Understanding Federal Grants for Not For ProfitsBy Paul H. Calabrese and A. Michael Gellman, CPA Imagine that you have just received your first federal grant. You are feeling a great sense of accomplishment and there is a temptation to sit back and relax. You think there are no other obligations to the granting agency to worry about. What is wrong with this picture? There are significant responsibilities inherent in managing major federal grants. The administrative cost to develop compliant accounting systems can be substantial. Government regulations resemble a minefield of hidden requirements and potential serious penalties. Let's briefly introduce some key areas of concern that will help you to fully recover costs related to your federal grant:
First, you must understand why indirect cost rates are integral to federal grants and full cost recovery. Indirect cost rates: NFPO's often allocate indirect cost expenses such as payroll taxes, employee benefits or rent to programs using full time labor equivalents, actual salaries and wages or another predetermined method. Sometimes direct and indirect salaries are allocated based on set budget percentages. Using estimates to approximate indirect wages in M&G, results in a less accurate calculation of support functions for purposes of IRS 990 reporting. Since 990s are public information, it would not be surprising that organizations might be tempted to artificially lower their M&G expense allocations to give the appearance that their administrative costs are at a minimum. For federal grants, the government requires complete accuracy of both direct and indirect labor charges by requiring the use of timesheets to record and document actual labor charges. Indirect costs cannot be based on some arbitrary method. Using actual labor charges as recorded in employee timesheets will give a precise methodology for allocating indirect costs. Indirect costs are computed and allocated based on the following rather simplistic percentage. The percentage is computed based on a fractional ratio containing a specific numerator and denominator. The numerator is M&G total expense, which is divided by a denominator representing the total of program expenses plus fundraising expenses. Only the appropriate amount of indirect cost can be allocated to federal grants using this percentage. When you prepare a grant proposal, the goal is to recover not only your direct program costs but also the applicable indirect costs as computed using your indirect cost rate. Full cost recovery: From the onset of preparing your grant proposal to a federal agency, you should include a provision for indirect cost, i.e. fringe benefits and M&G. Fringe pertains to the benefits associated with salaries such as payroll tax, workers compensation, pension, medical, life insurance, etc. Unfortunately, you will not be able to use an indirect rate until it is approved by the cognizant agency. It is recommended that when you submit your grant proposal, you also provide an Indirect Cost Rate Proposal (ICRP). A grant is not like a contract. If awarded a cost reimbursable contract, the NFPO is entitled to recover 100% of their incurred cost. Although grants are cost reimbursable, depending on the federal program, the government will be looking to cost share with the NFPO. Often grants have matching requirements such as cooperative agreements. For example, the government may provide 80% of a $100,000 grant but the agency is expecting the NFPO to cover the remaining 20% or $20,000 by incurring costs not reimbursed by the government; usually by in-kind contributions from existing volunteer donors in the form of contributions or services. Since the grantee will receive only 80% on the dollar, it is imperative that they recover all of their indirect costs. Consequently your indirect cost will not be recovered unless you include them in your grant proposal with an ICRP submittal to your cognizant agency. Let's discuss the indirect rate development process. Indirect Rate Development Most likely you will not have computed a provisional rate if this is your first federal grant. Until you receive a provisional rate, the government will not include your indirect expenses based on your provisional rate until the beginning of the next federal government fiscal year starting October 1st. The provisional rate will be used in invoicing and submitting proposals to the federal government. A provisional indirect rate is developed based on the prior year's historical data adjusted by the forecast for the upcoming fiscal year. Most agencies have a focal point, such as the division of cost allocation, to review and issue both provisional and final rates. Since a grantee might have awards with different federal agencies, the agency with the largest dollar concentration of government grants negotiates the rates on the behalf of all other departments. At the end of a fiscal period, the grantee submits their ICRP to the cognizant agency to settle their final rate as well as establishing next year's provisional rate. In establishing the final (actual) rate for a grantee's previous fiscal year, if the provisional rate was higher than actual expenses, the grantee must pay back the difference or offset their next invoice. If the historical rate is higher than the provisional rate, the grantee must quickly submit this information to their grants officer for recovery. However, four scenarios might limit recovery. First, if there was a ceiling rate, the grantee can only recover their actual indirect costs up to the ceiling rate. If the actual (historical or final) rate is lower than the ceiling rate, they will recover 100% of their indirect expenses. Second, the grant may not permit the recovery of indirect expenses after the final, actual rate is determined. Third, if the grantee has expended all of their funding, the grantee would not be reimbursed. However, the grantee is not precluded from requesting additional funds in next year's budget to recover the additional indirect expenses, but often this is not accomplished because of political reasons, i.e. the agency is generally not willing to pay for more cost than originally planned. The fourth limitation on cost recovery is the impact of not complying with government regulations. Compliance Requirements Depending on the level of agency oversight, the grantee may have greater risk of non-compliance. For instance, DCAA would perform a more involved audit. In order to assure that the grantee would have no deficiency, the NFPO would have to establish a more robust system of internal controls. Whereas, grantees having limited interaction with a cost negotiator might have less controls because of a lower chance of direct audit oversight. An adequate project cost accounting system must be able to segregate costs and funds by grant, distinguish between direct and indirect cost, and identify unallowable cost per OMB A-122. This regulation has 56 cost principles addressing cost recovery. If the grantee does not comply with the regulations, certain costs will be disallowed. Since the potential for non-compliance would have a negative affect, there is a higher administrative cost to maintain a robust compliance system. This form of self governance would include formal timekeeping, travel, and other procedures to ensure a strong system of internal controls is in place. If the grantee incurs more than $300,000 ($500,000 for fiscal years beginning after December 31, 2003) from federal awards during a fiscal year, their financial statements must not only be audited, but must issue a supplemental statement that states they are in compliance with the provisions of OMB Circular A-133. Conclusion Contracting with the government has inherent administrative cost for specialized accounting software, and maintaining stringent internal controls. There are other areas to consider when contracting with the federal government that should also be addressed though not discussed in this article to ensure a comprehensive accounting system.
Paul H. Calabrese is a senior manager at Rubino & McGeehin, Chartered, providing accounting and consulting services to the firm's non profit and government contracting clients. He has considerable experience with OMB Circular A-122, cost principles and indirect cost recovery for non-profit organizations. He has presented seminars to the Greater Washington Society of CPAs, Maryland Society of Accountants, Support Center of Washington, GMU Accountancy Advisory Council, GWU Law School, and the Institute of Management Accountants on related matters. He can be reached at 301-214-4137 or pcalab@rubino.com. A. Michael Gellman, CPA is a shareholder at Rubino & McGeehin, Chartered, CPAs and Consultants, where he is responsible for the firm's Not-For-Profit Specialty Group Consulting Practice. Mr. Gellman has more than 20 years experience in nonprofit accounting working as a financial and management consultant. He has conducted numerous seminars and has written articles on budgeting, reserve and investment policies, strategic planning, fees for services, endowment funds and board development. Mr. Gellman is currently serving as the immediate past president for the Greater Washington Society of CPAs. He can be reached at 301-214-4197 or mgellman@rubino.com. Copyright Rubino & McGeehan, 2003, All Rights Reserved
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