FRA XI - OMB Circular A-21 Cost Principles for Educational Institutions

1. FRA XI - OMB Circular A-21 Cost Principles for Educational Institutions Cindy Hope, The University of Alabama Gary Talesnik, Eclat Consulting LLC 1

2. OMB Circular A-21 Overview General and Specific Rules on Cost Allowability Unallowable Costs Direct and Indirect (F&A) Costs F&A Rates Cost Accounting Standards & Disclosure Statement Common Problem Areas 2

3. I. Overview 3

4. Objectives of Circular A-21 Government�Wide Policies on Cost Reimbursement Uniform Standards of Cost Allowability Uniform Standards of Cost Allocation Also Applies to Costs Used for Cost Sharing 4

5. Major Provisions of Circular A-21 General Standards for Cost Allowability Reasonable Allocable Treated Consistently 5

6. Major Provisions of Circular A-21 Specific Rules on Selected Types of Costs Examples: Salaries and Wages, Fringe Benefits, Depreciation, Travel, etc. Covers Allowability, Federal Approval Requirements, Documentation, Other Conditions Standards for Classifying and Allocating Indirect Costs and Computing Indirect Cost Rates Indirect Costs are Officially Called �Facilities and Administrative� Costs or �F&A� Costs 6

7. II. General and Specific Rules on Cost Allowability 7

8. General Standards for Cost Allowability Reasonable and Necessary Prudent Person Rule for Reasonableness Is Cost Necessary for Overall Operation of Institution or the Performance of the Sponsored Project? Are Costs Incurred Consistent with University Policies and Procedures? Allocable Assignable to a Cost Objective (e.g., a Research Project) in Accordance with Relative Benefits Received 8

9. General Standards for Cost Allowability Allocability to Sponsored Agreements Incurred Solely to Advance Work Under Sponsored Projects Benefits both Sponsored Projects and Other Institutional Activities in Proportions that can be Approximated Is Necessary for the Overall Operations of the Institution and Can be Considered to Benefit Sponsored Programs Consistent Treatment Requires Costs Incurred for the Same Purpose, In Like Circumstances, to be Handled Consistently as Direct or Indirect Costs 9

10. General Standards for Cost Allowability Applicable Credits Receipts or Negative Expenditures that Offset Direct or Indirect Costs Purchase Discounts Insurance Refunds 10

11. Specific Rules on Cost Allowability Section J. of Circular A-21 Currently Describes 54 Types of Costs Alphabetical Order � Advertising to Trustee Expenses Provides Specific Policies on Cost Allowability For Some Costs, Also Specifies Approval Requirements, Documentation, Other Provisions 11

12. III. Unallowable Costs 12

13. Generally Unallowable Costs Advertising, Public Relations Alcoholic Beverages Alumni Activities Bad Debts Charitable Contributions Contingencies Entertainment Fines and Penalties Fund Raising and Investment Management Costs Goods and Services for Personal Use 13

14. Generally Unallowable Costs Housing of Officers Interest Expense for Operating Purposes Certain Legal Costs Lobbying Costs Losses on Sponsored Agreements (Overruns) Losses that Could Have Been Covered by Insurance Memberships in Community Organizations, Country Clubs, Social Clubs Selling and Marketing Costs Student Activity Costs First Class Air Travel 14

15. IV. Direct and F&A Costs 15

16. Direct vs. F&A Costs Direct Costs: Specifically Identified to Individual Projects, Instruction Function or Other Major Functions F&A Costs: Common or Joint Objectives 16

17. Examples of Direct Costs Salaries and Wages, Fringe Benefits of Faculty, Technicians, Graduate Students, etc. for Work to Carry Out Project Objectives Travel Related to Performance of Project Lab Supplies Consulting and Other Specialized Services Subgrants and Subcontracts 17

18. F&A Cost Pools Building Depreciation or Use Allowances Equipment Depreciation or Use Allowances Interest Expense Operations and Maintenance Expenses General Administration and General Expenses Departmental Administration Sponsored Projects Administration Library Student Services 18

19. V. F&A Rates 19

20. F&A Rates F&A Costs are Claimed Based on F&A Rates Rates are Developed by Institutions in Periodic Indirect Cost Proposals Proposals are submitted to Cognizant Agency for Review, Negotiation, Approval After the Rates are Approved, they are Applied to Each Grant and Contract to Determine the Amount of Indirect Costs to be Charged to the Grant or Contract 20

21. Development of F&A Rates Rate Development Process Each F&A Cost Pool is Allocated to Major University Functions (e.g., Instruction, Research) Amount Allocated to Each Major Function is Divided by a �Base� which Represents Direct Operations of the Function The Resulting Percentage is the F&A Rate for that Function 21

22. Development of F&A Rates The Base Specified in Circular A-21 is �Modified Total Direct Costs� (Except for Some Schools Using the �Simplified Method� for Computing Indirect Cost Rates) Rates are Commonly Developed for Three Major University Functions: Organized Research Instruction Other Sponsored Programs 22

23. Example of F&A Rate F&A Costs Allocated to University Research Function Direct Cost Base of Research Function F&A Rate: $20 Million $40 Million $20 Million $40 Million 23

24. Types of F&A Rates Predetermined Rates Set in Advance No Adjustments Fixed Rates Set in Advance �Carry-Forward� Adjustments to Future Rates for Variances Between Fixed Rates and Actual Costs 24

25. Types of F&A Rates Provisional Rates Temporary Rate Will be replaced by a Predetermined, Fixed or Final Rate Adjustment Required if Provisional Rate Used in FSRs and New Rate is Lower Than Provisional Rate Adjustment is Optional If New Rate is Higher No Adjustment If New Rate is Same as Provisional Rate Final Rates Rarely Used for Universities Established After-the-Fact, When Fiscal Year is Complete Needed Only When Provisional Rates are Used for an Entire Fiscal Year Used to Make F&A Cost Adjustments if Provisional Rates Were Used for the Full Year 25

26. Cognizant Agencies A Cognizant Federal Agency is Designated by OMB For Each College and University Responsible for Audits, Audit Resolution, F&A Rate Negotiations May be Different Agencies for Audit/Audit Resolution vs. Rate Negotiation Acts on Behalf of All Federal Agencies Cognizance Usually Assigned to Agency with Largest Amount of Grants and Contracts with Institution HHS and DOD Office of Naval Research are Cognizant for All College and University F&A Negotiations 26

27. VI. Cost Accounting Standards and Disclosure Statement 27

28. Applicability of CAS To Educational Institutions Established by CASB in 1994 Extended to Grants and Cooperative Agreements in Circular A-21 in 1996 Four Standards and Disclosure Statement Standards Apply to all Grants, Contracts and Cooperative Agreements Collectively Called Sponsored Agreements No Dollar Threshold for Application of Standards Disclosure Statement Applies to Larger Schools All Institutions Receiving $25M Annually in Sponsored Agreements Subject To A-21 (Regardless of Amounts of Individual Awards) 28

29. Cost Accounting StandardsApplicable To Educational Institutions 501 Consistency in Estimating, Accumulating and Reporting Costs 502 Consistency in Allocating Costs Incurred for the Same Purpose 505 Accounting for Unallowable Costs 506 Cost Accounting Period 29

30. Consistency Standard �502� Consistency in Treatment of Costs Incurred for the Same Purpose Costs Incurred for the Same Purpose, in Like Circumstances, Must be Treated Consistently as Direct or F&A Costs Cannot Assign as Direct Cost if Included in F&A Cost Pool Cannot Assign to F&A Cost Pool if Charged as Direct Costs 30

31. �Normal� Treatment of Specific Departmental Costs (Sec. F.6.b.) �Normal� F&A Costs Salaries of Administrative and Clerical Staff Office Supplies Postage Basic (Local) Telephone Charges Membership Dues Personal Computers Journal Subscriptions 31

32. Administrative and Clerical Salaries Normally Treated as F&A Costs Can be Directly Charged Only Under Exceptional Circumstances �Major Project� Specifically Identified Explicitly Budgeted Definition of �Major Project� Requires an Extensive Amount of Administrative or Clerical Support Significantly Greater Than Routine Level Provided by Academic Departments Should have Written Justification and Approval 32

33. Administrative and Clerical Salaries Examples of �Major Project� (Exhibit C of A-21) Direct Charges MAY be Appropriate Large, Complex Programs � Center Grants, Program Projects Extensive Data Accumulation, Analysis, Reporting, Surveying, Tabulation (e.g., Epidemiological Studies, Clinical Trials) Making Travel and Meeting Arrangements for Large Numbers of People (e.g., Conferences and Seminars) Principal Focus is Preparation and Production of Manuals, Large Reports, Books, Monographs (Excluding Routine Progress, Technical Reports) 33

34. Administrative and Clerical Salaries Examples of �Major Project� (Exhibit C of A-21) Geographically Inaccessible to Normal Departmental Administrative Services, Such as Research Vessels Project-Specific Database Management; Individualized Graphics or Manuscript Preparation; Human or Animal Protocols; Multiple Project-Related Investigator Coordination 34

35. Other Normal F&A Costs Other Normal F&A Costs Specified in A-21 Office Supplies Postage Local (Basic) Telephone Services Membership Dues, Personal Computers, Journal Subscriptions Can be Directly Charged Only Under Exceptional Circumstances Examples of Exceptional Circumstances Postage � Mail Survey, Shipping Specimens Local Telephone � Dedicated Phone Lines for Telephone Survey, Hot Line Membership Dues � Membership Required to Attend a Conference (if Attendance at Conference is a Proper Direct Cost) Should Have Written Justification and Approval 35

36. CAS Disclosure Statement Comprehensive Description of an Institution�s Cost Accounting Practices 36

37. VII. Common Problem Areas 37

38. Common Problem Areas Effort Reporting � Documentation of Salaries and Wages Cost Transfers Documentation / Explanation of Transfers Timing Inconsistent Treatment of Costs; �Normal� F&A Costs Charged Directly Clerical & Administrative Salaries Office Supplies Postage Local Telephone Costs Membership Dues, Personal Computer, Journal Subscriptions 38

39. Common Problem Areas (Continued) Documentation of Supplies and Other Non-Labor Costs Documentation of Cost Sharing Unallowable Costs Subrecipient Monitoring 39

40. Cindy Hope Assistant Vice President for Research The University of Alabama (205) 348- 8119 E-mail: chope@fa.ua.edu Gary Talesnik Special Consultant Eclat Consulting LLC (301) 738-0088 E-mail: gtalesnik@msn.com 40