The Six Cs of Managing Federal Projects

How to Avoid Cost Disallowances

by Ernest R. Goeres and Cesidio G. Mancini



Introduction
Compensation
Costs
Consulting
Certification of Time and Effort
Contracting
Caveats

Reprinted with permission from the December 1995 Business Officer. Copyright 1995, National Association of College and University Business Officers.

Introduction

To avoid the embarrassment and the financial pain of incurring cost disallowances on federally sponsored projects, colleges and universities must ensure that faculty, staff, and administrators are familiar with rules and regulations governing the administration of these projects.

These rules and regulations emanate from wage and labor laws, from the agency sponsoring the project, and from institutional policies. Violation of rules and regulations may result in significant cost disallowances to the institution as well as sufficient justification for federal and state agencies to perform extensive audits of all sponsored projects. Violations can also cause irreparable damage to an institution's reputation and result in loss of future funds. Therefore, higher education administrators must pay particular attention to the six Cs of managing federally funded projects and educate personnel accordingly. The six Cs are:

  • Compensation (release time, overload, etc.)
  • Costs (allowable, attributable, transfers, etc.)
  • Consulting
  • Certification of time and effort
  • Contracting
  • Caveats (other)

Compensation

OMB Circular A-21 states: "Compensation for personnel services covers all amounts paid currently or accrued by the institution for services of employees rendered during the period of performance under sponsored agreements....Charges to sponsored agreements may include reasonable amounts for activities contributing and intimately related to work under the agreements..." The circular further states that faculty salaries paid from sponsored projects should be part of base salary rather than overload unless otherwise approved by the sponsoring agency.

Circular A-21 also stipulates that salaries paid to nine-month faculty members for summer work must not exceed their regular monthly academic year salary. Individual sponsor agreements and institutional policies sometimes place limitations on the number of summer months faculty members may receive salary for their work. To avoid later cost disallowances, proposal writers and project administrators should be aware of any limitations. Wages for nonfaculty must be distributed to projects based on time and attendance records. These wages must be paid as part of base salary, not as overtime, unless an employee is nonexempt. Exempt employees in this category may not receive overtime pay from sponsored projects; doing so violates section J.8.a of Circular A-21 and may breach institutional policy as well.

The hiring of relatives, payments in advance, and unsupported transactions are in violation of section J.8.a. of OMB Circular A-21 and are typically prohibited under institutional policy. These practices may also violate state and other governance policies. For example, the West Virginia Board of Regents Classified Employees' Handbook, printed in 1987, states that "employees of Board of Regents institutions should neither initiate nor participate in institutional decisions involving a direct benefit to members of their family...." This policy covers decisions on such issues as initial appointments, retention, promotion, salary, and leaves of absence.

Payments in advance of services rendered are not permitted by sponsoring agencies and are in violation of Circular A-21 and most state or institutional policies. West Virginia state code, for example, states that "no money shall be drawn from the treasury to pay the salary of any officer or employee before his services have been rendered."

Costs

OMB Circular A-21 offers four tests to determine the allowability of costs applied to federally sponsored agreements:

  • Allowable costs are reasonable. The costs must be necessary to fulfillment of the agreement and acquired by means consistent with federal and state laws and regulations. In addition, incurrence of the costs must be consistent with institutional policies and practices. The circular defines reasonable costs as follows: "A cost may be considered reasonable if the nature of the goods or services acquired or applied, and the amount involved therefore, 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 involved in the determination of the reasonableness of a cost are: the restraints or requirements imposed by such factors as arm's-length bargaining and the extent to which the actions taken with respect to the incurrence of the cost are consistent with established institutional policies and practices applicable to the work of the institution generally, including sponsored agreements."
  • Allowable costs are allocable to the agreement. A cost is allocable if it is identifiable to the agreement and incurred to advance the project.
  • An expense must be treated consistently throughout the institution. Similar costs cannot be identified as both direct and indirect costs.
  • Allowable costs must conform to any limitations or exclusions in the agreement.

Colleges and universities must also implement policies and procedures to identify costs allocable as indirect costs based on applicable federal regulations. Costs that have been incurred for common or joint objectives, and cannot be identified specifically and accurately with a particular sponsored project, should be treated as indirect costs. Examples include the cost of utilities, maintenance, and operation; building and equipment use expenses; administrative costs; library costs; and student services costs.

As a federally sponsored project nears completion, project administrators should not assess charges that do not benefit the project to deplete remaining grant or contract funds. This practice could be justified, however, for projects with multi-year funding in years other than the final one. Even then, such expenditures should be approved by the sponsor.

Costs allocable to a particular sponsored agreement cannot be shifted to other sponsored agreements to meet cost overruns or solve other problems. Legitimate cost transfers must be made promptly (typically within 120 days), with adequate justification, explanation, and documentation. These transfers should be approved by responsible officials in the department and the institution. Transfers of salary costs must not conflict with earlier certifications of effort. If such salary cost transfers are legitimate, earlier certifications of effort must be corrected to reflect changes.

Consulting

Special conditions relate to consulting activities on federally sponsored projects. OMB Circular A-21 states that "...intra-university consulting is assumed to be undertaken as a university obligation requiring no compensation in addition to full-time base salary. The principle also applies to faculty members who function as consultants or otherwise contribute to a sponsored agreement conducted by another faculty member of the same institution. "However, in unusual cases where consultation is across departmental lines or involves a separate or remote operation, and the work performed by the consultant is in addition to his or her regular departmental load, any charges for such work representing extra compensation above the base salary are allowable provided that such consulting arrangements are specifically provided for in the agreement or subsequently approved in writing by the sponsoring agency if not in the initial agreement."

In addition, a college or university may have policies about its employees' consulting activities. For example, at West Virginia University, consulting by faculty members is addressed in the WVU Faculty Handbook as follows: "The university rarely uses its staff and resources for paid consulting of its own projects. Such consulting must be approved by the dean and receive clearance from the Office of Sponsored Programs when a sponsored project is involved."

Certification of Time and Effort

Salaries and wages charged to federally sponsored projects must be supported by certified effort distribution reports, reflecting 100 percent of an individual's time and based on actual effort expended rather than the budget or availability of funding. Individuals with direct knowledge of the work performed should certify the reasonableness of effort distribution reports on a regular basis (based on the payroll distribution method of an institution). Those with direct knowledge of the work performed can include the employee, principal investigator, and/or a responsible official with first-hand knowledge of the effort. Excess work performed does not need to be included in the payroll distribution method if it is separately identified in the institutional accounting system.

Contracting

An institution retains significant responsibility when subcontracting part of the work on a federally sponsored agreement. The following are general guidelines that will assist administrators when subcontracting.

  • Never commit to subcontractors before awarding the subcontract. Even a suggestion could be construed as authorization to start work. Work begun before adequate assurances are met and the procurement process occurs could result in disallowances.
  • Obtain the necessary sponsor approvals before the subcontracting process begins.
  • When writing the subcontract agreement, include a clear statement of the work required, performance milestones, and schedule and method of payment as well as applicable institutional and sponsor requirements (such as small and disadvantaged business regulations, human subject guidelines, and Davis-Bacon assurances).
  • Consider, as a provision of the subcontract, sanctions for failing to comply with audit or program requirements.
  • Ensure that all parties clearly understand legal issues, such as indemnification and hold-harmless clauses, warranty clauses, intellectual property rights, and governance laws when subcontracting is done with an out-of-state organization.
  • Develop internal procedures for administering the work of the subcontract.
  • Follow the institutional procurement process.

The entity contracting for work has fiduciary responsibility for the fiscal propriety of subcontracted work. That entity is ultimately responsible for all federal dollars passed through to subcontractors. During the agreement period, project administrators must oversee subcontractors to ensure compliance with applicable federal requirements as well as program rules.

Caveats

Higher education officials must also be aware of the following issues.

Technical and Progress Reports: Most federal agreements require that principal investigators provide periodic reports on the status of projects. The submission of these reports is the only mechanism available to the sponsor to monitor the project's progress. Often, reimbursement for current project costs or future funding may be tied to the timely submission of these reports.

Cost Sharing: All cost sharing obligations must be handled as outlined in the grant or contract proposal. Documentation in the form of time and effort reports, explanations of expenditures for nonpersonnel items, and/or letters from third parties about their contributions to the project is required to avoid expenditure disallowances by the sponsoring agency.

Significant Budget or Program Revisions: Major changes in the budget or program of activities usually require sponsor approval. "Major" or "significant" is typically defined by the administrative regulations of the sponsoring agency. Because these regulations vary from sponsor to sponsor, the principle investigator or project director must become familiar with them. When in doubt, contact the program or contract officer to discuss the need for changes and obtain approval. If verbal approval is given, the request must be followed up in writing or in a letter of confirmation, with copies to the appropriate institutional offices.

Unrelated Business Income Tax: Some contractual research is subject to unrelated business income tax (UBIT). To be exempt from tax, research typically must be undertaken for the primary purpose of providing instruction or be scientific research in the public interest. Some "acid tests" of scientific research follow:

  • The results of the research are made public on a timely, nondiscriminatory basis.
  • The research is performed for either the federal or state government.
  • The research is directed toward benefiting the public.

Recommendations:
To avoid the embarrassment and financial liability (both real and potential) for cost disallowances on sponsored projects, a college or university should institute a program to educate personnel about applicable rules, regulations, and policies. Such a program might include:

  • Periodic review of policies and procedures.
  • Development of a guide to assist in management of sponsored projects.
  • Training of researchers and others who have a role in the preparation and management of sponsored projects in all facets of rules and regulations--at least annually, but more frequently when deemed appropriate.
  • Training of those personnel who are involved in the preparation of a proposal's budget. Budgeters also need to know the rules and regulations at the time the proposal is being prepared for funding consideration; many times they can also educate and remind proposal writers about the caveats of sponsored project administration.
  • Distribution of information to researchers and support staff through various media including newsletters, electronic listservs, and periodic mailings.
  • Development of a comprehensive set of policies and procedures to ensure compliance with rules, regulations, and policies.
  • Performance of institutional self-reviews and internal audits in addition to the required single audit prescribed by Circulars A-128 or A-133.

Higher education institutions will never be able to eradicate errors in sponsored projects administration. The extent to which colleges and universities can control mistakes will in large part depend on their desire and ability to educate all those who play roles in preparing proposals and administering funded projects.


Ernest R. Goeres is associate dean and professor in the College of Human Resources and Education at West Virginia University. Cesidio G. Mancini is the university's associate controller.

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