- Uniform Guidance [previously called OMB Circular A-21]: Federal Cost Principles for Educational Institutions
- Federal Cost Accounting Standards
- Justifiable Charges: Allowable, Allocable, Reasonable
- Unacceptable Charges/Practices
- Resolving Cost Overruns
a. Uniform Guidance [previously called OMB Circular A-21]: Federal Cost Principles for Educational Institutions
As noted in Section 4c (below), Uniform Guidance [previously called OMB Circular A-21] outlines the principles for determining the costs applicable to research and development, training, and other types of sponsored projects performed by colleges and universities under grants, contracts, and other agreements with the federal government. It includes the federal guidelines for identifying and assigning facilities and administrative (F&A) costs and for determining and applying F&A cost rates.
Sponsored Project budgets comprise a variety of costs that can be categorized into two main types: Direct Costs, and Facilities and Administrative (F&A) Costs.
Direct costs are costs that can be identified and associated with a particular sponsored project, instructional activity, or any other institutional activity, or can be directly assigned to such activities relatively easily and with a high degree of accuracy. Examples of direct costs include salary, travel, equipment, supplies, etc.
F&A costs, formerly known as indirect costs, are incurred for common or joint objectives, and therefore cannot be readily and specifically identified with a particular sponsored project, instructional activity, or any other institutional activity. Examples include costs for building and equipment depreciation and use; physical plant operation and maintenance; general administration and general expenses; departmental administration; sponsored projects administration; library expenses; and student administration and services.
- i) Direct Costs: Definition and Examples
It is the University's policy to charge the maximum F&A cost rate allowable on all sponsored projects, regardless of the source. For federal funding agencies, the University applies the current rates established through its most recent F&A Rate Agreement, as negotiated with the federal government. The UI's current F&A Cost Agreement is available through the UI Financial Management and Budget site, with current rates posted to the DSP F&A Costs site.
For private, nonprofit funding sources, the University documents and abides by each sponsor's individual F&A rate policy, where F&A reimbursement may range from zero percent on up. In cases where a sponsor stipulates a reduced F&A reimbursement rate, it is helpful to include a copy of the sponsor's F&A rate policy with the routed application, documenting the rate and avoiding any questions.
When categorizing the various types of costs as either Direct Costs or F&A Costs, the institution must be consistent -- so that costs incurred for the same purpose in like circumstances are consistently treated as either Direct Costs or as F&A Costs. In other words, when the purpose is the same and circumstances alike, the institution may not deem an expense a Direct Cost under one project and an F&A Cost under another project. For more information, please see the following section on the Federal Cost Accounting Standards.
The federal government's Cost Accounting Standards Board (CASB) has established a set of rules known as the Cost Accounting Standards (CAS) to achieve uniformity and consistency in the practices governing the measurement, assignment, and allocation of costs. Every organization is expected to establish and abide by standard cost accounting practices to ensure the organization is treating costs in a uniform and consistent manner.
The federal government provides significant funding to universities in support of research, training, and public service activities, and requires those funds to be accounted for appropriately. If you are involved with departmental activities that receive federal support, you should understand how the CAS affect the process of budgeting and allocating funds to sponsored activities.
The CAS state that costs incurred for the same purpose in like circumstances must be treated either as a Direct Cost or as an F&A Cost. The underlying reason for this rule is that the federal government does not want to reimburse universities for the same cost twice. Consequently, universities must establish and abide by consistent cost-accounting practices to prevent this from happening. For their part, departmental personnel associated with the fiscal administration of federal awards must exercise care in preparing budget proposals and ensure the proper allocation of the budgeted costs to meet project objectives.
Note that, if circumstances vary, a cost normally considered an F&A Cost may be deemed a Direct Cost. Interpreting what is an unlike circumstance will, no doubt, result in differences of opinion between auditors and university faculty and staff. If questions arise when preparing or administering a sponsored project budget, please seek guidance from your Division of Sponsored Programs or Grant Accounting Office contact.
According to the Uniform Guidance (Subpart E - Cost Principles), any charge to a sponsored project account, whether a Direct Cost or an F&A Cost, must be justifiable, meeting each of three standards. It must be (1) Allowable, (2) Allocable, and (3) Reasonable.
- Allowable -- A cost is considered Allowable if it is eligible, reasonable, necessary, and allocable to the project.
- Allocable -- A cost is considered Allocable if it is assignable or chargeable to one or more project objectives in accordance with the relative benefits received or other equitable relationships defined or agreed upon by contractual parties. For example, allocating a percentage of salary in relation to the percentage of effort devoted to the project.
- Reasonable -- A cost is considered Reasonable if the nature of the goods or services acquired or applied and the amount involved reflect the action that a prudent person would have taken under the circumstances prevailing at the time the decision to incur the cost was made. Major considerations include: (i) whether the cost is of a type generally recognized as necessary for the operation of the institution or the performance of the sponsored agreement; (ii) the restraints or requirements imposed by such factors as arm's-length bargaining, federal and state laws and regulations, and sponsored agreement terms and conditions; (iii) whether the individuals concerned acted with due prudence in the circumstances, considering their responsibilities to the institution, its employees, its students, the federal government, and the public at large; and (iv) the extent to which the actions taken with respect to the incurred cost are consistent with established institutional policies and practices applicable to the work of the institution generally, including sponsored agreements.
Uniform Guidance (Subpart E - Cost Principles) deems certain costs simply unallowable, and will not allow such costs to be budgeted as Direct Costs or F&A Costs. Examples of disallowed costs include expenses for alcoholic beverages, entertainment, fund-raising, and lobbying activities.
According to the Uniform Guidance (200.413), salaries and benefits of administrative and clerical staff and certain general expenses, including office supplies, postage, local telephone costs, and memberships in professional and scientific organizations are no longer allowed as direct charges to federally sponsored agreements, except in special circumstances, and should be treated as F&A Costs unless specific exceptions applied. All in all, the following guidelines should be observed when preparing budget proposals or directly charging costs under federally sponsored agreements:
Administrative and Clerical Salaries and Benefits
Administrative and clerical salaries and benefits associated with routine services such as typing reports, filing, handling mail, making travel arrangements, answering telephones, etc., should not be budgeted or charged as direct costs, even when there is a direct benefit to the project.
Examples of projects that may be allowed to direct-charge administrative and clerical salaries include major, complex, multi-investigator projects such as Center Grants, Program Project Grants, and other sponsored projects that entail assembling and managing teams of investigators. It may also be permissible to charge these salaries to single-investigator projects that require an extraordinary level of clerical and administrative support, such as the following:
- Projects that involve extensive data accumulation, analysis and entry, surveying, tabulation, cataloging, searching, and reporting, such as data reduction, epidemiological studies and clinical trials.
- Projects that require making extensive travel and meeting arrangements for a large number of participants, such as conferences and seminars.
- Projects that focus principally on the preparation and production of manuals and large reports (other than routine progress and technical reports), books, and monographs.
- Projects that are geographically inaccessible to normal departmental administrative services (e.g. off-campus research).
- Projects that require project-specific database management, individualized graphics or manuscript preparation, human or animal protocols, IRB preparations, and/or other project-specific regulatory protocols, and/or coordination and communication between multiple project-related investigators.
Office supplies that are normally used in the general administrative support of a project should not be included in the budget. Office supplies that are used exclusively for project-specific activities may be included in the budget. Since many items of office supplies are used for both general administrative support and project-specific activities, it is important that these items, when included in the budget, are described in terms of their proposed use.
Local Telephone Costs
Local telephone rentals used to conduct routine business of the project should not be included in the budget. Telephone lines, including data lines, modems, and telephones, used to conduct surveys or maintain contact with project activities conducted at remote locations may be included in the budget.
Telephone Toll Calls
Telephone toll calls (long distance) may continue to be included in the budget.Â However, care must be taken to ensure that calls are directly related to project-specific activities.
Memberships in Professional and Scientific Organizations
Memberships in professional and scientific organizations should not be included in the budget.
Postage may be included in the budget when it is directly related to the conduct of the study, including correspondence with the sponsor and project participants. Additional postage may be included in the budget to disseminate surveys and materials produced as a result of the project activities.
In order to allow these charges against sponsored agreements, the items must be included in the budget approved by the sponsoring agency. Principal Investigators and their departments are responsible for ensuring that costs assigned to federal projects are appropriate. Restricted cost categories and other inappropriate charges can be readily detected in audits, and departmental funds are used to reimburse the federal government for any resulting disallowances.
University of Iowa policy is very clear that the Principal Investigator is ultimately responsible to his or her departmental executive officer for resolving, in a timely manner, any over-expenditures or unallowable charges that occur on a sponsored project. In addition, federal regulations (Uniform Guidance 200.405), prohibit the use of federal funds to cover over-expenditures: Any costs allocable to a particular sponsored agreement may not be shifted to other sponsored agreements in order to meet deficiencies caused by overruns or other fund considerations, to avoid restrictions imposed by law or by the terms of the sponsored agreement, or for other reasons of convenience.