OMB Uniform Guidance: Focus on the Costing Principles
The recently released Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards from the Office of Management and Budget (2 C.F.R. § 200) (Uniform Guidance) is intended to ease the administrative burden and cost of compliance for entities that receive Federal awards. The Cost Principles section of the Uniform Guidance introduces new reforms and incorporates a number of important changes from the current circulars that will affect the direct and indirect costing at many types of entities, including Institutions of Higher Education (IHEs) and non-profit organizations. The guidance provides for more flexibility in direct charging federal awards and in some important areas on the indirect cost side. While the changes allow for increased flexibility, it is important to note that there is also a greater emphasis on internal controls to ensure compliance. Institutions should review their current practices in anticipation of agency specific guidelines in order to be prepared to implement the changes in a thorough, timely and compliant manner.
Huron has summarized the major changes to the cost principles, highlighted potential impacts of each change, and suggested recommendations to assist institutions in addressing the new regulations.
Additional Negotiated Rate Options
IHEs and non-profit organizations have the option of extending negotiated indirect cost or Facilities and Administrative (F&A) rates for up to four years, subject to the review and approval of the cognizant agency. If granted, this one-time option will allow non-federal institutions to negotiate an extension of their current rate without submitting a new F&A rate proposal. The rate may not be renegotiated until the end of the approved extension period.
As an additional reform, institutions that have never negotiated an F&A rate and have little capacity or need to negotiate one, including subrecipient institutions, can utilize a flat rate of 10% modified direct total costs (MTDC) on an indefinite basis. Small institutions can, therefore, avoid conducting a cost study, and prime awardees have clear guidance on what rate to allow for subrecipients without a federally negotiated rate.
- Before requesting an extension, conduct a cost-benefit analysis to determine if an increase in the current rate can be calculated. A simple return on investment assessment can show if the potential increased recovery is worth the cost of preparing the proposal.
- Consider the flat rate option to reduce the burden associated with preparing, submitting, and negotiating rates (especially likely for smaller institutions).
Added Flexibility in Direct Charging Administrative and Clerical Salaries
The Uniform Guidance clarifies that IHEs may charge directly allocable administrative and clerical support as a direct cost for project specific effort such as managing substances and chemicals, data and image management, or complex project management and security. Per the Uniform Guidance, the following conditions must be met to charge administrative/clerical salaries as direct costs:
- administrative and clerical services are integral to the project or activity,
- individuals can be specifically identified with the project or activity,
- such costs are explicitly in the budget or have prior written approval of the awarding agency, and
- the costs are not also recovered as indirect costs.
Under the existing circulars, administrative and clerical costs are allowable as direct costs on grants that are designated as “major projects.” That term has been removed from the new guidance in support of the conditions above. Also absent from the Uniform Guidance is the term “Direct Charge Equivalent” or “DCE,” which has historically been used to determine allowable departmental administrative costs for the F&A calculation. In the absence of any conflicting guidance, the DCE is expected to remain a factor in calculating F&A rates.
Expanded direct charging of administrative salaries could have potential impacts on F&A rates for some institutions. In particular, the Departmental Administrative cost pool may decrease, while the MTDC base used for calculating the F&A rate may increase. The magnitude of these impacts will vary depending on the actual charging practices of each IHE.
- Review and update policies and procedures for direct charging administrative costs to document and clarify how allowable costs are routinely and consistently charged to federal sponsored awards.
- Perform an analysis prior to the F&A base year to determine the potential impact on the F&A rate resulting from this change in charging practices.
Clarified Allowability of Other Direct Charges
The Uniform Guidance specifically addresses the allowability of the following items of cost:
- Computer Devices: Computing devices (including desktop and laptop computers, associated software, etc.) not considered a depreciable asset by an institution’s capitalization policy may be charged as supplies, meaning the item must be essential and allocable, but not required to be solely dedicated to the performance of a single project/award.
- Residual Inventory of Supplies: The federal government must be compensated for its share of a residual inventory of unused supplies exceeding $5,000 in total aggregate value upon termination or completion of the project. The compensation must be calculated in the same manner as that used for equipment.
- Budget for Contingency Funds: Contingency funds can be budgeted on awards for construction or upgrades to large facilities or instruments, or IT systems.
As with direct charging of administrative salaries, expanded direct charging of other types of costs may impact the F&A rate. The actual impact will depend on each institution and its charging practices.
- Evaluate the impact of direct charging these costs with respect to the F&A rate and overall cost recovery. Update policies and procedures to address these cost items for disclosure purposes and consistent cost practices.
Expanded Application of the Utility Cost Adjustment (UCA) Factor
IHEs have been extended provisions that allow for recovery of increased utility costs associated with research. The Uniform Guidance will allow all IHEs to calculate a UCA for their Organized Research F&A Rate. This reform is an expansion of the A-21 guidance, which limits the UCA allowance to a selected subset of IHEs.
Under the new guidance, the allowable UCA amount will be based on actual costs, not to exceed 1.3 percentage points included in the indirect cost rate. Institutions wishing to incorporate the UCA in their rates must determine the allocation of utilities costs by calculating an “effective square footage,” which will factor in the energy utilization of research laboratory space.
• Allocate utility costs using the effective square footage method to determine if the UCA the may be added to the Organized Research F&A rate:
- identify the specific research space to be included in the calculation,
- use the allowable Relative Energy Utilization Index (REUI) times the actual square footage of the identified research space, and
- calculate the impact of the UCA on your Organized Research F&A rate to ensure it meets or exceeds the 1.3 percentage points.
Increased CAS-2 Limit
The minimum threshold to submit a Disclosure Statement (DS-2) is raised from $25 million to $50 million in federal awards received in an institution’s most recent fiscal year. If an institution identifies the need to change a disclosed practice, an amendment must be submitted six months in advance of any planned change implementation. Upon federal approval, or if no response is received from the cognizant federal agency within six months requesting additional time to review the change or express concerns, IHEs may proceed with implementation.
- Continue to review and monitor practices against the DS-2 (if applicable) and ensure proactive in identification and amending the DS-2 in advance of implementing any changes to costing practices.
Institutions that do not require a DS-2 should still ensure adequate policies and procedures are in place.
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