoA) for specified carryover authority
• Many research grant programs are excluded from automatic carryover
provisions for unobligated balances. These grants and others would
require agency prior approval unless a special term or condition is
included in the NoA
• Cost principles – purchases paid for with grant funds must be
allocable to that award, and would need prior approval for items not
included in the original budget
CASE STUDIES/EXAMPLES
Problem #3
The Principle Investigator (PI) on an NSF
grant receives a new award from a
private foundation, on which he is also
the PI. He needs to reduce his effort on
the existing grant from the initial
approved level of 60% to 20%.
Does the University need prior approval?
What if the PI reduced his effort from
50% to 40%? Would the University still
need prior approval
CASE STUDIES/EXAMPLES
Discussion of Problem #3
Yes for the first part of the example - 200.308(c)(1)(iii) states that
reduction in time devoted to the project by key personnel specified in
the award notice by 25% or more must have prior approval.
No for the second part – the level of effort does not meet the 25% or
more threshold
CASE STUDIES/EXAMPLES
Problem #4
You are a grants administrator for a
University of Questionable Ethics
research department. You heard that an
administrator at another university has
been arrested and charged with taking
cash kickbacks from a contractor in
exchange the administrator securing
more work for the contractor. You are
concerned. The university that the
arrested employee works for also
receives a subaward from your
university. You confide in your boss, and
your boss tells you to stay out of it. What
do you do?
CASE STUDIES/EXAMPLES
Discussion of Problem #4
As the non-federal entity recipient of a federal award, your institution is
legally responsible and accountable to the awarding agency for
appropriate use of funds and for the performance of the project. This
includes the appropriate use and performance of any subawards.
CASE STUDIES/EXAMPLES
Discussion of Problem #4
Possible next steps
• Report to your institution
• Report directly to the agency who funds the grant
• Make a formal allegation to the agency Office of Inspector General (OIG)
YOUR QUESTIONS AND COURSE ASSESSMENT
• This was a fast-moving presentation - any questions on the material or other cost
issues?
• A quick assessment to test your knowledge