Not-for-profit and for-profit entities receive federal grants in many capacities. If your entity receives any federal dollars, you must understand the applicable requirements, which include understanding allowable costs to be reimbursed under the grant.
First, ensure your accounting system is set up to track grant expenditures separately. This is imperative, as your organization is likely working on other items outside of the project funded by the grant. Does your accounting system give you the ability to track projects separately within the system? If not, you will need to develop processes and procedures to identify costs that should be allocated to a federal grant. You will also need to ensure these costs have not been reimbursed by any other grant sources. Furthermore, make sure there is adequate review and oversight over the cost allocation process and reporting of federal grant projects.
The process of identifying costs to be allocated to a federal grant does have some challenges. Language in grant agreements can specifically define costs that are directly allocable to a grant. For example, if a federal grant can pay for an event, costs directly related to the event would be easy to identify. However, if a federal grant can also pay for salaries of employees who work on the event, and these employes spend time on activities other than the event, then there would be additional procedures to put in place to track the time of the employees to determine how much of their wages should be allocated to the federal grant.
Let’s keep using the example of a federal grant that is permitted to be used for a specific event. Where it can get even more challenging is if a federal grant says you are allowed to allocate other costs to the event, such as indirect costs, based on an allocation method. There are certain costs, such as information technology, rent and utilities, for example, where employees use these services as part of planning and administrating an event, but these costs are not directly associated with the event.
You first need to identify the pool of indirect costs that would be permissible for allocation to the federal grant. If the grant does not have specific language regarding indirect costs permitted to include in the pool, you can refer to Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) rules to assist you in that determination.
Second, if the grant agreement does not have specific language on the percentage allowed to be used for allocation, there needs to be some sort of allocation of these indirect costs to the federal grant. Uniform Guidance allows organizations to elect to use the 10% de minimis indirect cost rate. Or your organization can elect to calculate the allocation percentage, and this can be done in numerous ways. Full-time equivalents is one common input used to allocate indirect costs. You would determine the number of full-time equivalents at an organization that is working on the event funded by the federal grant and then calculate this as a percentage of the total full-time equivalents at your organization. You would then allocate the pool of indirect costs to the federal grant using that percentage. Allocating indirect costs using square footage as an input is another common way to allocate indirect costs.
As federal grant agreements may be specific on how costs should be allocated, while others are silent on the allocation method, it is imperative your organization be thoughtful about:
Navigating the complexities of federal grants demands a thorough understanding and meticulous management of the funding process. From grasping the specific requirements of the grant agreement to maintaining sufficient documentation to setting up robust internal controls and accounting systems, each step is crucial to ensure compliance and maximize the benefits of the funding.
By diligently following these guidelines and maintaining a clear focus on both the obligations and opportunities that federal grants provide, you can effectively enhance your organization’s operations.
Contact Tina Dzik or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.