- Definition of CAS-covered sponsored projects
- Definition of Non-CAS-covered sponsored projects
- Criteria to be considered in determining the allowability of a cost
- Direct Costs
- Additional Criteria for Determining Direct Costs
- Unacceptable Direct Costing Practice
- Indirect Costs
- Charging Costs Normally Classified as Indirect to Sponsored Projects
- Special Circumstances where Direct Charging of Indirect Costs may be Appropriate
Effective May 8, 1996, the Office of Management and Budget (OMB) revised Circular A-21 to incorporate four Cost Accounting Standards applicable to educational institutions. The Cost Accounting Standards Board (CASB) issued these on November 8, 1994, and the A-21 revision extended the standards to all sponsored agreements.
501 - Consistency in Estimating, Accumulating and Reporting Costs by Educational Institutions
- Fundamental Requirement - An educational institution's practices used in estimating costs in pricing a proposal shall be consistent with the educational institution's cost accounting practices used in accumulating and reporting costs.
502 - Consistency in Allocating Costs Incurred for the Same Purpose by Educational Institutions
- Fundamental Requirement - All costs incurred for the same purpose, in like circumstances, are either direct costs only or F&A costs only with respect to final cost objectives.
505 - Accounting for Unallowable Costs
- Fundamental Requirement - Costs expressly unallowable or mutually agreed to be unallowable shall be identified and excluded from any billing, claim, application, or proposal applicable to a Sponsored Agreement.
506 - Consistency in Using the Same Accounting Period for Purposes of Estimating, Accumulating and Reporting Costs
Responsibility for compliance with the Cost Accounting Standards lies primarily with principal Investigators (PI's) of sponsored projects, department heads, and college/department fiscal officers. The University administration is responsible for guidance and training, and for insuring compliance through periodic internal and external audits.
a) All federal awards
b) All awards that contain any federal flow-through money. If you discover the project is being funded with federal flow-through money after the award period has started, any unallowable direct charges need to be removed from the account
c) The terms and conditions of the proposal or award documents reference OMB Circular A-21 or Cost Accounting Standards
d) Any sponsored project whose funds are being used as cost sharing on a CAS-covered project. Only the individual cost(s) being used as cost sharing will be subject to the definitions of direct charges and "unlike circumstances."
1) State non-federal awards 2) Industry/private awards that do not meet any of the above criteria
Awards not covered under CAS administration are still subject to the requirements listed in the award, as well as University and State guidelines. Just because an award is not under CAS administration does not mean expenditures unrelated to the award can be charged. All expenditures on an award must be reasonable, allocable and allowable.
1. Costs must be reasonable. A cost is considered reasonable if the nature of the goods or services acquired and the amount involved reflect the action that a prudent person would have taken under the circumstances prevailing at the time the decision was made to incur the cost.
2. Costs must be allocable to sponsored agreements under the principles and methods of Circular A-21. A cost is allocable to a particular sponsored project if the goods or services involved are chargeable or assignable to the project in accordance with the relative benefits received.
3. CAS and the revised Circular A-21 emphasize the importance of consistent application of cost accounting principles. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect costs. Where the University treats a particular type of cost as a direct cost on sponsored agreements, all costs incurred for the same purpose in like circumstances must be treated as direct costs for all activities of the institution. Consistent treatment of costs is necessary to avoid inappropriate charges to the federal government or other sponsors when sponsored agreements are charged directly for specified costs, then charged again through the University's indirect cost rate. PIs, department administrators, and in some specific instances, central administration officials should review costs to ensure that they are allowable and allocable to a project. Size, nature and complexity of sponsored agreements, although not the final determining factor, are in the aggregate important considerations in determining unlike circumstances. Due to the unique requirements of each sponsored agreement, unlike circumstances are determined on a case-by-case basis.
OMB Circular A-21: Cost Principles for Educational Institutions states "Direct costs are those costs that can be identified specifically with a particular sponsored project, an instructional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect costs. Where an institution treats a particular type of cost as a direct cost of sponsored agreements, all costs incurred for the same purpose in like circumstances shall be treated as direct."
1. The cost must be included in the awarded budget, or the cost must be permitted within rebudgeting authority granted by the sponsor. When preparing applications for sponsored projects, the PI usually submits a detailed budget. This budget includes line items such as salaries and wages, benefits, travel, supplies and other direct costs. The award reflects approved budgeted items and becomes a part of the agreement between the university and the sponsor. Only those costs that are included in the budget or rebudgeted costs allowed by the sponsor should be charged. If the cost requires institutional and/or sponsor prior approval after the award is made, the approval must be secured before the cost is incurred.
2. The sponsor must not restrict the cost. Costs that are restricted or unallowable as indicated in the award notice or sponsor guidelines may not be charged to a sponsored project.
The following direct costing practices are unacceptable because they do not meet A-21's standard for a "high degree of accuracy" in the assignment of costs to sponsored agreements:
- Rotation of charges among sponsored agreements by month without establishing that the rotation schedule credibly reflects the relative benefit to each sponsored agreement;
- Assigning charges to the sponsored agreement with the largest remaining balance;
- Charging the budgeted amount rather than charging an amount based on actual usage;
- Assigning charges to a sponsored agreement in advance of the time the cost is actually incurred;
- Identifying a cost as something other than what it actually is, such as classifying an item of equipment as a supply;
- Charging expenses exclusively to sponsored agreements when the expense has supported non-sponsored agreement activities;
- Assigning charges that are part of normal administrative support (indirect costs) for sponsored agreements (e.g., accounting and payroll).
Indirect costs are defined in A-21 as "those that are incurred for common or joint objectives [of the University] and, therefore, cannot be identified readily and specifically with a particular sponsored project, an instructional activity or any other institutional activity." (A-21, E.1.) These costs are also referred to as "Facilities and Administrative" and are comprised of a number of components. Facilities includes "depreciation and use allowances, interest on debt associated with certain buildings, equipment and capital improvements, operation and maintenance expenses, and library expenses. Administration is defined as general administration and general expenses, departmental expenditures not listed specifically under...Facilities." (A-21, F.1.) At the college and department level "salaries of administrative and clerical staff ...[and] items such as office supplies, postage, local telephone cost, and memberships shall normally be treated as F&A costs." (A-21, F.6.b.) The University must consistently treat costs incurred for the same purpose in like circumstances as either direct or indirect.
Note: Throughout this document the terms F&A and Indirect Cost are interchangeable.
A-21 does not strictly prohibit costs identified by the institution as indirect from being charged directly to a sponsored agreement. However, strict criteria must be met. Costs normally treated by the University as indirect may be charged to a sponsored project when ALL of the following conditions are met:
- The cost can be readily identified specifically with the project with a high degree of accuracy;
- The costs are incurred for a different purpose or circumstance
- The cost is explicitly budgeted, with justification, and awarded:
a) The cost is separately budgeted in the proposal budget (Note that for certain fixed-price funding arrangements a detailed budget is not required by the sponsor; however, the internal budget should reflect the cost.)
b) The budgeted amount reflects a realistic estimate of the cost and, in the case of salary, the percent of effort;
c) A reasonable justification is given for the cost. In the case of federal agency sponsors the "Budget Justification" section of the proposal should state that the costs are normally treated as indirect by the institution, but are being requested due to a special purpose or circumstance; an explanation of the special circumstance should be clearly outlined in the "Budget Justification;"
d) The sponsor approves the item in the award. Since these items are specifically set forth in the proposal, it is assumed that the sponsoring agency has approved this exceptional treatment of administrative and clerical salaries or other costs normally treated as indirect if they accept the proposal, fund the project and do not prohibit the cost on the notice of award. It is the principal investigator's responsibility to notify the Division of Research Proposal Services of any changes made to the proposed budget in pre-award negotiations with the sponsor in which Sponsored Research did not participate.
Note that the determining factor in classifying salaries of administrative and clerical staff as direct costs must relate to the different work they perform to meet the exceptional requirements of the project as compared to that of administrative and clerical staff who perform work related to routine departmental or general institutional administration. Generally, a project that requires more of the same type of administrative support as that required for routine departmental or institutional administrative support would not meet the criteria of a different purpose and circumstance.
The proper classification (direct vs. indirect) of any charge should be determined based on a logical thought process. This process can be described in four steps as follows:
- Review-Regulations, Policies, Procedures applicable to the project. This would include internal or institutional regulations policies and procedures (e.g., USF's Disclosure Statement) as well as any external regulations, policies, or procedures (for example, A-21 and other relevant federal circulars, sponsor terms and conditions, and specific award terms and conditions).
- Judgment-Based on the review of specific facts and circumstances, a judgment is made by the institution's appropriate personnel as to the proper allocation (direct vs. indirect).
- Justification-Appropriate level of justification disclosed in the proposal narrative or "Narrative Budget Justification" page (or a justification is prepared when the need arises during the life of the project that could not have been anticipated in the proposal process).
- Agency Approval-of budget based on justification in the proposal and reliance on the fact that the institution made an informed decision based on the particular facts and circumstances.
There are some cost objectives that can be direct or indirect depending on the facts and circumstances of the individual project. The questions that should be asked to determine if it can be charged direct are:
1) Does the cost provide a direct benefit to the purpose or objective of the project as opposed to a cost that is "needed" to complete the project but is incidental to the purpose?
2) Can the cost meet the definition of a direct cost? Can the cost be specifically identified with a project with relative ease and with a high degree of accuracy and allowed by all terms and conditions governing a particular award?
3) For clerical and administrative salaries, do the facts and circumstances meet the criteria to qualify as an exception described by OMB guidelines to the general rule that these costs are an F&A cost?
Cost Accounting Standards require consistent treatment of costs in "like circumstances". Consequently "unlike circumstances" must be demonstrated/justified if a cost will be budgeted, charged, and reported inconsistently. The following arguments cannot be used in and of themselves to demonstrate "unlike circumstances":
a) Sponsor approval of the allocation of a particular cost without proper review by the institution
b) Insufficient F&A cost money returned to support the projects
c) Sponsor limits or will not pay F&A costs
d) Sponsor is willing to pay for the cost as a direct charge
Sponsor approval of a budget does not in and of itself constitute approval of the specific line items. The sponsor assumes the university has complied with A-21, with the Cost Accounting Disclosure Statement, our F&A cost proposal assumptions, and any other regulations cited. A cost that may be allowable at one institution as a direct charge may not be allowable at another because of the differences in the Disclosure Statement. Since there is no way for a sponsor to make a determination of allowability because of these variables it is university personnel who are responsibility to exercise this judgment.
Agency approval can be relied upon when USF personnel have reviewed regulations, policies and procedures; made a judgment based on this review; and disclosed the appropriate justification. Please note that even if the agency approves the expenditure, an auditor [Department of Health and Human Services (DHHS), sponsor, state, or internal] could come back at a later time and disallow the expenditure based on his or her review and judgment.
Costs considered "unallowable" in accordance with various authoritative documents and the individual Sponsors must be identified and accounted for separately. These costs may not be budgeted, charged or reported to a sponsor.