2CFR220 (A-21)

Cost Principles For Educational Institutions

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Cost Principles For Educational Institutions

Defines allowable and unallowable costs (the “J” section)Defines payroll distribution systems (a.k.a. “effort reporting”)

Defines methods of F&A cost rate identification and calculation

Establishes Cost Accounting Standards.

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DIRECT COSTS

Costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity; or

That can be directly assigned to such activities relatively easily with a high degree of accuracy

Examples of Direct Costs: Salary of researcher (including benefits

costs) Laboratory supplies purchased for project Technician

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FACILITIES AND ADMINISTRATIVE (F&A) COSTS (INDIRECT COSTS)

Costs that are incurred for common or joint objectives, and, therefore, cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity (Section E.1)

Examples of F&A Costs: Salary of department administrator Building utility and maintenance costs President, Provost, and CFOs offices

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TOTAL PROJECT COSTS (A-21, C.1)

Direct Costs (Directly benefit a specific sponsored

project)

F&A Costs(Cannot be attributed to a specific project)

-------------------------------= Total Project Costs

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WHAT DOES “ALLOWABLE” MEAN?

An “allowable” cost is one that is eligible for reimbursement by the federal government.

Contrast with: PERMISSIBLE BY INSTITUTION: A cost is

permitted by institution, as outlined in its various administrative procedures.

ALLOWABLE BY AGENCY: A cost is permitted by the terms of the sponsoring agency.

An "unallowable" cost is one that is not eligible for reimbursement by the federal government.

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WHAT IS AN “ALLOWABLE” COST?

An allowable cost must be: Reasonable: A prudent business person

would have purchased this item and paid this price.

Allocable: It can be assigned to the activity on some reasonable basis.

Consistently Treated: Like costs must be treated the same in like circumstances, as either direct or F&A costs.

Conform to Terms: In A-21 or the Sponsored Agreement.

Cost must meet all four standards to be considered allowable!

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WHAT DOES “REASONABLE” MEAN?

A cost is reasonable if …The nature of the good or service and the amount involved reflect the action of a prudent person.

Considerations in determining reasonableness: Necessary for the performance of the

sponsored agreement; Determined by arm’s length bargaining of a

prudent person; In accordance with the sponsored agreement

terms and conditions; Consistent with established institutional

policies and practices

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ALLOCABILITY

A cost can be allocable as a direct or an indirect cost

A cost is allocable as a direct cost if the goods or services provided are assignable in accordance with the relative benefits received…. It is incurred solely to advance the work

under the sponsored agreement It benefits both the work under the

sponsored agreement and other work of the institution in proportions that can be approximated

Allocate costs based on benefit to projects

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ALLOCATING DIRECT COSTS

Proportional benefit Cost benefits two or more projects in

proportions that can be determined without undue effort or cost

Any reasonable basis Proportional benefit between projects

cannot be determined because of the interrelationship of the work involved; allocate costs between projects on any reasonable basis

Who determines reasonable basis?

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EXAMPLES: ALLOCABILITY OF COSTS

Travel by PI to conference (not related to specific project) Not allocable as direct charge to sponsored

award. Salary of research technician

Allocable as direct cost, not as F&A cost Salary of administrative assistant

Allocable as F&A, not normally allocable as direct charge to a sponsored project

Proposal preparation costs Not allocable as direct charge to sponsored

award.

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EXAMPLES OF WHEN COSTS MAY NOT BE ALLOCATED

Costs can not be allocated:

to meet deficiencies caused by overruns, to avoid restrictions imposed by law or

terms of the sponsored agreement, for other reasons of convenience, or the big “No No”…

…Because one project has more funds!

CONSISTENTLY TREATED: COST ACCOUNTING STANDARDS (APPENDIX A)

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Each Institution Shall Follow Four CAS Standards:

CAS 505:

Identify and exclude unallowable costs from proposals and claims (e.g., F&A rate proposal)

CAS 506: Consistently use the same cost accounting period for purposes of estimating, accumulating and reporting costs.

CAS 501: Consistently follow its established cost accounting practices when estimating, accumulating, and reporting costs

CAS 502: Consistently allocate costs incurred for the same purpose, in like circumstances, as either direct or F&A costs as they relate to the final cost objective

DISCLOSURE STATEMENT

Educational institutions with $25 million or more in sponsored agreements per fiscal year required to file.

Disclosure Statement (DS 2) submitted to cognizant agency.

Must file amendments when disclosed practices are changed.

Cost adjustments shall be made if an educational institution fails to consistently follow its disclosed practices.

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UNALLOWABLE COST An “unallowable” cost is one that is not eligible

for reimbursement by a Federal sponsor, either directly or indirectly (through the F&A rate)

Costs that are ‘unallowable’ for reimbursement by Federal sponsors may still be permissible charges against department or institution funds e.g., wine at a reception to entertain

potential donors Care should be taken to specifically categorize

such costs so that while it may still be reimbursed by the institution it will not be passed on to the Federal government through the F&A rate

Organized fund raising Lobbying Commencement and convocation General public relations and alumni activities Student activities Student housing Campus bookstore Athletics Prosecuting claims against the federal

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Examples of Unallowable Activities(something you do)

UNALLOWABLE TRANSACTIONS (DIRECT OR INDIRECT)

Advertising (some types allowed)

Alcoholic beverages Entertainment (including

meals with inadequate substantiation of business purpose)

Fines and penalties Memorabilia, promotional

materials (allowable if used for employee morale)

Moving costs if employee resigns within twelve months

Certain recruitment costs

Certain travel costs (i.e., first class)

Cash donations to other parties (such as donations to other Universities)

"Golden Parachute" severance payments

Interest (except interest paid to outside parties for certain purposes)

Memberships in social, dining, or country clubs

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OTHER ALLOWABILITY & ALLOCABILITY CONSIDERATIONS: COSTS THAT SHOULD “NORMALLY”BE TREATED AS F&A COSTS

OMB Guidance on A-21 Revision to section F.6.b. (July 1993)“In developing the departmental administration cost pool, special care should be exercised to ensure that costs incurred for the same purpose in like circumstances are treated consistently as either direct or F&A costs....”

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A-21 REVISION TO SECTION F.6.B

“The salaries of administrative and clerical staff should normally be treated as 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. Items such as office supplies, postage, local telephone costs, and memberships shall normally be treated as F&A costs." [Ref: A-21:F6(b)]

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MAJOR PROJECTS

A-21 definition: “a project that requires an extensive amount of administrative or clerical support, which is significantly greater than the routine level”

Projects may be major, regardless of their size.

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EXAMPLES OF MAJOR PROJECTS

Those which require or involve: Large, complex programs Extensive data accumulation, analysis,

entry... Large amount of travel/meeting

arrangements Preparation of manuals, large reports,

books... Geographically inaccessible project

locations Conditions including human or animal

protocols, multiple-investigator coordination

Examples are not exhaustive, nor are they intended to imply that direct charging of admin / clerical salaries would always be appropriate in the situations illustrated.

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CRITERIA FOR DIRECT ADMIN CHARGING

1. Performance of a ‘major project or activity” (See A-21 Exhibit C. examples)

2. Identified with and directly benefiting the project

3. Budgeted and approved by the sponsor

4. Supported by a budget justification

When all criteria are met, you can charge direct…if it’s Allowable, Allocable, Reasonable, and Consistent!!

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EFFORT REPORTING

Required by OMB Circular A-21 (Section J.10)

Certifies that salaries and wages charged to sponsored agreements are reasonable in relation to the work performed.

Certifies that expended effort meets the commitments made in the project proposal, even if the person was not paid from project funds.

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EFFORT REPORTING - WHAT IS IT?

What is Effort? Effort vs. payroll charges Proposed vs. actual effort

Who can Certify? Effort reports will be signed (certified) by

the employee, principal investigator, or responsible official(s) using suitable means of verification that the work was performed.

What is “suitable means of verification?"

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EFFORT REPORTING

Why Should We Care? Recent settlements Office of Inspector General reports

Complicated Effort Reporting Areas NIH K-Awards VA appointments Clinical practice payments NIH salary cap Cost shared effort

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EFFORT REPORTING - ALTERNATIVES

Plan ConfirmationSalaries distributed based on budgeted, planned or assigned activity.

After-the-Fact Activity RecordsSalaries distributed are supported by activity reports.

Multiple Confirmation RecordsSalary distribution supported by records which verify separately direct and F&A activities.

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FACILITIES & ADMINISTRATIVE COSTS

Facilities & Administrative (Indirect) Costs: Real costs incurred by the institution Cannot be easily identified to a specific

project or activity Infrastructure costs to maintain a research

university Calculated as a % of a Base Made up of both “Facilities” and

“Administrative” costs

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FACILITIES & ADMINISTRATIVE CALCULATION

Organized Research Base

F&A(IDC) allocable to OR= F&A Rate

Committed cost sharing

Overdrafts

University-funded competitive awards

Sponsored

research

OR Base = All direct MTDC expenses related to OR

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FACILITIES COMPONENTS

Building Depreciation Equipment Depreciation Operations and Maintenance (utilities,

maintenance, custodial costs, non-capital improvements)

Interest Expense (paid to external parties) Library (books, library facilities and library

administration)

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ADMINISTRATIVE COMPONENTS Departmental Administration

Dean’s Office, Dept Heads, Dept Administrative staff and administrative work of faculty (including bid and proposal preparation)

General Administration & General Expense President or Chancellor, Institution-wide

Financial Management and Business Services, Personnel Management, Safety & Risk Management, etc.

Sponsored Projects Administration Grant and Contract Administration, Cost

Analysis, Patent Expenses Student Services

Registrar, Bursar, Student Medical Typically supports and is allocated to

Instruction

Administrative Components limited to 26% of MTDC

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NCURA UNIVERSITY F&A RATE (ON CAMPUS)

Administrative Costs General and Administrative 9.49% Departmental Administration 14.11% Sponsored Programs Administration 4.98%

Sub-total Administration 28.58% Capped Administrative rate 26.00%

Facilities Costs Building Depreciation 5.64% Equipment Depreciation 5.27% Interest Expense 1.61% Operations & Maintenance 13.54% Utility Cost Adjustment * 1.30% Library 2.64%

Sub-total Facilities 30.00%Total F&A Rate 56.00%

* If the Institution is listed in OMB A-21 Exhibit B

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TYPES OF F&A COST RATES

ProvisionalEstimated rate used when parties cannot agree on an equitable rate. May be replaced by fixed or predetermined rate before the end of the fiscal year.

PredeterminedRate established for period, normally 2 to 4 years. No carry forward provision.

Fixed with Carry ForwardRate established for period. Over/under recovery is determined and an adjustment is applied to a subsequent rate negotiation.

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NEGOTIATION OF F&A RATES

A “cognizant agency" means the Federal agency responsible for negotiating and approving F&A rates for an educational institution on behalf of all Federal agencies

Cognizant Agencies: Either Dept of Health and Human Services

(DHHS), or Office of Naval Research (ONR) (Section G-

11 of A-21) Cognizance is assigned to the agency that

provided the most funds to the educational institution over the past three years

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OFF-CAMPUS RESEARCH F&A RATE

F&A Rate applied to sponsored agreements at off-campus facilities

Off-Campus is usually not a university owned facility

Recovers administrative costs associated with sponsored agreements

Typically is the “A” portion of the Full (On-Campus) F&A rate; “F” costs are direct-charged

Example:

Administrative Costs 26.0%Facilities Costs + 30.0%F&A Rate 56.0%

Off-Campus Rate = Administrative Costs 26.0%

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OTHER F&A RATES

Non-Research Sponsored Programs Institutions with large amount of non-research

sponsored projects may negotiate a separate rate for these projects, e.g., Educational Services Rate, Sponsored Instruction, Other Sponsored Activities

Rates for Specific Facilities The costs of certain programs/facilities may be

unique enough to warrant a separate F&A rate Examples:

Agricultural Experiment Station University Medical Center Animal Care Facility

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APPLICATION OF F&A RATES

Negotiated F&A rates in effect at the time of the initial award should be used throughout the life of the sponsored agreement

“Life” means each competitive segment of a project

A “competitive segment” is a period of years approved by the Federal funding agency at the time of the award

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SIMPLIFIED METHOD (“SHORT FORM”) - A-21, SECTION H.

Less Than $10 Million In Expenditures on Federal Awards in a Year

Single F&A Pool, incl. G&A, Plant O&M (and depreciation/use allowance), Library, Dept Admin (20% of salaries of Deans, Dept Heads)

Rate Base Is Salaries And Wages (S&W) or Modified Total Direct Costs (MTDC)

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F&A CONSIDERATIONS

F&A cost recovery is the reimbursement for actual costs incurred by the institution in support of sponsored projects

F&A costs are incurred on all institutional activities, not just sponsored research

F&A costs are real costs! A significant portion of F&A costs are not

recovered

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F&A CONSIDERATIONS (CONTINUED)

When an external sponsor pays less than the full F&A rate, the unrecovered F&A costs must be absorbed by the institution (it’s an institutional decision)

F&A cost recovery is normally unrestricted income to the institution

F&A recovery may be returned to departments or retained centrally

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F&A CONSIDERATIONS (CONTINUED)

The F&A rate tends to go up when there is investment in new research facilities or when facilities costs are increasing at a faster rate than research funding

The F&A rate tends to go down when research expenditures are increasing at a faster pace than infrastructure costs

For institutions over the cap, increases in the F&A rate are not the result of increased administrative costs (a common misconception often held by faculty!)

A-21 SUMMARY & CONCLUSIONS

Costs charged to sponsored agreements must be allowable, allocable and reasonable

A direct costs of a sponsored agreement must be incurred solely to advance the work of the

project (or interrelated projects) be reasonable and necessary for the performance

of the project A cost may be allowable as an F&A cost only or a

direct cost only Cost accounting standards require institutions to be

consistent in the way that costs are estimated, accumulated

and reported in the treatment of costs as either direct or indirect

Institutions must exercise caution when direct-charging costs that are normally considered to be indirect

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RESOURCES

US Government Printing Office/FDSYS (electronic CFRs) http://www.gpo.gov/fdsys/ Select the year Select “Title 2 – Grants and Agreements Pick your type – pdf, XML, or other In the pdf, scroll down to about page 4, that’s where Part 215 (A-110)

begins

FDSYS XML link for A-110 http://www.gpo.gov/fdsys/pkg/CFR-2010-title2-vol1/xml/CFR-2010-title2-

vol1-chapII.xml

CONTACT INFORMATION

Maggie GriscavageEmail: gmgriscavage@alaska.edu

Acknowledgment: Liberally borrowed, by permission, from the NCURA FRA Workshops.

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