1. Cost Principles For Educational Institutions 1

2.  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. 2

3. 3  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

4. 4  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

5. 5 Direct Costs (Directly benefit a specific sponsored project) F&A Costs (Cannot be attributed to a specific project) ------------------------------- = Total Project Costs +

6.  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. 6

7. 7  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!

8. 8  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

9. 9  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

10. 10  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?

11. 11  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.

12. 12 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!

13. 13 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

14.  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.

15. 15  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

16.  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 government 16 Examples of Unallowable Activities (something you do)

17.  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 17

18. 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....” 18

19. “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)] 19

20. 20  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.

21. 21  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.

22. 22 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!!

23. 23  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.

24. 24  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?"

25. 25  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

26. 26  Plan Confirmation Salaries distributed based on budgeted, planned or assigned activity.  After-the-Fact Activity Records Salaries distributed are supported by activity reports.  Multiple Confirmation Records Salary distribution supported by records which verify separately direct and F&A activities.

27. 27  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

28. 28 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

29. 29  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)

30. 30  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

31. 31 Administrative Costs  General and Administrative 9.49%  Departmental Administration14.11%  Sponsored Programs Administration 4.98%  Sub-total Administration28.58%  Capped Administrative rate26.00% Facilities Costs  Building Depreciation 5.64%  Equipment Depreciation 5.27%  Interest Expense 1.61%  Operations & Maintenance13.54%  Utility Cost Adjustment* 1.30%  Library 2.64%  Sub-total Facilities 30.00% Total F&A Rate56.00% * * If the Institution is listed in OMB A-21 Exhibit B

32. 32  Provisional Estimated 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.  Predetermined Rate established for period, normally 2 to 4 years. No carry forward provision.  Fixed with Carry Forward Rate established for period. Over/under recovery is determined and an adjustment is applied to a subsequent rate negotiation.

33. 33  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

34. 34  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 Costs26.0% Facilities Costs+ 30.0% F&A Rate 56.0% Off-Campus Rate = Administrative Costs 26.0%

35. 35  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

36. 36  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

37. 37  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)

38. 38  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

39. 39  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

40. 40  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!)

41.  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 41

42.  US Government Printing Office/FDSYS (electronic CFRs)  http://www.gpo.gov/fdsys/ 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

43.  Maggie Griscavage Email: gmgriscavage@alaska.edugmgriscavage@alaska.edu  Acknowledgment:  Liberally borrowed, by permission, from the NCURA FRA Workshops. 43