2. OMB Circular A-122 and the Federal Cost Principles Copyright © Texas Education Agency 2012 1

3. OMB Circulars Office of Management and Budget is the federal agency responsible for issuing numerous circulars governing various aspects of grants management Circulars address federal cost principles and administrative requirements and are considered legally binding as a condition of accepting grant awards Revisions to OMB Circulars, including circulars pertaining to federal cost principles, audits, and uniform administrative grant requirements, are published in the Federal Register OMB Circular A-122, A-133, and A-110 apply to nonprofit organizations Circulars are also available on OMB’s website: http://www.whitehouse.gov/omb/circulars/index.html

4. Copyright © Texas Education Agency 2012 3 Federal Cost Principles Described in the OMB Circulars and provide federal agencies and federal award recipients with a uniform approach to determining costs of federally funded programs They are designed to provide that the Federal government bear its fair share of costs for grant projects There is the expectation in the cost principles that organizations will administer Federal funds properly and in a manner consistent with the sound management practices that the organizations apply to their own revenues The federal cost principles provide for consistent treatment of costs

5. Copyright © Texas Education Agency 2012 4 State-Funded Grants Uniform Grant and Contract Management Standards Act of 1981 (Texas Government Code, Section 783) directed the governor’s office to establish similar principles for state funded grants and contracts Incorporates the federal cost principles for use with state funded grants Establishes uniform procedures to promote the efficient use of public money Topics covered in Grants 101 for Nonprofits will apply to state and federal awards

6. Copyright © Texas Education Agency 2012 5 Premises of Federal Cost Principles The application of the cost principles is based on the premises that: Organizations are responsible for the efficient and effective administration of Federal awards through the application of sound management practices – internal controls – written policies and procedures – separation of duties – checks and balances – effective and appropriate decision-making – appropriate authority levels approving purchases and expenditures Organizations assume responsibility for administering Federal funds in a manner consistent with underlying agreements, program objectives, and the terms and conditions of the Federal award Each organization, in recognition of its own unique combination of staff, facilities, and experience, will have the primary responsibility for employing whatever form of organization and management techniques may be necessary to assure proper and efficient administration of Federal awards

7. Copyright © Texas Education Agency 2012 6 Guidelines of Federal Cost Principles To be allowable under Federal awards, costs must meet the following general criteria: Be reasonable and necessary for proper and efficient performance and administration of Federal awards. Be allocable to Federal awards under the provisions of the Circular. Be authorized or not prohibited under State or local laws or regulations. Follow the most restrictive rules Conform to any limitations or exclusions set forth in these principles, Federal laws, terms and conditions of the Federal award, or other governing regulations as to types or amounts of cost items.

8. Copyright © Texas Education Agency 2012 7 Guidelines of Federal Cost Principles Be consistent with policies, regulations, and procedures that apply uniformly to both Federal awards and other activities of the organization. Be accorded consistent treatment. A cost may not be assigned to a Federal award as a direct cost if any other cost incurred for the same purpose in like circumstances has been allocated to the Federal award as an indirect cost. Be 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 Federal award in either the current or a prior period, except as specifically provided by Federal law or regulation. Be adequately documented.

9. Copyright © Texas Education Agency 2012 8 Allowable and Unallowable Costs Specific allowable and unallowable costs are often described in the Request for Application (RFA) materials – Part 2: Program Guidelines – Part 3: Schedule Instructions – Guidelines Related to Specific Costs Costs must also be allowable as specified in the applicable OMB Circular Guidance related to allowable and unallowable costs are available on the Grant Resources section of the TEA Grant Opportunities page at: http://www.tea.state.tx.us/index4.aspx?id=8339&menu_id=951

10. Copyright © Texas Education Agency 2012 9 Allowable Payroll Costs OMB Circular A-122, Attachment B, section 8 addresses “Compensation for Personal Services” Payroll costs are allowable to the extent that: – compensation is reasonable for the services rendered and conforms to the established policy of the organization consistently applied to federal and non- federal activities – salaries and wages are supported by time and effort reports Compensation is considered reasonable to the extent that: – it is consistent with that paid for similar work for non-grant funded employees (when organization is predominantly engaged in non-federal activities) – it is comparable to that paid for similar work in the labor markets (when organization is predominately engaged in federal activities)

11. Copyright © Texas Education Agency 2012 10 Obligations “Obligations mean the amounts of orders placed, contracts and subgrants awarded, goods and services received, and similar transactions during a given period that will require payment by the grantee during the same or a future period” (34 CFR 74.2 and 80.3) When an obligation occurs depends on the type of transaction: – Real or personal property: the date of a binding written commitment to acquire the property – Services by an employee: when the services are performed – Services by a contractor: the date of a binding written commitment to obtain services – Utility services: when the services are received – Travel: when the travel is taken – Rental (or leasing) of property: when the property is used An “obligation” is the encumbrance of funds and must occur between the beginning and ending dates of the grant Once an encumbrance is paid, the obligation becomes a “cost”

12. Copyright © Texas Education Agency 2012 11 Liquidation of Obligations Grantees must pay all of their bills or the expenditure must be in their “accounts payable” by the time the final expenditure report is due to TEA. In order to pay a bill or to be in “accounts payable”, the invoice may have been received but the goods and services must have been received. NOTE: Auditors will determine if supplies and equipment were purchased in sufficient time to benefit the current grant period. Grantees cannot stockpile for future grant periods.

13. Copyright © Texas Education Agency 2012 12 Reasonable and Necessary All costs must be reasonable and necessary to carry out the grant project Reasonable – What the current market will bear for comparable goods and services – In accordance with prudent business practice Necessary – Necessary to carry out the objectives of the grant project

14. Copyright © Texas Education Agency 2012 13 Determining Reasonableness Consideration shall be given to: Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the organization or the performance of the award. The restraints or requirements imposed by such factors as: sound business practices, arms-length bargaining; Federal, State and other laws and regulations; and terms and conditions of the Federal award. No significant deviations from the established practices of the organization which may unjustifiably increase the Federal award’s cost.

15. Copyright © Texas Education Agency 2012 14 What Does “Necessary” Mean? A cost is necessary when it is vital or required in order to meet the objectives of the grant or for the grant to be successful. It is not “nice to have”.

16. Copyright © Texas Education Agency 2012 15 What are Allocable Costs? A cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to the cost objective in accordance with relative benefits received. – Cost objective: a function, grant, contract, or other activity for which cost data are needed and for which costs are incurred it is possible for some costs to benefit more than one objective or program a cost benefitting more than one program must be shared or prorated by those programs A cost allocable to a particular Federal award or cost objective may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by law or terms of the Federal awards, or for any other reasons.

17. Copyright © Texas Education Agency 2012 16 Direct Costs Typical direct costs chargeable to federal grants are: – Salaries and benefits for employees who devote time to one or more specific grant programs – Professional and contracted services for a specific grant program – Materials purchased for a specific grant program – Equipment purchased for use in a specific grant program – Travel costs and other operating costs directly attributed to a specific grant program

18. Copyright © Texas Education Agency 2012 17 Indirect Costs Organizations must have an approved indirect cost rate from their cognizant agency in order to charge indirect costs to state or federal grants. Costs that are incurred for common or joint purposes Costs that benefit multiple cost objectives thus supporting more than one federal award, state project, or activity Costs that cannot be specifically identified with a particular grant program without effort disproportionate to the benefits received – Accounting – Budget – Human Resources – Purchasing – Building Maintenance, etc.