March 13, 2013

By Troy Rector, CPA

The first of a two-part series covering the Proposed Uniform Guidance recently issued by the Office of Management and Budget (OMB). Part 1 will provide an overview of the overall Proposed OMB Uniform Guidance document and specific changes to cost principles and administrative requirements applicable to Federal awards. Part 2 will discuss OMB’s proposed changes to the Single Audit Act.

The recently issued Proposed OMB Uniform Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards (Uniform Guidance) is the largest change to the OMB circulars impacting grant compliance in many years. It consolidates eight existing OMB Circulars (including A-122, A-87, A-21, A-102, A-110 and A-133) and intends to provide uniformity across organization types. It also updates language to reflect current business practices such as electronic submissions of information, with anticipation of an even greater reliance on future advancements of information technology. The proposed Uniform Guidance will be applicable to Federal grants and cooperative agreements that involve state, local and tribal governments, as well as institutions of higher education and nonprofit organizations.

While the OMB plans to refine language based on public comment, the following are some highlights from the proposed Uniform Guidance as it stands:

Announcements of Funding Opportunities and Merit-Based Review (Section .204)

This section would (1) require Federal awarding agencies to publicly announce funding opportunities for discretionary Federal financial assistance programs using the website and (2) provide for an application period of no less than 30 days. In the announcement, the Federal agency will be required to communicate certain information including the criteria being used by the Federal agency to review applications. As discussed further in the Cost Principles section below, the Federal agency will also be required to identify any limitations on the recovery of indirect costs in the announcement. These changes will ensure that entities are made aware of all discretionary funding opportunities and the criteria to be used by the Federal agency in evaluating the merit of proposals.

Post-Federal Award Requirements (Subchapter E)

These requirements identify what an organization is required to follow throughout the Federal post-award period. While Subchapter E mostly incorporates provisions of OMB Circular A-110 into the Uniform Guidance, language from A-102 was added if found to be more clear than A-110. A new section titled Subrecipient Monitoring and Management was added to co-locate guidance on the oversight of subawards that was previously located in other OMB Circulars primarily from OMB Circular A-133 and the OMB Compliance Supplement.

Similar to existing guidance, the extent of subrecipient monitoring would still be largely based on assessment of the subrecipient risk. The proposed Uniform Guidance also clarifies that the small purchase threshold of $150,000 should be used in certain procurements and that the threshold for requiring suspension and debarment procedures is set at $25,000.

Cost Principles

Efforts were made by OMB to consolidate OMB Circulars A-21, A-87 and A-122 into one set of cost principles to eliminate duplicative language and develop one approach where various requirements existed previously, especially as it relates to wage allocations. The Uniform Guidance also proposes significant changes to indirect cost recovery. The following is a summary of some key provisions and changes:

Indirect Cost Recovery

For most entities who recover indirect costs from either direct Federal awards or pass-through awards, this will be a section of particular importance. The ANPG originally proposed two options related to indirect cost recovery: (1) a mandatory and universal discount from a negotiated rate, and (2) a flat discount from a previously negotiated rate. Based on commenter feedback, the OMB removed both of these options from the proposed Uniform Guidance. Instead, the proposed Uniform Guidance identifies that Federal awarding agencies and pass-through entities should pay federally negotiated indirect cost rates unless a lower rate is required by law or regulation or approved by a Federal agency head based on documented justification, and the justification must be made publicly available. Entities with a federally negotiated indirect cost rate will also be given a one-time option for a 4-year extension of their indirect cost rate, though the extension would require approval of the organization’s cognizant agency. If the extension is elected and approved, the organization would not have the ability to renegotiate their indirect cost rate during the 4-year extension period.

For those entities not having a formally negotiated indirect cost rate, the proposed Uniform Guidance provides for a de minimus indirect cost rate of 10% of modified total direct costs for a period of four years in order to provide the organization time to develop capacity to enter into indirect cost negotiations. The use of a de minimus indirect cost rate must also be provided in certain circumstances by pass-through entities to subrecipients unless another indirect cost rate is negotiated between the two parties using applicable Federal guidance.

Appendices are also included at the end of the Uniform Guidance, discussing in more detail indirect cost rate determinations for specific organization types including separate guidance for Educational Institutions and Nonprofit Organizations.

Wage Allocations

The OMB recognizes that much time and effort is spent in supporting allocations of wages charged to Federal awards, as well as between direct and indirect cost categories. Historically, A-122 had the most stringent requirements to document allocations of wages while A-21 had the least restrictive requirements. The proposed Uniform Guidance provides for certifications of payroll somewhat similar to OMB Circular A-87 and also discusses integration of necessary information into an organization’s automated payroll distribution system in order to reduce duplication of effort. The proposed Uniform Guidance has deleted references to specific examples and, instead, focuses on minimum requirements that a system must have to support the allocation of wages. Entities should begin reviewing the new requirements in section C-10 (Compensation-Personal Services) to identify how it may affect current payroll systems and processes to substantiate wage allocation. Wording and terms used by OMB in this section are very important and since the guidance is still subject to public comment may be clarified by the OMB in the issuance of the final guidance.

Use Allowance

A use allowance was previously identified as an allowable method for recovering cost of purchasing assets. However, the use allowance was been deleted as an option from the proposed Uniform Guidance leaving depreciation as the exclusive means of recovery

Computer Supplies

Language was included in the proposed Uniform Guidance to clearly allow for the costs of certain computing devices to be treated as supplies. Computing devices and related equipment would now explicitly be allowed as supplies as long as the purchase price is below the lower of $5,000 or the organization’s capitalization threshold.

Other Provisions

With the proposed Uniform Guidance consolidating guidance from all three OMB cost circulars, it will be important that an organization review the guidance to determine how the proposed principles will impact the organization’s type and to also identify where OMB has added new, clarifying language. For example, section .615 adds a small but new section identifying criteria that must be met for administrative and clerical costs to be charged as a direct cost. Section .506 discusses procedures to follow when an organization wants to use electronic copies of paper items as a substitute for the original records.

The proposed Uniform Guidance includes a provision where reporting packages (single audit reports and financial statements) will be available for viewing on a website, thereby circumventing the existing requirement to file a Freedom of Information Act request to view an entity’s financial statements. This could be a significant issue of concern for some types of organizations.

The Uniform Guidance also states that the OMB will review and consider amending the Uniform Guidance every 5 years, which will provide for an ongoing, periodic assessment. However, entities still have a chance to submit public comments and influence the rule making process. Public comment on the proposed Uniform Guidance is due to the OMB by May 2, 2013. Though the OMB has not identified an effective date of the guidance, Federal agencies are required to promulgate final regulations not more than one year after the OMB guidance becomes final.

The Uniform Guidance proposed by the OMB represents a significant amount of effort to consolidate and modernize existing OMB circulars and to use the Single Audit as an oversight tool to reduce waste, fraud and abuse. Entities impacted by the proposed guidance will want to evaluate the proposed guidance to identify how the new rules could impact existing policies and to identify issues with the proposed guidance, where the organization would like to influence rule making by submitting public comment either individually or through an industry association.

© Clark Nuber PS, 2013.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.