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State of Illinois Department of Human Services Secretary Michelle R.B. Saddler C OST P RINCIPLES AND A DMINISTRATIVE R EQUIREMENTS OF F EDERAL AND S TATE.

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Presentation on theme: "State of Illinois Department of Human Services Secretary Michelle R.B. Saddler C OST P RINCIPLES AND A DMINISTRATIVE R EQUIREMENTS OF F EDERAL AND S TATE."— Presentation transcript:

1 State of Illinois Department of Human Services Secretary Michelle R.B. Saddler C OST P RINCIPLES AND A DMINISTRATIVE R EQUIREMENTS OF F EDERAL AND S TATE G RANTS Carol A Kraus, CFO Department of Human Services August 6, 2013

2 Learning Objectives Management Improvement Initiative Committee Background Goals of MIIC Financial and Streamlining Federal and State Uniform Administrative Requirements – Authoritative Sources – OMB Circular A-110 (2 CFR Part 215) – Cost Allocation Overview – OMB Circular A-122 (2 CFR Part 230) – Basic Guidelines for Costs – Direct and Indirect Costs – Indirect Cost Rate Proposal – Cost Allocation Plan Process – Reporting of Time and Effort of Staff Questions and Answers 2

3 Management Initiative and Improvement Committee Background P.A required the Department of Human Services, Department of Healthcare and Family Services, Department of Children and Family Services and the Department of Public Health to provide recommendations to the legislature to remove redundancies of administrative burden on community providers P.A created the MIIC to implement the 35 recommendations in 7 different areas. Fiscal and Streamlining Subcommittee was formed to carry out the legislative directive. 3

4 Goals of MIIC To reduce the redundancy of the administrative burden on Provider community – Uniform Reporting Requirements; – Uniform Auditing Requirements; – Reduce the number of on-site reviews; – Reduce the number of requests for the same information and documentation; 4

5 Goals of MIIC Formed the Financial and Streamlining Subcommittee: – Subcommittee was composed of small, medium and large sized providers; – Representatives from 5 Human Service Agencies; – Representatives from Advocacy Groups. This group was charged with developing uniform requirements while complying with state and federal requirements. 5

6 November 2012 Report – Financial and Streamlining Progress report Summary of the steps taken for adoption of the new annual reporting requirements. In our deliberations the following steps were taken: It was determined that we should follow the federal requirements for annual reporting document; The federal general and administrative requirements were reviewed and discussed by team members; Everyone on the committee was asked to submit examples of their current reporting templates; It was determined that the Consolidated Financial Report (CRF) was used by more programs than any other collectively; 6

7 November 2012 Report – Financial and Streamlining Progress report A crosswalk between the CRF and the federal requirements was prepared for review; A review of the items federal requirements under the cost principles for indirect costs was reviewed to ensure that the indirect cost rate approval and the CFR in combination met federal requirements; The State Agencies and provider representatives reviewed and discussed any necessary changes A list of the required changes was provided and discussed A final vote was taken of the adoption of the CFR with the required changes. 7

8 Financial and Streamlining -Audits Requiring Financial Statements Audits to be conducted when funding received over $150,000 in state and federal pass-through funding; – Audits must be conducted in accordance with Government Auditing Standards; – An OMB Circular A-133 must be conducted when federal pass-through and federal direct funding meet federal threshold ($500,000) 8

9 Fiscal and Streamlining – Fiscal and Administrative On-Site Reviews Goal to reduce the number of on-site reviews: Uniform Risk Factors triggering an on-site review. Low Risk – to reduce the fiscal and administrative - On-site review to once every 3-5 years; Uniform On-Site Review procedures; Require On-Site Reviewers to use the CRV; 9

10 Management Initiative and Improvement Committee Background P.A required the Department of Human Services, Department of Healthcare and Family Services, Department of Children and Family Services and the Department of Public Health to provide recommendations to the legislature to remove redundancies of administrative burden on community providers P.A created the MIIC to implement the 35 recommendations in 7 different areas. Fiscal and Streamlining Subcommittee was formed to carry out the legislative directive. 10

11 Fiscal and Streamlining – Future Goals Coordination of 5 Human Service Agencies – Audit Report Review and Corrective Action – On-Site Review and Corrective Action – Indirect Cost Rate Approval – Use of CRV – Uniform Pre-Qualification Requirements – HB 2 Impact – applying uniformity for all grant making state agencies statewide 11

12 Provider Portal functionally allows State agencies to satisfy due diligence requirements based on data or documents, without redundant requests for the same. 12

13 The Act specifically directs the Management Improvement Initiative Committee (The Committee) to implement recommendations. Deemed Status / Accreditation Team Medicaid Team Financial Audit Reporting Team Streamlining Team CRV Technology Team Contract Team Six Subject Matter Specific Teams ask the MIIC to adopt the Teams Recomendation Management Improvement Initiative Committee (MIIC) Recommendations made to MIIC are adopted by full vote of the MIIC Governors Office Leadership Team (GOLT) Issues unresolved by the MIIC will be presented and resolved by the GOLT

14 The Problem: Redundant and inconsistent business processes impose significant administrative burden on community service providers, hindering the delivery of core human services. Business processes vary at each of the five State agencies, and many times, they vary within multiple departments at the five State agencies for : Accreditation – Deemed Status Contract Process and Contract Documents Reporting and Monitoring Procedures

15 The Solution: The Management Improvement Initiative The implementation of P.A , and P.A represent a collaborative effort between the Administration, the General Assembly and the network of Community Service Providers to streamline the complex and redundant business processes behind accreditation/licensure, contracting, auditing, monitoring and reporting. The success of this Initiative is critical to the maintenance of key human service safety nets and the survival of human service providers in Illinois.

16 Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course The inconsistency and redundancy in business process at the five State agencies causes significant administrative burden and cost to our providers, tantamount to a rate reduction and ultimately impacts service delivery.

17 Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Note the Redundancy & Inconsistent in Business Process at the five State Agencies.

18 A new, simplified, consistent and efficient business process across five State Agencies for accreditation, budget submission, contracting, monitoring and reporting. Fully Operationalize Deemed Status Accreditation Licensure Consistent Boilerplate Agreements for all five State Agencies Contract Execution Streamlined, user-friendly centralized budget reporting Budget Submission Data required for compliance Financial / Other Reporting ONE or a minimum set of consistent value-driven business processes Full implementation of Accreditation - Deemed Status Standard contract boilerplates and process Standardized non-redundant provider monitoring Standardized budget reporting required for compliance Our G oal:

19 Federal and State Uniform Administrative Requirements 19

20 Catalog of Federal Domestic Assistance; OMB Circulars; Code of Federal Regulations; Federal Register; OMB Memoranda and Bulletins; Approved State Plans; Community Service Agreements;; Grant Award Letters. Federal Authoritative Sources – The Rulebooks YOU START HERE! 20

21 Provide the general rules and regulations for federal award management Administrative Requirements Cost Principles Internal Controls Audit Requirements Exceptions to the OMB Circulars are codified in the Code of Federal Regulations, grant agreement and grant award letter OMB Circulars 21

22 States, local governments, and Indian Tribes follow: A-87 for cost principles, Relocated to 2 CFR, Part 225 (362k) A-87Relocated to 2 CFR, Part 225 A-102 for administrative requirements, and A-102 A-133 for audit requirements A-133 Educational Institutions (even if part of a State or local government) follow: A-21 for cost principles, Relocated to 2 CFR, Part 220 (384k) A-21Relocated to 2 CFR, Part 220 A-110 for administrative requirements, Relocated to 2 CFR, Part 215 (280k), and A-110Relocated to 2 CFR, Part 215 A-133 for audit requirements A-133 Non-Profit Organizations follow: A-122 for cost principles, Relocated to 2 CFR, Part 230 (362k) A-122Relocated to 2 CFR, Part 230 A-110 for administrative requirements, Relocated to 2 CFR, Part 215 (280k), and A-110Relocated to 2 CFR, Part 215 A-133 for audit requirements A What OMB Circulars Do I Follow?

23 23 PART 215UNIFORM ADMINISTRATIVE RIZEQUIREMENTS FOR GRANTS AND AGREEMENTS WITH INSTITUTIONS OF HIGHER EDUCATION, HOSPITALS, AND OTHER NON-PROFIT ORGANATIONS (OMB CIRCULAR A–110) – Provides uniform administrative requirements for grants and agreements – Codified in the Code of Federal Regulations at 2 CFR Part 215 – The provisions of the Circular apply to subrecipients performing work under awards if such subrecipients are non-profit organizations (2 CFR §215.5)

24 Definitions 2 CFR Award means financial assistance that provides support or stimulation to accomplish a public purpose. Awards include grants and other agreements in the form of money or property in lieu of money, by the Federal Government to an eligible recipient. The term does not include: technical assistance, which provides services instead of money; other assistance in the form of loans, loan guarantees, interest subsidies, or insurance; direct payments of any kind to individuals; and, contracts which are required to be entered into and administered under procurement laws and regulations. 24

25 Definitions 2 CFR Recipient means an organization receiving financial assistance directly from Federal awarding agencies to carry out a project or program. The term includes public and private institutions of higher education, public and private hospitals, and other quasi-public and private non-profit organizations such as, but not limited to, community action agencies, research institutes, educational associations, and health centers. The term may include commercial organizations, foreign or international organizations (such as agencies of the United Nations) which are recipients, sub recipients, or contractors or subcontractors of recipients or subrecipients at the discretion of the Federal awarding agency. 25

26 Definitions 2 CFR Subaward means an award of financial assistance in the form of money, or property in lieu of money, made under an award by a recipient to an eligible subrecipient or by a sub-recipient to a lower tier subrecipient. The term includes financial assistance when provided by any legal agreement, even if the agreement is called a contract, but does not include procurement of goods and services Subrecipient means the legal entity to which a subaward is made and which is accountable to the recipient for the use of the funds provided. Pass-through entity means a non-Federal entity that provides a Federal subaward to a subrecipient to carry out part of a Federal program. 26

27 Pass-through Agency Responsibilities This section sets forth a pass-through entitys responsibilities with respect to making Federal subawards and ensuring the subrecipients compliance with the terms and conditions of those, All pass-through entities shall: (1) Ensure that every subaward includes: – All clauses required by Federal statute, regulations, guidance, E.O.s and their implementing regulations; – Each administrative, national policy, and program-specific requirement that the Federal awarding agency requires the pass-through entity to flow down to subawards and subrecipients; – Any additional Federal requirements that the pass-through entity imposes on the subrecipient in order for the pass-through entity to meet its own responsibility to the Federal awarding agency ; 27

28 Pass-through Agency Responsibilities An approved Federally recognized indirect cost rate negotiated between the subrecipient and the Federal government or, if no such rate exists, either a rate negotiated between the pass-through and subrecipient entities (in compliance with Federal guidelines in this guidance), or a de minimis indirect cost rate equal to 10% of total modified direct costs A requirement that the subrecipient permit the pass-through entity and auditors to have access to the subrecipients records and financial statements as necessary for the pass-through entity to meet the requirements of this section, section ___.502 Standards for Financial and Program Management and Subchapter G- Audit Requirements of this Guidance; and Appropriate terms and conditions concerning closeout of the subaward. 28

29 Pass-through Agency Responsibilities (2) Consider imposing specific subaward conditions (not previously included in the Federal award announcement) upon a subrecipient that has materially failed to comply with the general and program-specific terms and conditions of a subaward. (3) Inform the subrecipient of the CFFA title and number, Federal award name and number, Federal award year, whether the Federal award is research and development (R&D), The pass-through entity shall provide this information to each subrecipient at the time of Federal award and with each annual continuation of the subaward. If a disbursement contains funds from multiple Federal awards or non-Federal funds, the pass-through entity shall identify the dollar amount made available under each Federal award. 29

30 Pass-through Agency Responsibilities (4) Ensure that subrecipients are aware of requirements imposed upon them by Federal laws, regulations, the provisions of subawards, and any supplemental requirements imposed by the pass-through entity. (5) Monitor the activities of subrecipients as necessary to ensure that Federal subawards are used for authorized purposes, in compliance with laws, regulations, and the provisions of subawards; and that subaward performance goals are achieved, in accordance with performance and financial monitoring requirements. Pass-through entity monitoring of subrecipients shall include: (A) Analyzing financial and programmatic reports submitted by subrecipients (including analyses to identify patterns and trends of program activity) and performing such other procedures as necessary to ensure proper accountability and compliance with program requirements and achievement of performance goals of the award. 30

31 Pass-through Agency Responsibilities (B) Following-up and ensuring that subrecipients take timely and appropriate action on all deficiencies detected through audits, on-site reviews, and other means. (C) Issuing a management decision for audit findings affecting the pass-through entitys programs as required. For cross-cutting findings, pass-through entities may rely on management decisions issued by the cognizant or oversight agency for audit in lieu of issuing a separate management decision. 31

32 Pass-through Agency Responsibilities Depending upon the pass-through entitys assessment of risk posed by the subrecipient, the following monitoring tools may be useful for pass-through entities to ensure proper accountability and compliance with program requirements and achievement of performance goals: (D) Performing on-site reviews of subrecipients program operations; (E) Providing subrecipients with training and technical assistance on program-related matters; and (F) Arranging for agreed-upon-procedures engagements. 32

33 Pass-through Agency Responsibilities (6) Evaluation of risk posed by subrecipients for purposes of monitoring may include such factors as: (A) The results of previous audits; (B) Whether the entity is a new subrecipient; (C) Whether the entity has new personnel or new or substantially changed systems; and (D) The extent of Federal monitoring if the subrecipient entity also receives direct awards. 33

34 Pass-through Agency Responsibilities (7) Ensure that every subrecipient is audited as required under section __.701 Audit Requirements if it has expended Federal funds during the respective fiscal year that equaled or exceeded the threshold for audit set forth in that section. (8) As applicable, establish audit requirements for for-profit subrecipients, which are not covered by the Single Audit Act, as amended (31 U.S.C. §§ ), (9) Consider whether the results of subrecipient audits and on-site reviews necessitate adjustments to the pass-through entitys own records. (10) Consider taking enforcement action against noncompliant subrecipients, 34

35 Pass-through Agency Responsibilities States shall follow state law and procedures when awarding and administering subawards. Federal agencies shall also require states to follow do the following: (1) Ensure that every subaward includes a provision for compliance with Record Retention and Access Requirements (2) Conform any advances of Federal subaward funds to subrecipients to substantially the same standards of timing and amount that apply to cash advances by Federal awarding agencies. (f) All pass-through entities may provide subawards based on fixed amounts up to the simplified acquisition threshold set in the Federal Acquisition Regulation at 48 CFR 13 and authorized by 41 U.S.C. § 1908 ($150,000 at the time of publication). 35

36 Subrecipeint Agency Responsibilities Organizations receiving HHS grant funds, whether such funds are received directly from the Federal Government, indirectly under a contract, subaward, are responsible for and must adhere to all applicable Federal statutes, regulations, and policies. Organizations also are expected to be in compliance with applicable State and local laws and ordinances. Source: US Department of Health and Human Services Grant Policy Statement January 1,

37 Subrecipeint Agency Responsibilities Recipients are required to meet the standards and requirements for financial management systems set forth or referenced in 45 CFR or 92.20, as applicable. The adequacy of the financial management system is integral to the ability of the recipient to account for the expenditure of grant funds. These standards are intended to ensure that Federal funds are handled in a responsible manner that includes adequate internal controls, cash management consistent with Department of the Treasury requirements 37

38 Subrecipeint Agency Responsibilities Provide accurate, current, and complete financial information about Federal awards and, for subawards, reasonable procedures for ensuring that subrecipients provide financial reports in sufficient time to allow preparation required reports. Maintain records that adequately identify the sources of funds for federally assisted activities and the purposes for which the award was used, including authorizations, obligations, unobligated balances, assets, liabilities, outlays or expenditures, and any program income. Accounting records must be supported by source documentation such as canceled checks, paid bills, payrolls, and time and attendance records. 38

39 Subrecipeint Agency Responsibilities Maintain effective control over and accountability for all cash, real and personal property, and other assets under the award; adequately safeguard those assets; and ensure that they are used only for authorized purposes. Compare actual expenditures or outlays with the approved budget for the award. 39

40 Subrecipeint Agency Responsibilities Minimize the time elapsing between any advance payment under this award and the disbursement of the funds for direct program costs and the proportionate share of any allowable indirect or facilities and administrative costs, and ensure that the timing and amount of any payments to subrecipients conform to this standard. Subrecipients must notify DHS Program Contact when financial management problems are discovered. Deficiencies in a recipients financial management system, whether reported by the recipient or identified by the DHS Administrative On Site Review or Audit, may result in the imposition of special award conditions, use of the reimbursement payment method, or other increased monitoring by the awarding office. Determine the allowability of costs in accordance with the applicable Federal cost principles, program regulations, and other requirements cited in the CSA Agreement. This includes the ability to readily identify unobligated balances, accelerated or delayed expenditures, and cost transfers. 40

41 41 OMB Circular A-110 Summary of Fiscal Requirements Financial management systems that provide – Effective control over and accountability for all funds, property and other assets – Comparison of outlays with budgetary amounts for each award – Cash management written procedures – Written procedures for determining the reasonableness, allocability and allowability of costs in accordance with the provisions of the applicable Federal cost principles (OMB Circular A-122) – Accounting records including cost accounting records that are supported by source documentation

42 42 Accounting Systems Cost Allocation is predicated on the premise that organizations maintain an adequate accounting system and accounting records to document costs and support claims (2 CFR §215.21(b)(7))

43 MAINTAIN COMPLETE AND ACCURATE FINANCIAL RECORDS Identify all costs related to the grant agreement Keep track of all funds received and paid out Identify and separate allowable and non- allowable project costs If applicable, demonstrate how each funding source is maintained and charged separately Account for all hours worked and be able to identify to which project the hours are allocated

44 44 Why is Cost Allocation Important? What is the difference between Direct and Indirect Costs ? What are the Federal requirements governing the funding received? What is a Cost Allocation Plan? How does this impact my organization? What are allowable or unallowed costs ? How do I calculate indirect cost rates?

45 45 Cost Allocation Overview What is Cost Allocation? – Cost Allocation is a Process to Determine the Total Cost of a Cost Objective – Achieved By Distributing or Apportioning Costs to a Benefiting Cost Objective… – Using Statistical Data or Metrics that Measure the Usage of a Service or the Relative Benefit Received

46 46 Commingling of Funds The accounting systems of all recipients and subrecipients must ensure that Federal funds for a particular award are not commingled with funds from other Federal awards or other sources. Each award must be accounted for separately. Recipients and subrecipients are prohibited from commingling funds on either a program-by-program or project-by- project basis. Federal funds specifically budgeted and/or received for one project may not be used to support another. Where a recipient's or subrecipient's accounting system cannot comply with this requirement, the recipient or subrecipient shall establish a system to provide adequate fund accountability for each project it has been awarded. Part II, Chapter 3, Financial Guide, U.S. Department of Justice, Office of Justice Programs (OJP)

47 47 Cost Allocation Overview What is a Cost Objective? – A Cost Objective is a particular award, contract, grant, project, service, or other activity of an organization for which cost data are desired and for which provision is made to accumulate and measure the costs

48 48 Cost Allocation Overview What is the Total Cost of a Cost Objective? – Total Cost is composed of the sum of the allowable direct costs and allocable indirect costs, less any applicable credits.

49 49 Total Costs = Direct + Indirect Direct Costs Can be identified specifically with a particular final cost objective (i.e., a particular award, service or direct activity) Indirect Costs Incurred for common or joint objectives and cannot be readily identified with a particular final cost objective

50 50 Allocating Indirect Costs Allocation Bases: The methodology or statistical measure by which Indirect Costs are distributed to other benefiting services and/or cost objectives – Examples May Include: Number of Active Employees; Number of Transactions Processed; Square Footage Occupied; Salaries and Wages of Units Supervised;

51 Cost Allocation Overview Simple Example: Centrally Located Copier Cost to Operate includes: Lease Payments Repairs & Maintenance Toner Paper Supplies, etc. Direct Costs

52 Cost Allocation Overview Copier Example (continued): What about electricity used, the space it occupies, the office managers time paying related bills, ordering paper & supplies, arranging deliveries and coordinating servicing, etc.? Indirect Costs

53 Cost Allocation Overview Copier Example (continued): Three Divisions Utilize Division A – 12 Staff Division B – 6 Staff Division C – 22 Staff

54 Cost Allocation Overview Copier Example (continued): How Do We Apportion or Allocate These Costs to the Three Divisions? Equal Distribution (i.e., 1/3rd Each) Good Number of Staff Using the Copier A – 30%, B – 15%, C – 55% Better User Codes Measures Actual Usage of the Copier Best

55 55 Basic Cost Allocation Guidelines United States Office of Management and Budget (OMB) Circular A-122 – Purpose: Establish principles for determining costs of grants, contracts and other agreements with non-profit organizations. (§230.5 of 2 CFR Part 230)

56 56 OMB Circular A-122 Overview Basic Principle The principles are designed to provide that the Federal Government bear its fair share of costs except where restricted or prohibited by law. (emphasis added) (§ of 2 CFR Part 230)

57 57 OMB Circular A-122 Overview Basic Guidelines for Costs To Be Claimed Under Federal Awards, Costs Must Be: – Allowable – Reasonable – Allocable

58 58 Allowable Costs To Be Allowable, Costs Must Meet the Following General Criteria: Be reasonable for the performance of the award Be allocable to the award under OMB A-122 cost principles Conform to any limitations or exclusions imposed by OMB A-122 cost principles or in the award as to the types or amount of cost items Be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the organization Be accorded consistent treatment Be determined in accordance with generally accepted accounting principles (GAAP) Not be included as a cost or used to meet cost sharing or matching requirements of any other federally-financed program Be adequately documented

59 59 Reasonable Costs A Cost is Reasonable if it Meets the Following General Criteria: Pass prudent person test – it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time of the decision to incur the costs Recognized as ordinary and necessary for the operation of the organization or the performance of the award Constitutes sound business practice, including arms length bargaining, and conforms to the restraints and requirements of Federal and State laws and regulations, and terms and conditions of the award Prudence exercised in the circumstances considering responsibilities to the organization, its members, employees, clients, public, and Federal Government Does not significantly deviate from the organizations established practices

60 60 Allocable Costs To be Allocable, Costs Must Meet the Following General Criteria: A cost is allocable in accordance with the relative benefits received Treated consistently with other costs incurred for the same purpose in like circumstances and – Incurred specifically for the award (direct relationship), or – Benefits both the award and other work and can be reasonably distributed in proportion to the benefits received, or – Is necessary to the overall operation of the organization and a direct relationship to any particular cost objective cannot be shown Costs allocable to a particular award or cost objective may not be shifted to other Federal awards to overcome funding deficiencies, or to avoid restrictions by law or by terms of the award

61 61 Direct Costs Direct Costs are those costs that can be identified specifically with a particular final cost objective (i.e., a particular award, project, service, or other direct activity of an organization) Costs identified specifically with awards are direct costs of the awards and are to be assigned directly to the award Costs identified specifically with other final cost objectives of the organization are direct costs of those cost objectives and are not to be assigned to other awards directly or indirectly

62 Direct Costs Administrative Costs can be Direct if they can be directly tied to a cost objective including: Office supplies Rent Utilities Postage Administrative support such as clerical; Duplication cost; Property Insurance; Also see indirect General and Facility Costs that can be directly tied to a cost objective, that meet the reasonable and necessary of carrying out a program. 62

63 63 Indirect Costs Indirect Costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective After direct costs have been determined and assigned directly to awards or other work as appropriate, indirect costs are those remaining to be allocated to benefiting cost objectives A cost may not be allocated to an award as an indirect cost if any other cost incurred for the same purpose, in like circumstances, has been assigned to an award as a direct cost

64 64 Indirect Costs Typical examples of indirect costs for many non-profit organizations may include Depreciation or use allowances on buildings and equipment Costs of operating and maintaining facilities General administration and general expenses, such as the salaries and expenses of executive officers, personnel administration, and accounting

65 65 Indirect Costs Indirect Costs shall be classified within two broad categories: Facilities and Administration Facilities includes – depreciation and use allowances on buildings, equipment and capital improvements – interest on debt associated with certain buildings, equipment and capital improvements, and – operations and maintenance expenses incurred for the administration, operation, maintenance, preservation, and protection of the organizations physical plant

66 66 Indirect Costs Operations and maintenance expenses include: – Cross allocations from other pools, as applicable Janitorial and utility services Repairs and ordinary or normal alterations of buildings, furniture and equipment Care of grounds Maintenance and operation of buildings and other facilities Security Disaster preparedness Environmental safety Property, liability and other insurance relating to property Space and capital leasing Facility planning and management Central receiving

67 67 Indirect Costs Administration includes – General administration and general expenses that have been incurred for the overall general executive and administrative offices of the organization and other expenses of a general nature which do not relate solely to any major function of the organization – Examples of this category include: Directors office Office of finance Business services Budget and planning Personnel Safety and risk management General counsel Management information systems Library costs and All other types of expenditures not listed specifically under one of the subcategories of Facilities (including cross allocations from other pools, as applicable)

68 68 Indirect Costs Special care should be exercised in developing theAdministration cost pool to ensure that costs incurred for the same purposes in like circumstances are treated consistently as either direct or indirect costs Organizations receiving more than $10 million in Federal funding of direct costs in a fiscal year must breakout indirect costs between Facilities andAdministration

69 69 What is a Cost Allocation Plan? A Cost Allocation Plan is a set of documents that relate to a process where Indirect Costs are allocated using a set of allocation methods to benefiting Cost Objectives The Purposes of a Cost Allocation Plan are as follows: – They are often the only way to determine the total cost of operating programs – They allow an organization to ensure that it is recovering all allowable costs incurred by the organization – They can provide valuable management data to an organization regarding funding levels and time spent on activities (when time and effort reporting is also employed)

70 70 Indirect Cost Rate Proposal Indirect Cost Rate Proposal (ICRP): the documentation prepared by an organization to substantiate its claim for the reimbursement of indirect costs. The proposal is the basis for establishing an indirect cost rate agreement

71 Indirect Cost Rate Proposal Required for Subawards over $250,000 in state and federal pass-through awards; Due 30 days after Financial or Single Audit due date – 210 days after fiscal year end; Must trace to Audited Financial Statements; We will accept a indirect cost rate or cost allocation plan that was approved by the Federal government, must submit the submission and approval documentation. 71

72 Indirect Cost Rate An Indirect Cost Rate is a Percentage calculated as follows: The Direct Cost Base is used to distribute Indirect Costs to individual Federal awards – An indirect cost rate must be applied to a direct cost base in order to determine the amount of indirect cost 72

73 Indirect Cost Rate Methodologies There are Two (2) Basic Methods for Calculating Indirect Cost Rates: Simplified Allocation Method Multiple Allocation Base Method 73

74 Indirect Cost Rate Methodologies The Simplified Method may be used where each of an organizations major functions benefit from its Indirect Costs to approximately the same degree Divide the Total Allowable Indirect Costs by an Equitable Direct Cost Base (e.g. Total Direct Costs, excluding capital outlay and other distorting items, Direct Salaries & Wages, or Modified Total Direct Costs (MTDC)) 74

75 Indirect Cost Rate Methodologies The Multiple Base Method is more appropriate where each of an organizations major functions benefit from its Indirect Costs in varying degrees – Classify Indirect Costs into functional cost groupings (Cost Pools) which benefit functions in significantly different proportions – Select appropriate basis for distribution of each classified pool of Indirect Costs based on relative benefits provided – Distribute each classified pool to benefiting functions – Calculate an Indirect Cost Rate for each function by relating the Total Indirect Costs allocated to that function to that functions Direct Cost Base 75

76 Types of Indirect Cost Rates OMB Circular A-122 Defines Four (4) Types of Indirect Cost Rates: Provisional Rate is a temporary rate, agreed to in advance, based on anticipated future costs. It is subject to retroactive adjustment at a future date after costs are known (pending a Final Rate). Final Rate is established after costs are known. It adjusts the Provisional Rate but is administratively burdensome. Underpayments are subject to availability of funds Overpayments must be credited or returned Not subject to adjustment Fixed Rate is agreed to in advance but is not retroactively adjusted. Difference between estimated and actual costs is carried forward as an adjustment to the rate computation of a subsequent period Predetermined Rate is agreed to in advance but is generally not subject to adjustment. Intended to be permanent

77 77 Direct Allocation Method Treat all costs as Direct Costs except General Administration and General Expenses Three basic categories: – General administration and general expenses – Fundraising – Other Direct Functions Prorate joint costs individually as Direct Costs to each category and to each award or other activity using an appropriate base for the cost being prorated – Relative benefits received – Reasonable criteria – Supported by current data Indirect Costs consist exclusively of general administration and general expenses – Compute indirect cost rate using Simplified Allocation Method

78 Selecting Rate Methodology The following should be considered in selecting a Rate Methodology: – Amount of Federal Funding – Size of the Organization (major functions) – Maximizing Indirect Cost Recoveries – Service Variances – Availability of Allocation Statistics – Types of Programs – Federal Agency

79 79 Cost Allocation Plan/Indirect Cost Rate Proposal Process Information Requirements: – Organization Chart – Chart of Accounts – Expenditure Detail – Payroll Data – Direct Charges – Interviews with Staffs – Statistical Data/Metrics – Grants Inventory (Schedule of Expenditure of Federal Awards)

80 Cost Allocation Plan/Indirect Cost Rate Proposal Process Eight (8) Broad Steps to Preparing an Indirect Cost Rate Proposal: 1. Review OMB Circular A Organization Review 3. Program Identification 4. Prepare a Cost Policy Statement 5. Review and Reconcile Financial Statements 6. Prepare Indirect Cost Rate Proposal Detail 7. Prepare an Indirect Cost Rate Calculation Worksheet and Determine Type of Rate(s) 8. Obtain Cognizant or State Agency Approval

81 81 Salaries and Wages Documentation Payroll - Charges to awards for salaries and wages, whether treated as direct costs or indirect costs, will be based on documented payrolls approved by a responsible official(s) of the organization (subparagraph 8.m.(1) of Appendix B to 2 CFR Part 230) Personnel Activity Reports (PARs) – The distribution of salaries and wages to awards must be supported by personnel activity reports (subparagraph 8.m.(1) of Appendix B to 2 CFR Part 230)

82 82 Personnel Activity Reports (PARs) PARs reflecting the distribution of activity of each employee must be maintained for all staff members (professional and nonprofessionals) whose compensation is charged, in whole or in part, directly to awards. PARs must also be maintained for other employees whose work involves two or more functions or activities in order to support the allocation of indirect costs. – e.g., an employee engaged part-time in indirect cost activities and part-time in a direct function

83 83 Personnel Activity Reports (PARs) PARs maintained by non-profit organizations must: Reflect an after-the-fact determination of the actual activity of each employee – Budget estimates do not qualify as support for charges to awards Account for the total activity for which employees are compensated and which is required in fulfillment of their obligations to the organization Be signed by the individual employee that the distribution of activity represents a reasonable estimate of the actual work performed by the employee during the periods covered by the report – May be signed by a responsible supervisory official having first hand knowledge of the activities performed by the employee Be prepared at least monthly and must coincide with one or more pay periods 63

84 TIME SHEET REQUIREMENTS Provides a daily account of work performed Provides brief descriptions of the daily grant activities performed (this can be recorded on an activity sheet instead of a timesheet) Activities must be recorded separately for each grant All hours in the day, hours worked and non-working hours, such as holidays and vacation, and unpaid time need to be tracked Must be prepared at least monthly and coincide with one or more pay periods Should be signed and dated by the employee and/or his/her supervisor

85 Timekeeping Requirements A power point presentation is included in the reference information; The presentation includes common mistakes when documenting time and attendance; The reference material also includes sample timesheets and activity reports and an excel template.

86 86 References OMB Circular A-122, Cost Principles for Non-Profit Organization OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-profit Organizations OMB Circular A-133 Audits of States, Local Governments, and Non-Profit Organization. ASMB C-5, A Guide for Nonprofits 45 CFR Part 74, Uniform Administrative Requirements for Awards and Subawards to Institutions of Higher Education, Hospitals, Other Nonprofit Organizations, and Commercial Organizations; And Certain Grants and Agreements with States, Local Governments and Indian Tribal Governments – U.S. HHS Implementing Regulations for OMB A-110. Internet Sites: – OMB Circulars - – HHS Cost Policy Issuances- – CFR Sections -

87 87 Questions and Answers - Questions - Discussion - Answers

88 Increased Efficiency | Elimination of Redundancy | Reducing Burden on Human Service Providers C OST P RINCIPLES AND A DMINISTRATIVE R EQUIREMENTS OF F EDERAL AND S TATE G RANTS Carol A Kraus, CFO Department of Human Services August 6, 2013 State of Illinois Department of Human Services Secretary Michelle R.B. Saddler


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