1 Dave Cotton, CPA, CFE, CGFM Cotton & Company LLP Alexandria, Virginia Federal Cost Principles and Administrative Rules … What You Don’t

1

Dave Cotton, CPA, CFE, CGFM

Cotton & Company LLP

Alexandria, Virginia

www.cottoncpa.com

Federal Cost Principles and Administrative Rules …

What You Don’t Know Could Cost You

May 20, 2013

American Institute of CPAs

Session Highlights

What principles and rules do you need to memorize?

What are the similarities?

What are the differences?

What’s REALLY important?

Session Format:

TEST YOUR KNOWLEDGE AND COMPETE AGAINST YOUR PEERS


Teamwork

• Form teams of 5-6 each• Answer the easy 15-question quiz• Be ready to explain and defend your answers


Federal Contract and Grant Cost Principles and Administrative Rules

Question #1:

Cost principles for state and local governments, Indian tribal governments, non-profits, educational institutions, and commercial entities are:

a) All pretty much the same.

b) Similar but contain some important differences.

c) Identical for state governments, local governments, and Indian tribal governments.

d) All identified in the Federal Acquisition Regulation.

e) b, c, and d.

f) b and c.



Question #1:

Cost principles for state and local governments, Indian tribal governments, non-profits, educational institutions, and commercial entities are:

a) All pretty much the same.

b) Similar but contain some important differences.

c) Identical for state governments, local governments, and Indian tribal governments.

d) All identified in the Federal Acquisition Regulation.

e) b, c, and d.

f) b and c.


What Rules Apply …

Cost Principles Administrative Audit

FAR 31 A-21 A-87 A-122 A-102 A-110 A-133

Commercial

Educational

Non-Profit

State Government

Local Government

Indian Tribes



States, local governments, and Indian Tribes follow: A-87 for cost principles (Relocated to 2 CFR, Part 225) A-102 for administrative requirements, and A-133 for audit requirements

Educational Institutions (even if part of a State or local government) follow: A-21 for cost principles (Relocated to 2 CFR, Part 220) A-110 for administrative requirements (Relocated to 2 CFR, Part 215), and A-133 for audit requirements

Non-Profit Organizations follow: A-122 for cost principles (Relocated to 2 CFR, Part 230) A-110 for administrative requirements (Relocated to 2 CFR, Part 215), and A-133 for audit requirements

http://www.whitehouse.gov/sites/default/files/omb/assets/omb/fedreg/2005/083105_a87.pdf


http://www.whitehouse.gov/sites/default/files/omb/assets/omb/fedreg/2005/083105_debarment.pdf


http://www.whitehouse.gov/sites/default/files/omb/assets/omb/fedreg/2005/083105_debarment.pdf



FAR Subpart 31.2—Contracts with Commercial Organizations

FAR Subpart 31.3—Contracts with Educational Institutions

FAR Subpart 31.6—Contracts with State, Local, and Federally Recognized Indian Tribal Governments

FAR Subpart 31.7—Contracts with Nonprofit Organizations



Question # 2:

For a cost to be allowable under a Federal award (contract or grant), the cost must be:

a) Reasonable, allocable to the award, and necessary

b) Given consistent treatment

c) In conformity with cost principle exclusions or limitations and in conformity with the contract or grant agreement

d) Net of applicable creditse) Adequately documented

f) All of the above

g) a and c

h) a, b, and c



Question # 2:

For a cost to be allowable under a Federal award (contract or grant), the cost must be:

a) Reasonable, allocable to the award, and necessary

b) Given consistent treatment

c) In conformity with cost principle exclusions or limitations and in conformity with the contract or grant agreement

d) Net of applicable creditse) Adequately documented

f) All of the above

g) a and c

h) a, b, and c


Cost Allowability

The different cost principles contain slightly different wording, but essentially the same baseline requirements



Question # 3:

Cost reasonableness is an important consideration in determining the allowability of costs. As long as a cost (a) has actually been incurred and (b) meets the prudent person test, it is presumed to be reasonable and the government has the burden of proving otherwise.

TRUE FALSE



Question # 3:

Cost reasonableness is an important consideration in determining the allowability of costs. As long as a cost (a) has actually been incurred and (b) meets the prudent person test, it is presumed to be reasonable and the government has the burden of proving otherwise.

TRUE FALSE


Cost reasonableness

“A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business” [FAR 31.201-3]

“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.” [A-21]


Cost reasonableness

“A cost is reasonable if, in its nature and amount, it 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.” [A-87 and A-122]


Cost reasonableness considerations

FAR 31.201-3:

1. Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;

2. Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations;

3. The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

4. Any significant deviations from the contractor’s established practices.



A-21:

1. whether or not the cost is of a type generally recognized as necessary for the operation of the institution or the performance of the sponsored agreement;

2. 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;

3. 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,

4. 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.



A-87:

1. Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the governmental unit or the performance of the Federal award.

2. The restraints or requirements imposed by such factors as: Sound business practices; arm’s-length bargaining; Federal, State and other laws and regulations; and, terms and conditions of the Federal award.

3. Market prices for comparable goods or services.

4. Whether the individuals concerned acted with prudence in the circumstances considering their responsibilities to the governmental unit, its employees, the public at large, and the Federal Government.

5. Significant deviations from the established practices of the governmental unit which may unjustifiably increase the Federal award’s cost.



A-122:

1. Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the organization or the performance of the award.

2. The restraints or requirements imposed by such factors as generally accepted sound business practices, arms length bargaining, Federal and State laws and regulations, and terms and conditions of the award.

3. Whether the individuals concerned acted with prudence in the circumstances, considering their responsibilities to the organization, its members, employees, and clients, the public at large, and the Federal Government.


Cost reasonableness—burden of proof

A-21, A-87, and A-122 do not specify

Prior to July 30, 1987, courts and boards followed the standard set forth in Bruce Construction Corporation, et al. v. The United States, 163 Ct. Cl. 97, November 15, 1963:

Where there is an alleged disparity between "historical" and "reasonable" costs, the historical costs are presumed reasonable.

Since the presumption is that a contractor's claimed cost is reasonable, the government must carry the very heavy burden of showing that the claimed cost was of such a nature that it should not have been expended, or that the contractors' costs were more than were justified in the particular circumstance.

FAR 31.201-3 was revised effective July 30, 1987 to state that:

No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.”



Question #4:

All indirect costs must be treated as indirect costs and should never be charged against direct cost objectives.

TRUE FALSE



Question #4:

All indirect costs must be treated as indirect costs and should never be charged against direct cost objectives.

TRUE FALSE



Question #5:

All direct costs must be treated as direct costs and should never be recorded in an indirect cost pool.

TRUE FALSE



Question #5:

All direct costs must be treated as direct costs and should never be recorded in an indirect cost pool.

TRUE FALSE


Direct and Indirect Costs

Any direct cost of a minor amount may be treated as an indirect cost for reasons of practicality where such accounting treatment for that item of cost is consistently applied to all cost objectives.

Example: photocopying costs of Grantee could be direct-charged, but okay to put such costs in indirect pool (unless not all grants use about the same type of photocopying)



Question #6:

Labor costs charged to Federal awards must always be supported by

a) Reports reflecting the distribution of the activity of employees

b) An after-the-fact determination of the actual activity of each employee

c) Reports that account for the total activity of each employee

d) All of the above

e) None of the above



Question #6:

Labor costs charged to Federal awards must always be supported by

a) Reports reflecting the distribution of the activity of employees

b) An after-the-fact determination of the actual activity of each employee

c) Reports that account for the total activity of each employee

d) All of the above

e) None of the above


Support for labor costs

In general, under FAR 31, A-87, and A-122, labor costs must be supported by time distribution reports reflecting the after-the-fact determination of how all time was spent ...

But, there are exceptions (persons working only on one award; substitute system approved by cognizant agency; etc.)

Educational institutions get special treatment:… it is recognized that, in an academic setting, teaching, research, service, and administration are often inextricably intermingled. A precise assessment of factors that contribute to costs is not always feasible, nor is it expected. Reliance, therefore, is placed on estimates in which a degree of tolerance is appropriate.



Question #7:

“Uncompensated overtime” refers to situations in which employees who are paid on an hourly basis work more than 40 hours per week but do not get paid for the overtime hours.

TRUE FALSE



Question #7:

“Uncompensated overtime” refers to situations in which employees who are paid on an hourly basis work more than 40 hours per week but do not get paid for the overtime hours.

TRUE FALSE


Uncompensated Overtime

Relates to exempt, salaried employees who work more than the standard number of hours

“Standard” is usually 40 hours per week, 2080 hours per year

“Standard hourly rate” equals salary divided by standard hours

Accounting problems arise if: Employees don’t record all hours worked Billings to customers are based on the standard hourly

rate Expenses are recorded using the standard hourly rate


Uncompensated Overtime Example 1

Jane’s salary with the Ajax Institute is $41,600

Her standard hourly rate is $20.00

In one particular week, Jane works 25 hours on a cost-reimbursable grant (A), 15 hours on a fixed price grant (B), and 10 hours on G&A. She records 40 hours (the time on the 2 grants) on her time sheet.

Ajax bills A $500 + indirect costs; records $500 as labor costs on A and $300 as labor costs on B

Problems: Jane’s time on A only cost Ajax $400; her time on B only cost $240; no cost for G&A was recorded


Jane’s salary with the Ajax Institute is $41,600

Her standard hourly rate is $20.00

In one particular week, Jane works 25 hours on a cost-reimbursable grant (A), 15 hours on a fixed price grant (B), and 10 hours on G&A. She records all 50 hours on her time sheet.

Ajax bills A $500 + indirect costs; records $500 as labor costs on A, $300 as labor costs on B, and $200 as G&A

Problems: Jane’s time on A only cost Ajax $400; her time on B only cost $240; Ajax recorded $1,000 of costs, but only paid Jane $800 [$41,600 divided by 52 weeks]

Uncompensated Overtime Example 2


Proper Treatment of Uncompensated Overtime

Employees should record all hours worked

Either: Accumulate the variance between standard

and actual in an indirect “variance” account Compute the actual pay rate each pay period

and use this for cost-reimbursable billings and recording expenses

First option only okay if variance account stays small

Second option preferred and more accurate



Question #8:

Indirect costs should always be allocated on a cost base (such as total direct costs, direct labor costs, direct labor plus overhead costs, etc.) that results in an equitable allocation of indirect costs to benefitting direct cost objectives.

TRUE FALSE



Question #8:

Indirect costs should always be allocated on a cost base (such as total direct costs, direct labor costs, direct labor plus overhead costs, etc.) that results in an equitable allocation of indirect costs to benefitting direct cost objectives.

TRUE FALSE


Indirect Cost Allocation Bases

The essential consideration in selecting a base is that it be the one best suited for assigning the pool of costs to cost objectives in accordance with benefits derived; a traceable cause and effect relationship; or logic and reason, where neither benefit nor cause and effect relationship is determinable. [A-21]

Indirect cost pools should be distributed to benefitted cost objectives on bases that will produce an equitable result in consideration of relative benefits derived. [A-87]


Indirect Cost Allocation Bases

… allocation of indirect costs may require the accumulation of such costs into separate cost groupings which then are allocated individually to benefiting functions by means of a base which best measures the relative degree of benefit. [A-122]

While a cost base is often used, some other base is allowed as long as the resulting distribution is equitable.



Question #9:

Unallowable costs should always be excluded from overhead when calculating indirect cost rates.

TRUE FALSE



Question #9:

Unallowable costs should always be excluded from overhead when calculating indirect cost rates.

TRUE FALSE


In Indirect Cost Rate Calculations ...

Unallowable costs must be removed from the pools being allocated (i.e. the numerators in the rate calculations)

But, unallowable costs remain in the allocation bases (i.e. the denominators in the rate calculations)

Unallowable base costs must receive their fair share of allowable pool costs

Unallowable costs cannot be recovered either directly or indirectly

Typical Cost Allocation Structure

Direct Labor Costs

= Unallowable Costs

Direct Labor Costs

= Unallowable Costs

Overhead Costs


Direct Labor Costs

= Unallowable Costs

Overhead Costs

Other

Direct

Costs


Direct Labor Costs

= Unallowable Costs

Overhead Costs

Other

Direct

Costs

General & Administrative Costs


But, Unallowable Costs Get Allowable Costs Allocated To Them

Direct Labor Costs

= Unallowable Costs

Overhead Costs

Other

Direct

Costs


Allowable Overhead Rate

Direct Labor Costs = B

= Unallowable Costs

Overhead Costs = C

A

D

OH Rate = C/(A+B)

Allowable G&A Rate

Direct Labor Costs = B

= Unallowable Costs

Overhead Costs = C

Other

Direct

Costs

General & Administrative Costs = G

A

D

= E

F

H--

G&A Rate = G/(A+B+C+D+E+F)



Question #10:

Lewis Segusi is executive director of the Consolidated Association of Reputable Politicians (CARP), a (very small) non-profit organization that studies honesty in politics. Lew travels to Festering Shores, CA to attend a legislative retreat where he discusses his views on pending legislation. He is careful to fly at coach air fares and he follows the Federal Travel Regulations for meals and lodging.

a) Lew’s labor costs are unallowable:

TRUE FALSE

b) Lew’s travel, meals, and lodging costs are allowable indirect costs:

TRUE FALSE



Question #10:



TRUE FALSE

b) Lew’s travel, meals, and lodging costs are allowable indirect costs :

TRUE FALSE


Lobbying Costs (A-110, Appendix B; Paragraph 25)

… the following activities are unallowable:

(1) Attempts to influence the outcomes of any Federal, State, or local election, referendum, initiative, or similar procedure, through in kind or cash contributions, endorsements, publicity, or similar activity;

(2) Establishing, administering, contributing to, or paying the expenses of a political party, campaign, political action committee, or other organization established for the purpose of influencing the outcomes of elections;

(3) Any attempt to influence: The introduction of Federal or State legislation; or the enactment or modification of any pending Federal or State legislation through communication with any member or employee of the Congress or State legislature (including efforts to influence State or local officials to engage in similar lobbying activity), or with any Government official or employee in connection with a decision to sign or veto enrolled legislation;

….



Question #10:



TRUE FALSE


TRUE FALSE



Question #10:



TRUE FALSE


TRUE FALSE


OMB A-110, Appendix A, Paragraph B.4.

The costs of activities performed primarily as a service to members, clients, or the general public when significant and necessary to the organization’s mission must be treated as direct costs whether or not allowable and be allocated an equitable share of indirect costs. Some examples of these types of activities include:

…

c. Promotion, lobbying, and other forms of public relations.



Question #11:

Same situation as 10, but Lew spends part of his time (20%) while in CA working on a final report to be submitted under one of CARP’s Federally-funded grants.

a) Lew’s time spent on the report is an allowable cost of the grant.

TRUE FALSE

b) 20% of Lew’s travel, meals, and lodging costs are allowable under the grant

TRUE FALSE



Question #11:



TRUE FALSE


TRUE FALSE



Question #11:



TRUE FALSE


TRUE FALSE


A-110, Appendix A, Paragraph A.3.

… In determining the reasonableness of a given cost, consideration shall be given to:

a. Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the organization or the performance of the award.


A-110, Appendix A, Paragraph A.3.

… In determining the reasonableness of a given cost, consideration shall be given to:

a. Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the organization or the performance of the award.



Question #12:

Same situation as 10, but Lew spends part of his time (20%) while in CA interviewing politicians to assess their honesty, part of a survey required under one of CARP’s Federally-funded grants.

a) Lew’s time spent doing the interviews is an allowable cost of the grant.

TRUE FALSE b) 20% of Lew’s travel, meals, and lodging costs are allowable

under the grant

TRUE FALSE



Question #12:




under the grant

TRUE FALSE



Question #12:




under the grant

TRUE FALSE IT DEPENDS …



Question #13:

Under each of the situations in 10, 11, and 12, CARP must calculate the fringe benefit costs associated with Lew’s lobbying time and exclude those unallowable costs from CARP’s indirect cost pool.

TRUE FALSE



Question #13:

Under each of the situations in 10, 11, and 12, CARP must calculate the fringe benefit costs associated with Lew’s lobbying time and exclude those unallowable costs from CARP’s indirect cost pool.

TRUE FALSE

Treatment of Directly Associated Costs

Basic indirect cost allocations rules are that (1) unallowable indirect costs should be removed from pools and (2) unallowable base costs should remain in bases

The exception to these rules is when indirect costs are unallowable only because they are directly associated with unallowable costs

Directly associated (but otherwise allowable) indirect costs should remain in the pool; and they will be allocated to the unallowable base costs with which they are associated

Direct Labor Costs

= Unallowable Costs

Overhead Costs

Other

Direct

Costs



But, Unallowable Costs Get Allowable Costs Allocated To Them

Direct Labor Costs

= Unallowable Costs

Overhead Costs

Other

Direct

Costs




Question #14:

The Attachments to OMB Circulars A-102 and A-110 were replaced by the “Common Rule” so that all Federal agency administrative requirements can be found in one place.

TRUE FALSE



Question #14:

The Attachments to OMB Circulars A-102 and A-110 were replaced by the “Common Rule” so that all Federal agency administrative requirements can be found in one place.

TRUE FALSE


The Common Rule and OMB Circular A-102

“On March 12, 1987, the President directed the Federal grantmaking agencies to issue a grants management common rule to adopt governmentwide terms and conditions for grants to States and local governments. In 1988, OMB revised Circular A-102 to include guidance to Federal agencies on matters not covered by the grants management common rule. The attachments to Circular A-102 were replaced by the grants management common rule.

“It is important for a grantee to review the regulations of their Federal awarding agency. Therefore, the generic text of the common rule is not provided on this site. Please refer to the chart above to locate the codified common rule for a particular Federal agency.”

-- http://www.whitehouse.gov/omb

http://www.whitehouse.gov/omb



The Attachments to OMB Circular A-110

“Prior to 1993, Circular A-110 contained attachments for each of the administrative requirements it covered. In 1993, Circular A-110 was revised to locate all the administrative requirements into the text of the main document. There are no longer any attachments to Circular A-110.”

-- http://www.whitehouse.gov/omb

http://www.whitehouse.gov/omb



Question #15:

If a commercial entity is a vendor, then it is not required to have an A-133 audit, but if the commercial entity is a recipient or subrecipient then it is required to have an A-133 audit.

TRUE FALSE



Question #15:

If a commercial entity is a vendor, then it is not required to have an A-133 audit, but if the commercial entity is a recipient or subrecipient then it is required to have an A-133 audit.

TRUE FALSE


A-133: Audits of States, Local Governments, and Non-Profit Organizations

For-profit subrecipient.

Since this part does not apply to for-profit subrecipients, the pass-through entity is responsible for establishing requirements, as necessary, to ensure compliance by for-profit subrecipients. The contract with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient's compliance responsibility. Methods to ensure compliance for Federal awards made to for-profit subrecipients may include pre-award audits, monitoring during the contract, and post-award audits.


How Did You Do?

15 or more correct = A+ (and send me your resumes)

12-14 correct = A

10-11 correct = B

8-9 correct = C

Less than 8 correct = C-



Dave Cotton, CPA, CFE, CGFM

Cotton & Company LLP

Alexandria, Virginia

www.cottoncpa.com

Federal Cost Principles and Administrative Rules …

What You Don’t Know Could Cost You

May 20, 2013

Documents

1 Dave Cotton, CPA, CFE, CGFM Cotton & Company LLP Alexandria, Virginia Federal Cost Principles and Administrative Rules … What You Don’t