By Kristin Derryberry, CPA and HoganTaylor Assurance Manager

The new mandate is embedded in grant making rules that the federal Office of Management and Budget (OMB) put into effect at the end of 2014. The prior cost principles that an organization followed were dependent upon the type of organization. For state, local and American Indian tribal governments, the prior rules were contained in Circular A-87; for educational institutions, the guidance was found in Circular A-21; and for nonprofit entities, Circular A-122 had previously applied. The new uniform grants guidance consolidates these three cost circulars into one document that will now apply to all entities. In addition, the new OMB Uniform Guidance streamlines and clarifies cost allocation and other rules related to government grants and contracts, removing some areas of confusion and inconsistency while treating more of a nonprofit’s expenses as direct (reimbursable) costs.

The OMB Uniform Guidance clarifies numerous cost allocation rules and specifies more costs that are reimbursable as direct costs. For instance, in certain circumstances, program administration (e.g., administrative staff dedicated to a specific program) can be reported as direct, rather than as indirect, costs, and therefore are fully recoverable. The uniform guidance reemphasizes the need for costs to be necessary in the performance of a Federal award, be adequately documented and be reasonable. OMB tries to distinguish between direct and indirect costs but does acknowledge that there is no universal rule for identifying a cost as either direct or indirect.

The Uniform Guidance expressly requires pass-through entities (typically states and local governments, as well as some larger nonprofits) using federal funds and all federal departments/agencies to reimburse a nonprofit for the reasonable indirect costs it incurs. Nonprofits that have never had a federally approved indirect cost rate can elect either the de minimis rate of 10 percent of their modified total direct costs (MTDC) or negotiate a higher rate in accordance with the federal cost principles. Indirect cost rates and cost allocation plans still exist under the new reforms. However, be careful as there are areas where the requirements differ depending on your type of organization.

Remember, the grants reform requires written procedures for determining availability of costs in accordance with the revised cost principles. Various other written procedures are required by the grants reform rules, too, so be on the lookout for those requirements as you read other sections of these reforms.

Overall, the changes made to the con=st principles were designed to ensure that the Federal awards bear their fair share of costs; however, these principles do not in any way guarantee the extent of Federal participation in the project. Federal dollars are still limited.

These cost principles will apply to new awards and to extensions of existing awards made after December 26, 2014.

See below for further information in an article from David L. Thompson, Vice President of Public Policy, National Council of Nonprofits

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