“Repay the unallowable costs!” That is the result no grant manager wants to hear, especially with federal funding.
So, I speak a lot about keeping federal grants from being unallowable grant costs in terms of strong internal controls. Let’s shift gears and look at a real-life case study from the Office of the Inspector General (OIG) for a federal agency.
Organization Claimed Unallowable Grant Costs for Expenditures-What Happened?
The Office of the Inspector General for the Department of Health and Human Services found that an organization receiving federal funds charged the federal government for $22,602 of fringe benefit costs that were unallowable under the Cost Principles regulations for grant recipients and had another $122,000 set aside for review and possible disallowing of costs.
Wow, over $144,000 in potential disallowed costs and repayment of federal funds.
What Types of Costs were Disallowed or Questioned?
There were a number of areas costs were questioned:
- $22,602 of fringe benefit costs were unallowable
- $28,796 of salaries and wages were set aside because the costs were based on budget estimates
- $21,789 of fringe benefits related to the set-aside salaries and wages
- $71,415 of shared costs because the costs were not allocated to the programs in reasonable proportion to the benefits received.
What were the Main Issues with the Costs?
The main issues had to do with the labor tracking of administrative and program employees.
Here are three big “no-no’s” from the organization’s expenditures:
Big no-no #1: Timesheets were adjusted to match the program budget
- Timesheets were kept for each employee, but after the fact, timesheets were adjusted to match the program budget, rather than submitting actual costs incurred.
Big no-no #2: Timesheets didn’t show where the time was spent on the program or not?
- Timesheets didn’t track the hours worked specifically on the various federal grants, so it was impossible to determine what the correct amount of time charged should have been.
Big no-no #3: Not knowing what really made up the charges
- The $22,602 was unallowable because the organization didn’t have supporting documentation to justify the charges.
Officials said they didn’t know how these fringe benefits were calculated and whether they should have been charged to the award.
They believed that a previous officer charged fringe benefits so they could “use up” the rest of the grant funds available under the award.
What is Required for Allowable Costs for a Federal Award?
- Remember, the federal cost principles in the Standards for Documentation of Personnel Expenses state that charges to awards for salaries and wages must be based on personnel reports that accurately reflect the actual activity of each employee.
Here are the specifics from 2 CFR Part 200.430 Compensation—personal services:
1) Charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must:
(i) Be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated;
(ii) Be incorporated into the official records of the non-Federal entity;
(iii) Reasonably reflect the total activity for which the employee is compensated by the non-Federal entity, not exceeding 100% of compensated activities (for IHE, this per the IHE’s definition of IBS);
(iv) Encompass both federally assisted and all other activities compensated by the non-Federal entity on an integrated basis, but may include the use of subsidiary records as defined in the non-Federal entity’s written policy;
(v) Comply with the established accounting policies and practices of the non-Federal entity (See paragraph (h)(1)(ii) above for treatment of incidental work for IHEs.); and(vi) [Reserved]
(vii) Support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity.
Budget estimates are also discussed in this section of why they are unallowable grant costs:
(viii) Budget estimates (i.e., estimates determined before the services are performed) alone do not qualify as support for charges to Federal awards, but may be used for interim accounting purposes, provided that:
(A) The system for establishing the estimates produces reasonable approximations of the activity actually performed;
(B) Significant changes in the corresponding work activity (as defined by the non-Federal entity’s written policies) are identified and entered into the records in a timely manner. Short term (such as one or two months) fluctuation between workload categories need not be considered as long as the distribution of salaries and wages is reasonable over the longer term; and
(C) The non-Federal entity’s system of internal controls includes processes to review after-the-fact interim charges made to a Federal awards based on budget estimates. All necessary adjustment must be made such that the final amount charged to the Federal award is accurate, allowable, and properly allocated.
You must document spending
- The cost principles state that costs must be reasonable for the performance of the award and adequately documented to be allowable to charge an award.
It is not considered reasonable nor adequate documentation to just charge the grant based on budget numbers, it must be actual allowable costs.
Don’t be a cost- shifter
- Costs must be attributable to the grant in reasonable proportion to the benefit received.
Shifting costs to other Federal awards to overcome funding deficiencies or to avoid restrictions is not allowed.
Do you know the requirements in the Uniform Guidance for charging wages and salaries to a federal award?
How about fringe benefits?
- Both of the rules for wages and fringe benefits are covered in 2 CFR Part 200.430 Compensation—personal services.
A thorough understanding of what is required by the federal cost principles for labor and salaries and related fringe benefits could have eliminated this whole unfortunate situation.
How about you?
Do you see any of these “no-no’s” happening at your organization?
Get more tips for time and effort reporting at https://blog.myfedtrainer.com/wp-content/uploads/2015/04/Special-Report-4-Time-and-Effort-Reporting.pdf
Read more of the Office of the Inspector General report:
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Lucy Morgan CPA, MBA
CEO, Compliance Warrior
Author of “Decoding Grant Management-The Ultimate Success Guide to the Federal Grant Regulations in 2 CFR Part 200” The 2nd Edition is now available on Amazon in Paperback and Kindle versions.