This is Part Two of a short series on preparing to apply for federal grant funding. For Part One, click here.
Applying for federal grant funding may seem like an intimidating prospect, especially if it is your first attempt, but there are policies and procedures your organization can put in place to prepare for a smooth application process and successful grant administration. Before applying for federal grant funding, your organization should consider the following advice, which picks up where Part One left off:
Consider Your “Tone at The Top”
“Tone at the top” refers to the commitment by management and the board of directors to a system of internal controls that values openness, transparency, and other ethical values and behaviors. This commitment, the “tone at the top,” is the most important element of the system because it creates a business culture centered around honest and open communications and ethical behavior. This message of integrity from upper management and the board guides the strategic mission of your organization and assists in safeguarding it from risk.
Governance is also an important element of effective internal controls and successful grant administration. The board of directors is responsible for ensuring that skilled management, who know the rules and regulations of federal grant administration, is in place. And that leaders can be held accountable.
Clark Nuber Tip #1: Some federal agencies require your governing body to approve the submission of grant applications, along with other specific actions. Be sure to investigate any special requirements for your governing body once a funding opportunity has been identified; you may have to build time into your grant preparation process for these special requirements.
Responsibilities may differ by funding mechanism but having an informed and responsive board is important to any organization. While the board of directors may not be involved with writing a grant proposal, they should be kept informed of potential funding opportunities and of any roles or responsibilities that might require special action on their part with the acceptance of an award.
Understand Uniform Guidance
You may not be well-read on the Office of Management and Budget’s (OMB) Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), but you and other key finance, human resource, and programming staff will need to become familiar. The Uniform Guidance outlines the rules and regulations of the federal government, and you will regularly refer to it during your administration of any federal award.
Clark Nuber Tip #2: Now is the time to read through the Uniform Guidance and, possibly, attend a training or two.
Finance, grant compliance, and even programming staff will refer to the Uniform Guidance prior to applying, and throughout the grant administration process, to understand what costs and activities are allowable, allocable, and reasonable when it comes to grant expenditures and activities.
Clark Nuber Tip #3: Develop a solid understanding of the Uniform Guidance and remain apprised of updates through websites like Grants.gov. Go to their website, sign up for their newsletter, and watch free training webcasts.
The Uniform Guidance outlines audit requirements and auditee responsibilities in 200.501 through 200.521. The current single audit threshold for federal awards is $750,000, which means if your organization has an aggregate federal expenditure amount of $750,000 or more during a fiscal year, your organization is required to hire an outside and independent entity to conduct a Single Audit. During the Single Audit, auditors will assess your organization’s internal controls, policies and procedures, financial management practices, and compliance. Audits are due no more than nine months after the end of the fiscal period under audit, or thirty days after issuance. The Uniform Guidance also contains Compliance Supplements for each major funding source, organized by the administering department.
Clark Nuber Tip #4: Review the relevant Compliance Supplement prior to applying to a specific federal agency; it contains program specific guidance regarding allowable activities, reporting, indirect cost recovery, etc. This information will be used by auditors during your Single Audit to evaluate your organization’s management of its federal award.
Put in Place Policies and Procedures
Internal controls are supported by strong policies and procedures that are aligned with the federal compliance requirements outlined in the Uniform Guidance at 2 CFR Part 200, and your entity’s objectives. Policies and procedures should be routinely reviewed for compliance, and new policies should be developed to address any identified gaps or weaknesses. Your board, working closely with senior management, is responsible for approving and overseeing the implementation of new policies.
Some of the more important policies and procedures you’ll want to confirm are in place include: code of conduct; whistleblower protection; procurement; contracted services; conflict of interest; and subrecipient monitoring (pass-through entities receiving federal funds as part of your federal grant award must be monitored for compliance). Remember, once your organization has its policies and procedures in place, ongoing staff training is essential.
Clark Nuber Tip #5: Staff should annually review all policies and procedures and sign off to acknowledge their review and understanding. This annual review ensures both their understanding and accountability.
Check Your Internal Controls
Your organization’s management is responsible for establishing and maintaining an effective system of internal controls. Internal controls are safeguards related to operations, compliance, and financial reporting that are designed to mitigate risk and ensure that your entity achieves its mission. An effective system of internal controls provides reasonable assurance that policies, processes, tasks, behaviors, and other aspects of your organization are working together effectively and efficiently. Internal controls also help ensure the quality of internal and external reporting and help ensure compliance with applicable laws and regulations. Effective internal controls are also a pre-requirement by the federal government when considering whether or not to award federal funds to a grantee. Well-developed internal controls provide reasonable (not absolute) assurance that an organization will meet its objectives. Management, and ultimately, your CEO, are responsible for the effectiveness of internal controls.
Internal controls should be well developed, documented, and functioning before applying for federal grant dollars. There are no “one size fits all” internal controls, but effective internal controls can exist within any organization regardless of size. Assessing existing internal controls to identify strengths, weaknesses, and solutions will help eliminate potential surprises from the grantor or unwelcome findings during a future Single Audit. Effective internal controls will also make your organization stronger and more competitive when applying for federal funding opportunities. Internal controls will be evaluated during a pending grant’s fiscal review, grantor site visits, and Single Audits. Strong performance in this area will help develop trust between your entity and the funder, and help you rise above other applicants.
Clark Nuber Tip #6: To gain additional insight into the expectations of federal agencies when it comes to internal controls, review this document from the Department of Justice: Understanding the Financial Management and System of Internal Controls Questionnaire.
Understand Indirect Costs and Indirect Rates
Expenditures for federal and state grants are classed into two categories: direct and indirect. Determining whether a cost is direct or indirect may depend on the individual funding source. Typically, a cost is “direct” if it can be tracked to a specific award and directly benefits the client or program activities. A cost is considered “indirect” if it pertains to a common organizational function that cannot be broken out to individual cost objectives or relates to general administration of an award.
Indirect rates are used to recover the General and Administrative costs of an organization and any indirect costs associated with the program. To recover indirect costs, organizations may apply the de minimis rate of 10% on modified total direct costs (MTDC) charged to the award. MTDC, as defined in the Uniform Guidance at 200.68, are “… all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and subawards and subcontracts up to the first $25,000 of each subaward or subcontract (regardless of the period of performance of the subawards and subcontracts under the award).” Organizations may only use the de minimis rate if they have never previously negotiated an indirect cost rate. Auditors are required to verify your organization’s use of the de minimis rate by going back three years to ensure that the entity did not negotiate a rate within that time.
Organizations with previously negotiated indirect cost rates are required to use their currently approved rate on all federal and state awards, unless regulations exist that require the use of a different rate. Indirect rates will need to be renewed annually through the approved cognizant organization. The cognizant organization is typically the federal entity that provides the first federal award or the largest amount of funding.
Clark Nuber Tip #7: It is important to remember that an indirect rate, de minimis or otherwise, is not an opportunity to make money. The indirect rate allows for the organization to proportionately recover indirect costs.
Update Your Financial Software if Necessary
What expenses will you need to track and how might you need to classify those expenses? Can your current financial software and/or chart of accounts handle the reporting requirements of a federal award? These are important questions that need to be answered before you receive and report on federal dollars.
Tracking indirect vs. direct costs, as mentioned above, adds a level of complexity to any system and preparing for that complexity is important for proper tracking and successful reporting. Additionally, your organization should consider whether any financial data being monitored or evaluated could also prove helpful in future grant applications. This financial data may not necessarily be the same budget line items or classifications required by the funder. For instance, the funder may be interested in having you track program expenditures by project phase, while your organization may want to track expenditures by location. Having an early conversation with finance, programming, and other key stakeholders prior to project implementation will give your organization the ability to track expenditures in a variety of beneficial ways.
Track Physical Space and Staff Time Allocations
Physical space and staff time are both organizational resources that will likely be part of your federal grant project budget. As these resources are expended, the associated expense must be allocated to the appropriate funding mechanism. There are a number of ways to do this. For example, costs associated with the operation of physical space can be allocated based on a percentage of the number of full-time employees or on a percentage of total square footage. Whichever method is chosen, your organization must be consistent with their chosen allocation method and document (in an approved policy) the methodology being used to construct the allocation. This methodology should be reviewed annually to ensure it remains reasonable and applicable to all funding sources.
If staff work on multiple awards, or if their time is split between direct and indirect activities, their salaries and fringe benefits may be allocated to various funding sources using a time allocation plan. This time allocation plan must meet the Standards for Documentation of Personnel Expenses as detailed in the Uniform Guidance.
Clark Nuber Tip #8: Time allocation plans should be developed with the use of time studies that document actual hours worked. Time studies provide an estimate for the equitable division of an employee’s wages and fringes across multiple funding mechanisms.
Your organization is responsible for determining a review period to compare and adjust actual hours worked against the time allocation, though the Uniform Guidance does mention a period of at least every two months. The process for reviewing and applying a time allocation should be documented in your organization’s policy and procedures. However, it is important for organizations to understand that allocations to grants by budgeted percentages alone are not sufficient. Allocations must be supported by documented activity levels.
Before you apply for your first or additional federal grant funding, review your organization’s physical space and staff time allocation policies and methodology to ensure that each funding source will be allocated their appropriate share of costs.
If you would like assistance preparing your organization for grant applications, contact the professionals at Clark Nuber.
Sara T. Behrman is a freelance writer and grants consultant living in Portland, Oregon.
© Clark Nuber PS, 2019. All Rights Reserved