1. Research Administration for Scientists Tim Quigg, Associate Chair and Lecturer Computer Science Department, UNC-Chapel Hill OMB Circular A-21 Cost Principles COMP 918: Research Administration for Scientists © Copyright 2012 Timothy L. Quigg All Rights Reserved

2. Research Administration for Scientists What’s a Circular? Instructions/information issued by OMB to federal agencies providing common policy/rules that all agencies must follow! to federal agencies providing common policy/rules that all agencies must follow!

3. Research Administration for Scientists Relevant OMB Circulars A-21 Establishes principles for determining costs applicable to grants, contracts, and other agreements with educational institutions A-110 Uniform administrative requirements for grants and cooperative agreements with institutions of higher education, hospitals and other non-profit institutions A-133 Audit standards for states, local governments and non-profit organizations

4. Research Administration for Scientists Quick Definitions: Details to Follow Allocable Costs: A cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective, e.g., account, in accordance with the relative benefit received or some other equitable relationship. The cost is necessary for the project and it is being incurred to benefit that project!

5. Research Administration for Scientists Quick Definitions: Details to Follow Allowable Costs: A cost is allowable to a particular cost objective if it is consistent with the definitions and requirements contained in A-21.

6. Research Administration for Scientists A-21 Cost Principles: Definitions Direct Cost – Any cost which is identified specifically with a particular sponsored agreement or other institutional function. Facilities and Administrative (F&A) Costs – Costs incurred for common or joint objectives that cannot be readily/specifically identified with a particular sponsored project or other institutional function. It may be possible to track some costs, e.g., Sponsored Programs Office staff could document time spent per award by completing detailed time sheets, but the “overhead” cost/effort would be prohibitive! And the accuracy questionable.

7. Research Administration for Scientists A-21 Cost Principles: Definitions Direct Cost – Any cost which is identified specifically with a particular sponsored agreement or other institutional function. Facilities and Administrative (F&A) Costs – Costs incurred for common or joint objectives that cannot be readily/specifically identified with a particular sponsored project or other institutional function. Composition of Total Costs – The total cost of a sponsored agreement consists of the allocable portion the allowable direct costs incident to its performance, plus the allocable portion of the allowable F&A costs of the institution.

8. Simple Budget MTDC = Modified Total Direct Costs (TDC-Equipment-Tuition – Patient Care Costs - SubK costs > $25,000)

9. Simple Budget MTDC = Modified Total Direct Costs (TDC-Equipment-Tuition – Patient Care Costs - SubK costs > $25,000) You wouldn’t actually submit a budget with these 2 columns, but this is a useful way to illustrate the concept!

10. Simple Budget MTDC = Modified Total Direct Costs (TDC-Equipment-Tuition – Patient Care Costs - SubK costs > $25,000)

11. Simple Budget MTDC = Modified Total Direct Costs (TDC-Equipment-Tuition – Patient Care Costs - SubK costs > $25,000) Modified Total Direct Costs (MTDC)

12. Research Administration for Scientists 1.Total direct cost * minus: Equipment (> $5K) Tuition Patient care costs Subcontract amounts > $25K (per sub for duration of contract, not each year) 2.F&A rate only applies to MTDC! * All costs must be allowable/allocable under A-21 requirements! Modified Total Direct Costs

13. Research Administration for Scientists The largest line item expenditure on most budgets is personnel So, what unit of measure is used for budgeting personnel on federal projects? Months (or fractions)!

14. Research Administration for Scientists How do you calculate a month of effort? Well, it depends! It’s NOT necessarily based on a 40 hour work week, rather it is based on what is normal and customary for the employee! If the employee (e.g., faculty) normally works 60 hours a week, then 30 hours per week for a month represents one half month of effort. Faculty are expected to “get the job done” – there is no employer-defined number of hours per week or month!

15. Research Administration for Scientists How do you calculate a month of effort? Well, it depends! If university/department policy requires graduate students to work 20 hours per week in their RA assignment, then 20 hours per week for a month represents one full month of effort. If university/department policy requires a staff member to work 40 hours per week, then 30 hours per week for a month represents three quarters of a month of effort.

16. Research Administration for Scientists A-21 Effort Reporting Rules Effort Reporting – A-21 requires institutions to have a system for employees to certify that the amount charged to a project is consistent with the effort worked on the project! The system must certify that: 1.) Effort supported (paid) by a federally sponsored project has been performed as promised. OMB Circular No A21 J10c(2)(a)-(f)

17. Research Administration for Scientists A-21 Effort Reporting Rules Effort Reporting – A-21 requires institutions to have a system for employees to certify that the amount charged to a project is consistent with the effort worked on the project! The system must certify that: 2.) All salary sources (including cost share) for the period are made congruent with the effort spent for the period. OMB Circular No A21 J10a-b

18. Research Administration for Scientists A-21 Effort Reporting Rules Effort Reporting – A-21 requires institutions to have a system for employees to certify that the amount charged to a project is consistent with the effort worked on the project! The system must certify that: 3.) Effort expended in support of a federally sponsored project but not paid by the project has been performed as promised. OMB Circular No A21 J10c(2)(a)-(f)

19. Research Administration for Scientists Total Effort is defined by A-21 as the amount of time a person devotes to fulfilling his/her university responsibilities. Components of 100% effort for faculty would include: Attending general departmental faculty meetings Serving on the university committees Writing proposals Other normal duties within department/university Serving on an NIH Study Section or NSF Peer Review Panel OMB Circular No A21 B1 (a-d)

20. Research Administration for Scientists Primary Activity NOT Included in 100% Effort Consulting time through a non-university consulting agreement. OMB Circular No A21 B1(a-d)

21. Research Administration for Scientists How is Effort Calculated? Estimate of hours spent on sponsored project in period ___________________________________________ Total hours in an average work period EQUALS % Effort on Sponsored Project Formula for Determining Faculty Effort

22. Research Administration for Scientists OMB Circular A-21 J10b(1)(c) recognizes that: “In the use of any methods for apportioning salaries, it is recognized that, in an academic setting, teaching, research, service and administration are often inextricably intermingled.” THEREFORE: “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.”

23. Research Administration for Scientists Accepted A-21 Standard for Accuracy in Effort Reporting Distribution of effort should always represent a reasonable estimation of the actual effort expended during the time period being certified.

24. Research Administration for Scientists Who Certifies Time and Effort?  Each individual must certify his/her own Time and Effort Report (unless they are not available to do so).  A-21 requires that anyone certifying effort for another individual must credibly have first hand knowledge of the individual’s actual effort.  Erroneously certifying effort reports can be viewed as fraud under the False Claims Act, 31 U.S.C., sections 3729 & 3721  The compliance environment has become more stringent and it is not likely to change in the foreseeable future.  So be diligent when certifying effort!

25. Research Administration for Scientists A-21 Effort Reporting Rules at UNC The University of North Carolina at Chapel Hill launched a new effort certification system, ecrt, on February 28, 2011. This system replaces the paper forms ("PARS") you may have used in the past. Educational Institutions that receive federal funding are required by the OMB Circular A-21 "Cost Principles for Educational Institutions" to maintain an effort reporting system, the purpose of which is to assure that the distribution of pay is in accordance with actual effort expended (by funding source and activity). The University of North Carolina at Chapel Hill has implemented the ecrt system (Effort Certification & Reporting Technology) to comply with this requirement. All individuals with cost sharing or effort committed to a sponsored project are required to complete an effort report, per federal regulations. UNC certifies twice per year (1-1 to 6-30 and 7-1 to 12-31)

26. Research Administration for Scientists Special Issues with Employees 100% Funded by Soft Money (Grant) Accounts!  If 100% of their time is paid by one or more grant accounts, then 100% of their effort must be spent on “A-21 Allowable” activities.  Writing grant proposals is not an allowable activity (except on some training grants).  Nor is attending faculty meetings, serving on committees, etc.  Remember, there is no concept of “on their own time” for job-related tasks. If it’s job-related, it’s part of total effort.

27. Research Administration for Scientists Special Issues with Employees 100% Funded by Soft Money (Grant) Accounts!  So what is the “best policy” for funding “soft money” supported positions?  Fund a small portion of their salary from institutional funds that are flexible in terms of what activities they will allow.  “No defense of zero”!

28. Research Administration for Scientists To comply with A-21, university accounting systems must: 1.allow for the assignment of costs to various institutional functions consistent with A-21 definitions 2.track unallowable as well as allowable costs Important A-21 Requirements

29. Research Administration for Scientists To comply with A-21, university accounting systems must: 1.allow for the assignment of costs to various institutional functions consistent with A-21 definitions 2.track unallowable as well as allowable costs Important A-21 Requirements

30. Research Administration for Scientists 1.Instruction – all teaching/training activities  Institution Funded  Sponsored Instruction/Training  Departmental Research (No separate budget) 2. Organized Research – All R&D activities that are budgeted and accounted for separately  Sponsored Research  University Research A-21 Cost Principles Major Institutional Functions

31. Research Administration for Scientists 3.Other Sponsored Activities  Health Service  Community Service 4.Other Institutional Activities  Residence and Dining Halls  Hospitals  Athletics  Book Stores  Museums A-21 Cost Principles Major Institutional Functions

32. Research Administration for Scientists 1.Instruction 2.Organized Research 3.Other Sponsored Activities 4.Other Institutional Activities TASK: To allocate (assign) each cost incurred by the institution to one or more function (account or objective) in reasonable/realistic proportion to the benefits provided or by another equitable relationship. A-21 Cost Principles Major Institutional Functions

33. Research Administration for Scientists Account Numbers 5 – 12345 – 0 – 110 - 3276 Ledger Account Budget (Fund Source) Purpose (Function) Department

34. UNC Central Report

35. All University Costs Total Institutional Costs 1. Instruction3. Other Sponsored Activities 2. Organized Research4. Other Institutional Activities Allowable* Unallowable * Direct Costs Indirect Costs (F&A) * For Federal Participation

36. Research Administration for Scientists To comply with A-21, university accounting systems must: 1.allow for the assignment of costs to various institutional functions consistent with A-21 definitions 2.track unallowable as well as allowable costs Important A-21 Requirements

37. Research Administration for Scientists Tests of Allowability: in order to be allowable as either a direct or indirect cost, a cost must be: 1. Reasonable A-21 Cost Principles

38. Research Administration for Scientists Reasonable: a cost may be considered reasonable if it’s nature and amount reflect the action that a prudent person would have taken under the circumstances prevailing at the time the decision was made.  Generally recognized as necessary  “Arm’s-length” bargaining  Acted with due prudence  Consistent with institutional policies applicable to all of the institution’s work A-21 Tests of Allowability

39. Research Administration for Scientists Tests of Allowability: in order to be allowable as either a direct or indirect cost, a cost must be: 1. Reasonable 2. Allocable under A-21 principles/methods A-21 Cost Principles

40. Research Administration for Scientists Allocable: a cost may be considered to be allocable to a particular project if it:  is incurred solely to advance work under a sponsored agreement (s) or  it benefits both the sponsored agreement (s) and/or other work of the institution, in proportions that can be approximated using reasonable methods or  it is necessary to the overall operation of the institution and is, consistent with A-21, deemed assignable in part to the sponsored agreement. A-21 Tests of Allowability

41. Research Administration for Scientists Tests of Allowability: in order to be allowable as either a direct or indirect cost, a cost must be: 1. Reasonable 2. Allocable under A-21 principles/methods 3. Treated consistently A-21 Cost Principles

42. Research Administration for Scientists Consistent Treatment When 1. Estimating, accumulating and reporting costs A-21 Tests of Allowability Budgeting Spending Invoicing and Financial Reporting

43. Research Administration for Scientists Consistent Treatment When 1. Estimating, accumulating and reporting costs The format and definitions used in the proposal budget should be consistent with those used in both the institution’s accounting system and on financial reports submitted to the agency A-21 Tests of Allowability Simply use the same chart of accounts with the same definition for each budget line item for all three purposes! Example: equipment is always an item costing over $5K and having a useful life of over 1 year!

44. Research Administration for Scientists Agency wants “hourly rates” in budget but University tracks “effort” by percentage What do you do? You want the contract, but you must comply with A-21 Possible solution – “presentation of hourly wage is for illustration purposes only, the university certifies all effort on a percentage basis…” Potential Problem Complying with Consistent Treatment Requirement

45. Research Administration for Scientists Consistent Treatment When 2. Allocating costs incurred for the same purpose All costs incurred for the same purpose, in like circumstances, are either direct costs only or F&A costs only A-21 Tests of Allowability

46. Research Administration for Scientists Costs incurred for the same purpose, in like circumstances, are either direct costs only or F&A costs only  Example #1: Office supplies, postage, local telephone costs and memberships shall normally be treated as F&A costs (per A-21 policy guidance memo)  Exceptions? Projects that require unusually high amount of postage – survey research using the mail!

47. Research Administration for Scientists  Example #2: Administrative and clerical staff should normally be treated as F&A costs (per A- 21 policy guidance memo)  Exceptions? “Major Projects” – General Clinical Research Centers, Primate Centers, Program Projects, NSF and other “Center Grants”, and projects that involve many investigators at a number of institutions Costs incurred for the same purpose, in like circumstances, are either direct costs only or F&A costs only

48. Research Administration for Scientists Tests of Allowability: in order to be allowable as either a direct or indirect cost, a cost must be: 1. Reasonable 2. Allocable under A-21 principles/methods 3. Treated consistently 4. Consistent with limitations/exclusions under A-21 A-21 Cost Principles

49. Research Administration for Scientists Limitation/Exclusions Section J provides specific guidance to assist in determining the potential allowability of 54 specific expense categories. Some are allowable under certain circumstances, others (including those listed below) are always unallowable.  Alcoholic beverages  Alumni/ae Expenses  Bad debts  Commencement costs  Lobbying costs  Fines and penalties  Goods/services for personal use  Losses on other sponsored agreements/contracts A-21 Tests of Allowability

50. Research Administration for Scientists Tests of Allowability: in order to be allowable as either a direct or indirect cost, a cost must be: 1. Reasonable 2. Allocable under A-21 principles/methods 3. Treated consistently 4. Consistent with limitations/exclusions under A-21 5. Consistent with limitations/exclusions applicable to specific sponsored agreements A-21 Cost Principles

51. Research Administration for Scientists Limitation/Exclusions Applicable to Specific Sponsored Agreements Some sponsored agreements may be subject to statutory limits on allowance of costs:  Some grants are for equipment only, therefore other line items (including F&A) are not allowed  Others place a limit on F&A %, e.g., NSF REU’s  Others cap the amount of salary participation, e.g., NIH current cap of $179,700 A-21 Tests of Allowability

52. Research Administration for Scientists Tests of Allowability: in order to be allowable as either a direct or indirect cost, a cost must be: 1. Reasonable 2. Allocable under A-21 principles/methods 3. Treated consistently 4. Consistent with limitations/exclusions under A-21 5. Consistent with limitations/exclusions applicable to specific sponsored agreements A-21 Cost Principles

53. All University Costs Allowable* Reasonable Allocable Consistent Not excluded Unallowable* Don’t meet A-21 test Specifically not allowable in Section J Specifically not allowable in award Direct Costs Specific to project Indirect Costs (F&A) Common objective Not Specific to project * For Federal Participation Total Institutional Costs 1. Instruction3. Other Sponsored Activities 2. Organized Research4. Other Institutional Activities

54. Research Administration for Scientists Facilities and Administrative Costs “Costs incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project or other institutional function.”

55. Research Administration for Scientists Facilities and Administrative Costs Includes the following cost components:  Building depreciation or use allowances  Interest on debt associated with certain buildings and capitalized equipment  Equipment (> $5K per unit) depreciation  Operations and maintenance  Library  But how is the rate actually calculated?

56. Research Administration for Scientists Facilities and Administrative Costs 1.For the base period, all allowable facilities costs are documented using A-21 definitions to determine total facility costs for the institution. 2.Determine how space is actually used and assign everything to one of the four A-21 Institution Functions. 3.Conduct a space-use survey of the entire campus: room-by-room.

57. Research Administration for Scientists Facilities and Administrative Costs Factors to consider when assigning space to one or more functions: who is assigned to the room what are their salary sources what equipment is located in the room Most space surveys are “moment in time” based, i.e., what is the use as of a certain date.

58. Research Administration for Scientists Administrative portion is capped at 26% which must be documented. Universities can take a 24% fixed allowance with limited documentation.  General Administration (Chancellor, University-wide Business Offices, General Counsel, Central IT Services)  Departmental Administration (Academic Deans, Accounting, Clerical and other Administrative Salaries) Facilities and Administrative Costs

59. Research Administration for Scientists Administrative portion is capped at 26% which must be documented. Universities can take a 24% fixed allowance with limited documentation.  General Administration (Chancellor, University-wide Business Offices, General Counsel, Central IT Services)  Departmental Administration (Academic Deans, Accounting, Clerical and other Administrative Salaries) Facilities and Administrative Costs

60. Research Administration for Scientists Remember the A-21 policy guidance memo that required all administrative and clerical salaries (except for “Major Projects”) to be treated as indirect rather than direct costs? What happens when a cost is moved to a source that is already at or above the cap? It’s still allowable, but as a practical matter there is no opportunity to recover the costs when at the administrative cap! Facilities and Administrative Costs

61. Research Administration for Scientists Administrative portion is capped at 26% which must be documented. Universities can take a 24% fixed allowance with limited documentation.  General Administration (Chancellor, University-wide Business Offices, General Counsel, Central IT Services)  Departmental Administration (Academic Deans, Accounting, Clerical and other Administrative Salaries)  Sponsored Projects Administration (University-wide)  Student Administration and Services (Deans of Students, Admissions, Registrar, Student Advisors, Health Clinic) Facilities and Administrative Costs

62. Research Administration for Scientists 1. The F&A rates in effect at the time of the award shall be used throughout the life of the award (defined as each competitive segment). 2. If you are required to submit a new budget (a new “competitive segment”), you must use the current F&A rate. 3. New rates are normally negotiated every three (3) years – if there is a delay, the previous rate is used until the new rates are established. Facilities and Administrative Costs: Applicable Duration

63. Research Administration for Scientists F&A Rate Negotiation: Cognizant Agency The federal agency responsible for negotiating and approving F&A rates for an institution. Once the rate is approved, all federal agencies must accept it.  Cognizance is usually based on which agency provides the most funding to the institution! It can be either:  Department of Health and Human Services (DHHS) or  Department of Defense’s Office of Naval Research (DOD-ONR)  If there is no funding from either, HHS prevails!

64. Research Administration for Scientists F&A Rate Negotiation: Typical Process Institution Develops F&A Cost Pools for Base Period Submits to Cognizant Agency Negotiation Process F&A Rates Approved

65. Sample F&A Rate: UNC-CH

66. Research Administration for Scientists Simplified Methods for Small Institutions (< $10 million/year) Salaries and Wages Base - A modified cost pool is established using only general administration, operations and maintenance, library, and departmental expenses. After a rate is negotiated, it is applied only to the direct salaries and wages within sponsored agreements. Modified Total Direct Cost Base - Same as above except the rate is applied only to MTDC within sponsored agreements.

67. TEST

68. Research Administration for Scientists Case Study: Joseph Green, who is in charge of departmental purchases, is puzzled by a purchase order submitted by Daniel Terry a post-doc in the Oldham lab. The chemical is the same one that Terry has been purchasing every couple months on his NIH post-doc grant, but this time the form indicates that the purchase should be charged to Prof. Oldham's NSF grant account. So, Green gives Terry a call to check. "Yes, that's correct," Terry says when Green explains the situation. "I'm getting low on funds in my account, so Dr. Oldham told me to start putting my supplies on his NSF account. There should be plenty of money there." When Green explains that he can't approve charging supplies for one project to an unrelated project because that would be against university and federal policy, Terry becomes agitated. "Look," he says, "just do as I've asked, OK? I'm already in trouble with Oldham. He says I'm bothering him too much about little things. Just this morning he was going on about how I need to make decisions on my own and be more independent. I need him to write me a good recommendation letter for a job I'm considering. How is it going to look if you bother him about my purchase order?"

69. Research Administration for Scientists  As expenses are incurred on a sponsored research account, the university will periodically “bill” the funding agency for direct expenses and applicable F&A.  Bill? Many people assume the money arrives with the award. It’s just sitting in a university bank account, isn’t it?  It would be nice if the system worked that way, but it doesn’t. So how are funds transferred from the U.S. treasury to the university? F&A Receipt Collections

70. Research Administration for Scientists Two primary methods for transfer:  Weekly (or periodic) electronic “draw down”  estimate of financial requirements for the coming week (period) for all awards from that agency  penalties (paying interest to feds) if excessive  separate process for each agency (NIH, NSF)  Invoice – Reimbursement  incur the expense first and then request “reimbursement”  can be either electronic or paper process  significant delay! Who finances the “float time”?

71. Research Administration for Scientists  So as federal funds are transferred to university accounts, they include F&A dollars  Note: the F&A dollars are viewed as “reimbursements” for expenses incurred.  NC views these F&A reimbursements as “general fund revenues”.  UNC is currently allowed to keep all F&A receipts, but the General Assembly has withheld a portion in the past! F&A Receipt Collections

72. Research Administration for Scientists NOTE: A-21 rules are used to determine allowable costs for the institution and then through negotiation with the institution’s cognizant agency, equitable F&A rates are established. The F&A funds “paid” to the institution are reimbursements for the federal share of allowable F&A costs already incurred. The institution is not bound by A-21 rules on how to spend these funds! Rules for F&A Receipt Expenditures Are Often Confused!

73. Research Administration for Scientists NOTE: A-21 rules are used to determine allowable costs for the institution and then through negotiation with the institution’s cognizant agency, equitable F&A rates are established. The F&A funds “paid” to the institution are reimbursements for the federal share of allowable F&A costs already incurred. The institution is not bound by A-21 rules on how to spend these funds! Rules for F&A Receipt Expenditures Are Often Confused!

74. Research Administration for Scientists Examples of uses: Utility bills (electricity, water, etc.) Administrative Salaries Construction (debt service) Faculty startup packages, cost-sharing Discretionary allocations And a portion is sent to the departments that generated the F&A dollars (currently the rate is 16 cents on every dollar earned)! How are F&A Receipts Spent at UNC-CH?

75. Research Administration for Scientists Some departments administer these funds centrally, others distribute a portion of the funds to the faculty or labs responsible for generating them! Examples of uses: Administrative Salaries Faculty startup packages Cost-share on proposals Discretionary allocations How are F&A Receipts Spent at the Department Level?