Direct/Indirect Charging

Policy statement and procedures
Adopted August 2008

Policy Statement

The University will follow the restrictions and requirements of Office of Management and Budget Circular A-21, Cost Principles for Educational Institutions (OMB A-21) and applicable federal regulations with respect to charging direct and administrative costs (F&A or indirect) to federally sponsored projects. All unallowable charges must be removed from the sponsored account.

Reason for Policy

As a recipient of federal awards, the University is obligated to comply with rules and regulations concerning the consistent treatment of direct costs and administrative (F&A or indirect) costs. The consistent treatment of expenditures, as direct or indirect costs, ensures that sponsors do not pay twice for the same type of costs. The OMB has adopted regulations from the Cost Accounting Standards Board (CASB) and applied them to educational institutions for direct and indirect charges.

The University follows guidelines provided in OMB A-21 and CASB's Cost Accounting Standards for Educational Institutions to identify and account for costs, both allowable and unallowable as well as direct and indirect. OMB A-21 provides general standards to identify allowable costs that can be charged to a sponsored agreement. (See Procedures for more detailed information.)

OMB A-21 also requires the University to identify unallowable costs and exclude them from any application, proposal, billing or claim related to a federally sponsored agreement. Instead, they must be charged to specific expense accounts in the University's accounting system so they can be easily distinguished from allowable costs charged to the sponsored agreement. Appendix A lists University expense accounts that must be excluded from any transactions under any federally funded agreement, while Appendix B lists and describes unallowable costs, as defined in OMB A-21, Section J.

Finally, OMB A-21 mandates that administrative costs be treated as facilities and administrative (F&A, formerly "indirect") costs and generally should not be charged directly to awards funded by the federal government. OMB A-21 provides guidance as to when it may be appropriate to charge administrative costs directly to federally sponsored agreements. Special care should be exercised so that costs incurred for the same purpose in like circumstances are treated consistently as either direct costs or F&A costs.

Procedures

All direct costs must be charged in a timely manner and be:

  1. Reasonable and necessary for the performance of the project.
    A cost may be considered reasonable if the nature and amount of the cost reflect actions that a prudent person would have taken under circumstances prevailing at the time. Among other factors, a reasonable cost is one generally recognized as necessary for the operation of the institution or the performance of the sponsored agreement, and is consistent with established institutional policies and practices applicable to the work of the institution, including sponsored agreements.
  2. Allowable as dictated by University policy, sponsor policies and federal regulation. Appendices A and B of this policy statement list and describe the costs specifically deemed unallowable by the University and by OMB A-21, Section J.
  3. Allocable as a cost that has a direct benefit and is directly attributable to the project being performed.

    Among other factors, a cost is allocable to a sponsored agreement if (1) it is incurred solely to advance the work under the sponsored agreement; (2) it benefits both the sponsored agreement and other work of the institution in proportions that can be approximated through the use of reasonable methods; or (3) it is necessary to the overall operation of the institution and, in light of the principles provided in OMB A-21, is deemed to be assignable in part to sponsored projects.

Any expense that does not meet all of the above requirements cannot be charged to the sponsored account.

Indirect Cost Information

Definition and Examples of Direct Charging

According to OMB A-21, consistency means that costs incurred for the same purpose, in "like circumstances," must be treated uniformly as either direct costs or as F&A costs. Certain types of costs (e.g., salaries of administrative and clerical staff, office supplies, postage, local telephone charges) are normally treated as F&A costs (indirect or overhead costs) and cannot be charged directly to sponsored projects unless "unlike circumstances" can be justified.

In accordance with the guidelines of OMB A-21, F&A costs will be considered for direct charging under the following circumstances:

  1. The expense is an allowable cost;
  2. The expense is specifically identified with a major project and requires amounts of administrative and clerical support significantly greater than the routine level of such services provided by the responsible administrative unit; and
  3. The expense is necessary to complete specific requirements of the project.

OMB A-21 lists the following circumstances under which such expenses may be charged directly:

  1. 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
  2. Projects that 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)
  3. Projects that require making travel and meeting arrangements for large numbers of participants, such as conferences and seminars
  4. Projects whose principal focus is the preparation and production of manuals and large reports, books and monographs (excluding routine progress and technical reports)
  5. 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
  6. Individual projects requiring project-specific database management; individualized graphics or manuscript preparation; human or animal protocols; and multiple project-related investigator coordination and communications

The direct charging of office supplies, postage and/or telecommunications costs, substantially beyond that normally provided by the responsible administrative unit, may be approved under the following circumstances:

  1. The expense is an allowable cost;
  2. The expense is required by the project scope (e.g., local telephone services would be allowable under a program requiring telephone survey or postage would be allowable for a program requiring surveys by mail);
  3. The cost is identified and properly justified in the sponsored agreement budget and narrative; and
  4. The sponsor has approved the expense as part of the direct cost budget.

Notwithstanding the above guidelines, if the sponsor, the Finance Office, or University auditors disapprove the expense for any reason, then the cost must be removed from the sponsored account.

F&A or Indirect Cost Rate

The Finance Office will prepare and negotiate the F&A rate in conformance with OMB A-21 standards. The submission will be reviewed by federal auditors and negotiated by the University with representatives of the University's cognizant federal agency, the Department of Health and Human Services (DHHS). The current maximum Indirect Cost Rate Agreement with DHHS outlines the rate that must be incorporated into all budgets.  The University's current maximum on-campus negotiated rate is 43.83% (22.09% off-campus) of modified total direct costs, consisting of all salaries and wages, fringe benefits, materials, supplies, services, travel and subgrants and subcontractors up to the first $25,000 of each subgrant or subcontract (regardless of the period covered by the subgrant or subcontract).  Modified total direct costs shall exclude equipment, capital expenditures, charges for patient care, student tuition remission, rental costs of off-site facilities, scholarships, and fellowships as well as the portion of each subgrant and subcontract in excess of $25,000.  Additionally, the following cost categories are exempt from the application of the F&A rate:  adaptation of equipment for accessibility, interpretation, CART, note taking, support for GU student workers, fellowship stipends, and subawards to other institutions of higher education, or other accessibility related costs. The purpose of this waiver on those cost categories is to ensure that Gallaudet is applying for federal funds on a level playing field with other institutions that are applying for those same competitively awarded funds.  The same rates will be utilized for off-campus projects.  The agreement expires September 30, 2015. 

Pre-Award

The Office of Sponsored Programs (OSP) is the liaison between the principal investigator (PI) and the federal sponsor. All proposals will be in compliance with OMB A-21.

  1. The PI will develop budget justifications. If needed, the OSP provides guidance for detailed budgets and budget justifications. OSP will ensure compliance with OMB A-21 and University policies.
  2. The final budget and justifications will be directed to the OSP and the appropriate budget unit head, department chair and dean prior to submission to the sponsor to ensure approval of all parties regarding the use of University resources and employees.
  3. The OSP will forward the sponsor authorized budget and notice of award to the Finance Office.

Post-Award

  1. Upon receipt of the sponsor-authorized budget and the notice of award, the Finance Office will set up the new sponsored account in the PeopleSoft Financials system (PS) and add the associated budget information. If the sponsored account has associated cost sharing, this will be set up in PS as well.
  2. The Finance Office will train the PI on the following: (1) the signature authority form, which governs employee spending limits, expense approval,and access to PS reports; (2) the Personnel Action form, which specifies the charging of salaries and benefits to project and department budgets; (3) PS reports, which document expenses attributed to the project; and (4) compliance with federal and University policies.
  3. Throughout the month, the PI will review expenses charged to the sponsored account and the cost-sharing account, if applicable. The PI will ensure the following regarding direct charges:
    1. Items are not purchased to simply use unobligated balances.
    2. Charges are not rotated among grants.
    3. Costs are not assigned based on remaining budgets.
    4. Charges are based on actual project use, not budgeted amounts.
    5. Administrative charges are not assigned as direct costs unless the authorized budget allows.
    6. Costs charged to the grant support the grant only.
  4. At the end of the month, the Finance Office will also review all charges (sponsored program and cost-shared) and work with the PI to ensure all expenses are in compliance with OMB A-21 and University policies.
  5. All unallowable charges will be removed from the sponsored or cost-shared account. See the Cost Transfers policy for procedures.
  6. If a budget revision is necessary, refer to the Cost Transfers and/or Institutional Prior Approval System (IPAS) for Budget Revisions policy.

Forms/Instructions

Additional Contacts

All extensions are tty/voice unless otherwise noted.

  • Finance Office (main office, ext. 5299; grants accountant, ext. 5273)

Related Information

External Resources

Internal Information

Definitions

Terms Definition and Examples
Allocate Allocate means to assign an item of cost, or a group of items of cost, to one or more sponsored agreements, functions (such as "research"), organizational subdivisions (such as "college") or other work unit (adapted from CAS 9905.502).

"A cost is allocable to a particular cost objective (i.e., a specific function, project, sponsored agreement, department, or the like) if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received or other equitable relationship" (OMB A-21, Sec. C-4).

Example: An educational institution normally allocates the cost of equipment required to conduct a project directly to the sponsored agreement.
Allowable costs "Costs that are (a) reasonable; (b) allocable to sponsored agreements under the principles and methods outlined in OMB A-21; (c) given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances; and (d) conform to any limitations or exclusions set forth in OMB A-21 or in the sponsored agreement as to types or amounts of cost items" (OMB A-21, Sec. C-2).

Example: A piece of equipment required to conduct the study is an allowable cost to the project, but entertainment costs are not.
Authorized budget Each project has a budget approved by the sponsor and the University. This is a target document indicating intended categories of fund expenditures. Depending on the sponsor’s award provisions, it may be modified, as required, in the course of project performance. Some sponsors have restrictions as to the kinds and amounts of modifications that may be made in the budget.
Direct costs "Those costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy" (OMB A-21, Sec. D-1).

Example: Travel is normally charged as a direct cost to a project.
F&A (or indirect) cost rate A composite rate applied to sponsored projects as a percentage of the sponsored project’s direct costs for the purpose of charging the sponsored project its share of the University’s F&A/indirect costs. In business and industry, this is known as "overhead." The federally negotiated F&A/indirect cost rates for research and other sponsored activities are developed by the University in accordance with OMB A-21 and negotiated with the Department of Health and Human Services (DHHS), the University’s federal cognizant agency. The University’s current rate of 63% of salaries and wages ends September 30, 2011.

Example: The University’s F&A/indirect cost rate for an on-campus research project is 63% of salaries and wages, if allowable.
Facilities and administration costs (F&A) "Costs that are incurred for common or joint objectives and, therefore, cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity" (OMB A-21, Sec. B-4).

In its 1996 revision of OMB A-21, the federal government replaced the term "indirect costs" with "facilities and administrative costs."

Examples: Building operation and maintenance expenses are F&A costs.
Indirect costs See "Facilities and administration costs."
Proposal routing form An internal form used to route a proposal for sponsored funding through the process of administrative review and approval.
Reasonable costs "A cost may be considered reasonable if the nature of the goods or services acquired or applied, and the amount involved therefore, reflect the action that a prudent person would have taken under the circumstances prevailing at the time the decision to incur the cost was made" (OMB A-21, Sec. C-3).
Unallowable costs "Unallowable cost means any cost which, under the provisions of any pertinent law, regulation, or sponsored agreement, cannot be included in prices, cost reimbursements, or settlements under a sponsored agreement to which it is allocable" (CAS 9905.505). These unallowable costs cannot be included in the budget.

Example: Entertainment costs on federally sponsored projects are unallowable costs.

Responsibilities

Role Responsibility
Principal investigator (PI)
  • Ensure the appropriateness of all charges on sponsored projects.
  • Ensure the consistent application of direct costing practices to his/her federally sponsored projects.
  • Prepare proposal budgets, justify expenses, charge costs, and track expenses.
Office of Sponsored Programs
  • Establish effective processes and controls that will ensure compliance with this policy.
  • Provide guidance to PIs on budget proposals and negotiate terms with sponsor.
Department head
  • Establish effective processes and controls to ensure compliance with this policy.
  • Communicate these practices to all responsible employees within the department.
Dean/Provost
  • Establish effective processes and controls to ensure compliance with this policy.
  • Communicate these practices to all responsible employees within the departments.
Finance Office
  • Establish effective processes and controls to ensure compliance with this policy.
  • Train PIs on appropriate charging and reviewing of costs.
  • Establish sponsored projects and cost-sharing accounts in the University's financial system.
  • Ensure the appropriateness of all charges on sponsored projects.
  • Ensure the consistent application of direct costing practices to their federally sponsored projects.
Vice President of Administration and Finance
  • Establish effective processes and controls to ensure compliance with this policy.

Appendices

Appendix A: Unallowable Expense Account Codes
Appendix B: Examples of Unallowable Costs in OMB A-21, Section J

History

Origination date: August 2008
Last amended date:
Next review date: August 2009

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