Cost Principles 2CFR Part 220 (Formerly OMB Circular A-21) Office of Sponsored Programs Engineering (Phone) (Fax) 1 Departmental Research Administrators Training Track

2CFR Part 220 Emphasizes  Allowable and Unallowable Costs  Calculating F&A Proposal  Cost Accounting Standards

You Will...  …Learn what costs are allowable and unallowable  …Discover how the F&A Rate is determined  …Learn what F&A costs are  …Explore cost accounting standards (CAS)

Parts of the Cost Principles for Educational Institutions  Part A -General  Part B -Definition & Terms  Part C -Basic Consideration  Part D -Direct Costs

Parts Continued  Part E - F&A Costs (formerly Indirect Costs)  Part F - Identification of F&A Costs  Part G - Determining F&A Rates  Part H -Methods for small institutions  Part I -Reserved  Part J -Provisions for costs  Part K -Certification of charges

2CFR Part 220  Appendix:  A.- Cost Accounting Standards  B.- Disclosure Statement  C.- Examples of Administrative Charges

2CFR 220 Part A  Principles for determining costs applicable to grants, contracts, and other agreements  The principles are designed to provide that the Federal Government bear its fair share of total cost, determined in accordance with generally accepted accounting principles

2 CFR 220 Part B  Defines terms  Defines allowable and unallowable costs (the “J” section)  Defines methods of indirect cost rate identification and calculation

History of Indirect Cost Rates 1947 ONR reimbursed universities for indirect costs incurred for Navy contracts 1955 DHEW used this approach to set their rate at 8% of Total Direct Costs 1958 NIH raised the rates to 15% 1958 The Bureau of Budget introduced the famous Circular A-21

History of 2CFR 220 Continued 1966 The Government made a commitment to fully reimburse universities for the cost of federally sponsored research 1979 A-21 revision introduced the MTDC concept 1986 A-21 revision capped faculty administration

Revisions: October 1991  26% Cap on administrative components (GA, DA, SPA)  Certification about unallowable costs required in IDC proposal  New unallowables, e.g. alumni activities, lobbying, trustees travel

Revisions: October 1991  Assurances from major institutions that indirect cost reimbursement for facilities and equipment will be expended for that purpose within 5 years  Can’t shift underrecovery of research sponsored by foreign government, industry or other sponsor to federally funded research

Revisions: July 1993  Two broad categories: Facilities and Administration  26% cap on administrative components retained  Predetermined rates from two to four years is the norm

Revisions: July 1993  Consistent treatment of costs - “Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect costs.”  New rules on administrative and clerical staff costs- normally treated as indirect costs

Revisions: July 1993  “The salaries of administrative and clerical staff should normally be treated as indirect 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 of activity. Items such as office supplies, postage, local telephone costs, and memberships shall normally be treated as indirect costs.” F.6.b.

Revisions: July 1996  Extend CAS and Disclosure Statement to grants and Cooperative Agreements  Increase maximum equipment capitalization level to $5,000  Change cognizant agency assignments

Revisions: July 1996  Require Fixed F&A rate(s) for entire competitive segment of a project period  Standardize treatment of unrecovered depreciation when institution converts from allowances to depreciation

Revisions: July 1996  Add new conditions for allowability of interest costs  Disallow tuition benefits for employee family members

A-21 Revisions, July 1998  Guidelines for depreciating buildings  Standard forms for F&A proposal  Clarification of charging administrative salaries  Exhibit C

Main Objectives of Changes  Tighten rules on allowability and allocation of costs  Primary focus on F&A costs  Promote greater standardization in treatment of costs  Also directed primarily at F&A costs

Costs are reimbursable by the Federal government if they are: ALLOWABLE: Under the circulars applicable to the award (2CFR 220) ALLOCABLE: They can be assigned to the activity on some reasonable basis. REASONABLE: A prudent person would have purchased this item/paid this price. If a cost cannot meet the above criteria, it is UNALLOWABLE, no matter what it is for.

Facilities & Administrative (F&A) Costs  Costs that cannot be identified specifically with a particular sponsored project  Costs associated with common or joint objectives  Formally identified as indirect costs

Cost are Distributed Based on Activity  Instruction  Organized Research  Other Sponsored Activity  Other Institutional Activities

Definition: Instruction  The teaching and training activities of an institution, whether they are for credit or on a non-credit basis.  Includes departmental research

Definition: Instruction  Sponsored instruction & training: Specific instructional or training activity established by grant, contract or cooperative agreement  Departmental research: Development and scholarly activities that are not separately budgeted and accounted for.

Definition: Organized Research  All research and development activities of an institution that are separately budgeted and accounted for

Organized Research Includes:  Sponsored Research means all research and development activities that are sponsored by Federal and non-Federal agencies. This includes training individuals in research techniques  University research activities are separately budgeted and accounted for using institutional funds

Definition: Other Sponsored Activity  Programs and projects financed by Federal and non-Federal agencies that involve work other than instruction and organized research. (e.g... heath service and community service programs)

Definition: Other Institutional Activities  Activities such as operation of:  residence halls  dining halls  student unions  athletics  bookstores  chapels  theaters

Distribution of F&A Costs  Distribution is proportional to function within the University  Appropriate distribution base:  Facility costs based on functional use of space  Administrative costs based on MTDC  GA - Campus MTDC  DA - Departmental MTDC

2CFR Part 220 Types of costs included in the F&A calculation

Depreciation & Use Allowance  Allocated on basis of usable square feet of space:  Equipment depreciation  Building use allowance  Interest on debt

Operation & Maintenance  Incurred for the administration, supervision, operation, maintenance preservation and protection of physical plant:  Janitorial & utilities  Repairs & alterations/planning  Care of grounds  Security/hazardous waste disposal

Library  Costs incurred for operation and acquisition of materials  Books  Building  Salaries of Librarians  Allocated by category of user  Student  Professional  Other

Administrative Costs - General  Incurred for administrative offices that serve the entire university:  President’s office & legal affairs  Institution wide financial management  Personnel  Administrative computer center

Departmental Administration  Incurred for administration in:  Dean’s office  Departmental office  Includes 3.6% for faculty preparation of proposals  Organized research units  institutes & centers  Functions such as  Secretarial & clerical staff  Business officers

Sponsored Project Administration  Costs incurred by OSP and CGA to administer sponsored projects  review proposals  negotiate awards  collect award dollars  calculate & negotiate F&A rate  keep official financial records  close-out

Student Administration  Incurred for administration of student affairs & services  Dean of Students  Admissions & registrar  Counseling & placement  Advisors  Health center  Catalogs & materials

Determination of F&A Rate  Aggregate F&A costs into pools  Divide pool by functional base  MTDC  Three major function rates  Research  Instruction  Other sponsored activity

F&A Cost Calculation Modified Total Costs Total Costs Exclusions Adjustments Financial Statement Capital Expenditures UMSA/State Allocation Building/Equip. Use

FACILITIES AND ADMINISTRATION (F&A) COST CALCULATION MODIFIED TOTAL COSTS Depreciation of Building & Equip Operations & Maintenance General & Administrative Departmental Administration Sponsored Project Administration Student Services Administration Instruction Organized Research Other Sponsored Activities Other Institutional Activities DIRECT COST POOLS These become the denominator (base) in the rate calculations F&A COST POOLS After cross-allocations – these become the numerator in the rate calculations Library

Simplified F&A Rate Calculation Numerator Expenses: Library Building Depreciation Operation & Maintenance (Utilities) General Administration (Payroll) Department Administration (Dean, Business Mgr.) Sponsored Projects Administration Denominator Expenses: Sponsored Agreements Non-Sponsored Dept. Research Cost Sharing/Matching = F & A Rate

Negotiation & Approval of F&A rate  Department of Health & Human Services  Cognizant agency is responsible for negotiating and approving rates on behalf of all federal agencies

Fiscal Year 1995 Rate Schedule - Research F&AMTDC % General Admin 6,14083, Department Administration16,40083, Sponsored Programs Admin 1,73879, Building Use Allow 2,14471, Equipment Use 2,50671, Building Interest 69571, Operating & Maintenance Plant12,64671, Library 1,35771, Facilities26.93 Total on Campus Rate Total Off Campus Rate

2CFR Part 220

Section J General Provisions for Selected Items of Costs  Cost principles apply whether an item is treated as direct or F&A costs  In a case of discrepancy between provisions of a sponsored agreement and section J, the agreement should govern.

Unallowable Costs (When charged against Federal agreements, used as cost sharing or placed in the F&A cost base) Unallowable Activities (something you do)  Organized fund raising  Lobbying  General public relations & alumni activities  Student Activities  Managing investments solely to enhance income Unallowable Objects (Something you buy, a line item)  Advertising  Alcoholic beverages  Entertainment  Fines & penalties  Moving costs if employee resigns within twelve months  Certain recruitment costs

Unallowable Costs (When charged against Federal agreements, used as cost sharing or placed in the F&A cost base)  Certain travel costs  Cash donations to other parties  “Golden Parachute” severance  Interest (except interest paid to outside parties for certain purposes)  Memberships in social, dining or country clubs

Sections J1 & J8  Advertising - allowable for:  Recruiting of personnel for the project  Procurement of goods & services  Disposal of scrap materials  Compensation for employees:  Salaries, wages & fringe benefits  Estimates with a “degree of tolerance” is appropriate  Tuition for family members unallowable on federal awards after 7/1/99

Effort Reports J8c.2  Reports will reasonably reflect the activities for which employees are compensated  Reports will be signed by the employee, principal investigator or responsible official...

Equipment - What is allowable? A-21 J16a  Equipment means:  “Article of nonexpendable, tangible personal property having a useful life of more than one year and of cost of $5,000 or more.”  Capital Expenditure means:  Cost of an asset including attachments, accessories, modifications and installation and delivery costs

Equipment - What is allowable? A-21 J16a  Special Purpose Equipment:  Equipment used only for research, medical, scientific or other technical activities  General Purpose Equipment:  Equipment which use is not limited to research or technical activities (e.g. office equipment, reproduction & printing equipment and automatic data processing equipment)

Equipment - What is allowable? A-21 J16a  Capital expenditures for general purpose equipment, buildings & land are unallowable as a direct charge, except where approved in advance by sponsoring agency  Special purpose equipment charges are allowable as direct when approved by the agency

Section J25  Losses on other sponsored agreements or contracts are unallowable  Can’t transfer deficits from one award to another  Amounts claimed as cost sharing can not be included in F&A costs

Other Costs  Section J28 - Cost of subscriptions to business, professional & technical are allowable  Section J34 - Proposal costs - normally F&A costs  Section J37- Recruiting costs - allowable if reasonable

“Major Projects” for Direct Charging of Administrative Salaries A-21 Exhibit C  Complex projects with teams of investigators from various institutions  Projects with extensive data collection  Travel arrangements for lots of people  Projects preparing manuals  Geographically inaccessible to the department administrative staff

CAS - Cost Accounting Standards Appendix A  CAS 501  Consistency in estimating, accumulating, and reporting costs  CAS 502  Each type of cost is allocated only once and on only one basis to cost objective - consistent treatment as direct or indirect

CAS - Cost Accounting Standards Appendix A  CAS 505 Accounting for Unallowable costs  Cost expressly unallowable or mutually agreed to be unallowable shall be identified and excluded from any billing, claim or proposal applicable to a Government sponsored agreement  CAS 506 Accounting Periods  Institution’s fiscal year must be used as the cost accounting period

Consistency is a Problem  Consistency in estimating, accumulating and reporting costs  Consistency in allocating costs incurred for the same purpose  Should be able to compare proposal estimate with actual costs for any “significant” cost

Consistency Concerns  Inconsistent treatment of costs between:  Schools  Departments  Projects

CAS Disclosure Statement A comprehensive description of an organization’s cost accounting practices CASB Central systems and Group Expenses Deferred Compensation/ Insurance Costs Leave Costs and Applicable Credits General Information F&A Costs Direct Costs Depreciation and use allowance

Main OSP Contact/Reference UMBC Office of Sponsored Programs Engineering (Phone) (Fax)