Cost (Expense) Considerations
An approved grant budget is the financial expression of the approved project. It is assumed that only allowable costs have been included in the budget. To uphold the true intent of expenses on a grant budget it is also important for any budget narrative to be given to Grant Accounting. Federal agencies rely on Montclair State University’s internal control system to ensure that costs conform to applicable cost principles. Part of this control is expenditure monitoring by Gant Accounting.
When Grant Accounting submits an invoice or financial report this constitutes a claim for reimbursement or settlement. Montclair State University is essentially asserting that only allowable, eligible costs in pursuit of the project or agreement have been incurred. Cost allowability becomes most crucial at this point. Grant Accounting along with the PI, or director of the program, must verify that costs incurred are consistent with those identified in the appropriate cost principles. For institutions of higher education, this is OMB Circular A-21, Cost Principles for Educational Institutions, 2 CFR Part 220.
It is important to understand that the cost principles do not represent what the federal government will pay for, but rather what may be paid.
From Cost Principles the following important considerations have been extracted:
- Allowable Costs
- Charging Practices – Direct and Indirect Costs
- Unallowable Costs/Activities
- Departmental Administrative Expenses
- Examples of “Major Project” Where Direct Charging of Administrative or Clerical Staff Salaries May Be Appropriate
OMB Circular A-21 lists four general tests for allowability, which are:
- Costs must be reasonable.
- Costs must be allocable to sponsored agreements under the principles and methods provided in the circular.
- Costs must be given consistent treatment through the application of generally accepted accounting principles appropriate to the circumstances.
- Costs must conform to any limitations or exclusions set forth in the circular or in the sponsored agreement as to types or amounts of cost items.
Reasonableness of Costs
A cost may be considered reasonable if the nature of the goods or services acquired or applied, and the amount involved therefore, reflects 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:
- whether or not the cost is of a type generally recognized as necessary for the operation of the institution or the performance of the sponsored agreement;
- the restraints or requirements imposed by such factors as arm's-length bargaining, Federal and State laws and regulations, and sponsored agreement terms and conditions;
- whether or not the individuals concerned acted with due prudence in the circumstances, considering their responsibilities to the institution, its employees, its students, the Federal Government, and the public at large;
- the extent to which the actions taken with respect to incurrence of the costs are consistent with established institutional policies and practices applicable to the work of the institution generally, including sponsored agreements.
The cost principles require institutional representatives to treat federal funds carefully and to recognize something of a "public trust" in the conduct of federally assisted programs.
Allocability of a cost involves an assessment of the relative benefits received from the incurrence of the cost. There are several different levels of cost allocability:
- At the first level, a cost is incurred solely to advance work under a sponsored agreement.
- At the second level of cost allocability, a cost is incurred in a manner that benefits both the sponsored agreement and other work of the institution in proportions that can be approximated through the use of reasonable methods.
- A third level of allocability involves costs necessary for the overall operation of the institution and, under Circular A-21, deemed to be assignable in part to sponsored projects.
Consistent Treatment of Costs
Consistent treatment of cost is another general test. An institution must estimate costs in its grant proposals in a manner consistent with the cost accounting practices it uses in accumulating and reporting costs. All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives. No final cost objective may have allocated to it any cost that had been included as a direct cost for that or any other final cost objective.
Limitations and Exclusions
In some cases, the cost principles or, more likely, the terms and conditions of a specific sponsored agreement will establish limitations or exclusions as to types or amounts of cost items. If an authorization statute or an appropriation statute states that there is a specific limitation on the payment of a particular type of cost, the fact that the cost principles are silent on the subject or state something else would mean that the statutory provision takes precedence. For example, NIH has a statutory limitation on the rate of compensation that may be charged to its awards for individual employees of grantees that is equal to the level of a comparable position within the federal government. (This level is reviewed annually.) Under these circumstances, an institution is not limited to what it pays; however, it is limited on what the federal government will help it pay for.
The federal government also is concerned about overcharges that may result from an institution incurring a cost at one level and subsequently receiving receipts or expenditure-type transactions that operate to offset or reduce direct or facility and administrative cost items. Typical examples of such applicable credits are purchase discounts, rebates, allowances, recoveries or indemnities on losses, and adjustments of overpayments or erroneous charges. The ultimate institutional claim for an allowable cost will be the net amount involving an incurred cost minus applicable allocable credits.
Montclair State University’s accounting policy dictates as to whether a particular type of charge is considered direct or indirect. As noted, once the choice has been made, it is expected to be followed consistently. Accordingly, direct costs are those costs that can be identified specifically with a particular sponsored agreement and instructional activity or another institutional activity or that can be readily assigned to such activities with a high degree of accuracy.
Direct costs generally include:
- Salaries and wages (including vacations, holidays, sick leave, and other excused absences of employees working specifically on objectives of a grant or contract – i.e, direct labor costs).
- Employee fringe benefits allocable on direct labor employees.
- Consultant services contracted to accomplish specific grant/contract objectives.
- Travel of (direct labor) employees.
- Materials, supplies and equipment purchased directly for use on a specific grant or contract.
- Communication costs such as long distance telephone calls or telegrams identifiable with a specific award or activity.
Indirect costs are those that are incurred for common or joint objectives and cannot be readily identified or specifically identified with a particular sponsored agreement or other activity without a substantial effort disproportionate to the results achieved.
Examples of indirect costs are:
- Salaries of administrative and clerical staff providing normal support activities in the department, college or school
- Office supplies (including postage)
- Local telephone calls
Cost principles identify certain activities and specific items of cost as unallowable - these are listed below:
Unallowable activities include:
- Alumni activities
- Organized fundraising
- Commencement and Convocation
- General public relations and alumni activities
- Student activities such as intramural activities and student clubs
- Managing investments solely to enhance income
- Prosecuting claims against the federal government
- Defending or prosecuting certain criminal, civil, or administrative proceedings
- Housing and personal living expenses of University officers
- Selling or marketing of goods and services (does not include selling goods or services internal to the university by any service centers)
Unallowable costs include:
- Advertising (only certain types are allowable).
- Alcoholic beverages.
- Fundraising or lobbying costs.
- Fines and penalties.
- Memorabilia or promotional materials.
- Relocation costs if employee resigns within 12 months.
- Certain recruitment costs.
- Certain travel costs, such as first-class travel.
- Cash donations to other parties, such as donations to other universities.
- Interest payments.
- Membership in civic, community, and social organizations or in dining and country clubs.
- Goods or services for the personal use of employees, including automobiles.
- Insurance against defects in the University's workmanship.
Section F.6.b of OMB Circular A-21 poses some particular problems for institutional costing practices and goes directly to the principle of consistency. Section F.6.b, in part, states:
The salaries of administrative and clerical staff should normally be treated as F&A costs. Direct charging of these costs may be appropriate where a major project or activity explicitly budgets for administrative or clerical services and individuals involved can be specifically identified with the project or activity.… Items such as office supplies, postage, local telephone costs, and memberships shall normally be treated as indirect costs.
- Large, complex programs such as General Clinical Research Centers, Primate Centers, Program Projects, environmental research centers, engineering research centers, and other grants and contracts that entail assembling and managing teams of investigators from a number of institutions;
- Projects which involve extensive data accumulation, analysis and entry, surveying, tabulation, cataloging, searching literature, and reporting (such as epidemiological studies, clinical trials, and retrospective clinical records studies)
- Projects that require making travel and meeting arrangements for large numbers of participants, such as conferences and seminars;
- Projects whose principal focus is the preparation and production of manuals and large reports, books and monographs (excluding routine progress and technical reports).
- Projects that are geographically inaccessible to normal departmental administrative services, such as research vessels, radio astronomy projects, and other research fields sites that are remote from campus.
- Individual projects requiring project-specific database management; individualized graphics or manuscript preparation; human or animal protocols; and multiple project-related investigator coordination and communications.
These examples are not exhaustive nor are they intended to imply that direct charging of administrative or clerical salaries would always be appropriate for the situations illustrated in the examples.