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The consequences of not following financial compliance rules in managing sponsored projects can range from detrimental to devastating – adversely affecting personal careers, university funds, and institutional reputations.
Note the negative audit findings and consequences for some universities in recent years listed in the image on the right. And even though the faces pictured in the chart are not actual staff photos, remember that these statistics relate to more than just numbers and findings.
Here is a short list of potential negative effects:
Review this important Financial Compliance section of the RAMP Guide thoroughly to learn more about managing the high risk financial issues in award management and how to reduce potential audit findings.
There is an easy answer to that question: We are all responsible!
Compliance must be a joint venture across campus to be successful. The Office of Contracts and Grants as well as hundreds of people across campus (Principal Investigators, Research Officers, accounting staff, etc.) who handle the financial aspects on research (ledger 5) accounts share this responsibility.
As an essential employee in our university research community, it is your responsibility to review compliance rules and ask compliance questions as necessary when processing fiscal transactions on research project accounts.
For a more in-depth look at college level and university level responsibilities, review the following charts by opening and closing the charts as instructed below.
The university has delegated important pre-audit responsibilities related to financial compliance to College Business or Research Offices or Departments as outlined in the following chart:
We must make sure that our proposal budgeting and award management complies with a number of rules and regulations to avoid audit findings and potential penalties as described in the previous section.
Since the rules are complex, this section is structured with links to other web pages as well as detailed charts and content below.
Review the chart below for general definitions of the types of costs that apply to sponsored projects.
You cannot rely on a sponsor's approval of a budget to ensure that your specific cost items are allowable. The sponsor assumes that the university has complied with Circular A-21, the F&A cost rate proposal assumptions, and all other regulations cited. However, sponsors may approve one of our budget items that may be allowable at other institutions as a direct charge but may not be allowable at our university because of the decisions made at our institution regarding the Disclosure Statement and the F&A cost rate proposal process. Because of these variables, the sponsor cannot reliably make a determination of allowability for our university.
It is also possible that even if the agency approves an expenditure, various auditors (e.g., Department of Health and Human Services (DHHS) sponsor, state, or internal auditors) could disallow the expenditure based on their review, judgment, or lack of appropriate documentation.
For these reasons, it is the our responsibility to exercise judgment on each cost before including it in a budget for agency approval.
Before reviewing the specifics that follow, note the decision chart below. The chart illustrates the logical thought process that we should use before including items as direct costs in proposal budgets.
Review the following information carefully to ensure that all of your budget items are legitimate and will not be denied or later disallowed through an audit finding.
Almost all of our awards fall under the requirements of certain federal Circulars and Cost Accounting Standards (CAS). Seventy five percent or more of our awards fall under one of the first two categories and most other awards fall under the other categories listed below. Contracts (rather than grants) fall under the Federal Acquisition Regulation (FAR).
These Cost Accounting Standards (CAS) apply to sponsored awards that meet any one of the following criteria:
Awards not covered under CAS administration are still subject to the requirements listed in the award as well as all University and State guidelines. Even if an award is not under CAS administration, expenditures unrelated to the award cannot be charged. All expenditures on an award must be reasonable, allocable, and allowable.
The chart below lists the basic elements of the main federal regulations that we must follow. You may click each section under the Policy heading to access the federal links and review our explanatory notes that follow.
In addition to the federal regulations cited above, sponsored awards must also comply with the following policies and authoritative documents:
You may also view the optional 3-minute Order of Precedents video below that was produced by the National Council of University Research Administrators (NCURA).
The video presents an overview of how to follow the pyramid hierarchy illustrated on the left to answer the question, "Do I Follow the Award or the Circulars?" when deciding what rules and regulations apply to your projects.
Note that these NCURA videos are useful as additional references on our RAMP Guide topics, but be sure to refer to our specific university policies, procedures, and contacts when making project decisions.
Before clicking the play arrow below, take a moment to grab your ear buds or adjust your computer's volume up or down to listen in your work environment.
Under the regulations cited above as well as our university policies, costs are classified as allowable or unallowable. Unfortunately, there is not a simple list of allowable and unallowable costs or set of rules that easily fit every project. In fact, generally it is not the type of cost that determines allowability, but rather the purpose and circumstance of the expenditure. For example, just because a cost is "direct" doesn't automatically make it allowable. In this section, you'll find a number of tests and decision criteria to help you analyze charges as they relate to each project.
Generally, experienced PI's and Research staff charge and track most common project costs accurately. Unfortunately, however, charges that are not handled correctly can result in audit findings and university penalties. Be sure to work with your college and departmental research staff and contact Sponsored Programs and Regulatory Compliance Services (SPARCS) and the Office of Contracts and Grants (CNG) when you have any questions about whether certain charges are allowable, being tracked and posted correctly, and that you have all of the documentation required to back up your decision to include a charge.
Review the chart on the right for commonly cited unallowable charges. Keep in mind that this list is not all inclusive and under certain circumstances the starred costs might be allowable with advance approval from the sponsor.
Click the link to Section J of A-21 to read the specific language under "General provisions for selected items of cost."
The Allowable Costs chart on the right and the bullet lists below contain "short lists" of commonly allowable charges and whether they are generally characterized as "Direct" or "Facilities or Administrative" (F&A) costs.
Common allowable costs that are DIRECT include the following:
Common allowable costs that are considered part of F&A rates include the following:
Note that the charts above are a starting point only! Review the following sections for important information regarding whether a cost is an allowable expense for each award and other criteria affecting the correct expense category (Direct or F&A).
Before reviewing the sections that follow detailing the general rules and regulations, you may want to read through some specific information on the common charges displayed below. Click the Policies content image below to go to this section of the CNG Cost Accounting Standards (CAS) site and then click any or all of the links there to learn more about each category. (Don't forget to bookmark the section for future reference.)
When direct costs do not fit neatly in the realm of the commonly acceptable, we need to examine each cost to make sure it meets the rules cited in the federal Cost Accounting Standards.
Review this section for a "plain English" primer, but be sure to check the regulatory language in OMB Circular A-21 to make sure that you are including allowable costs.
All of the direct costs charged to a project must be specifically identifiable with that individual project. The federal rules cite the concept of "relative ease and high degree of accuracy" meaning that the university must be able to easily explain how each charge relates directly to the project.
This assertion that a cost is allowable must also meet the following criteria:
Review the following chart for more detail on the "Reasonable" criteria cited above:
All of the direct costs as well as F&A costs charged to a project must also meet the definition of allocability. The federal rules cite this allocability concept related to whether or not a cost or portion of costs benefits a particular sponsored agreement.
Review the chart below for an overview of this concept and you will find more information in the Direct vs. Facilities and Administrative (F&A) Costs page referenced in the section that follows.
Usually, the decision on whether to charge common expenses under Direct or F&A costs is clear.
Sometimes, however, the expenses may not be as clear-cut, so be sure to review all of the information in the two subsections that follow: Common F&A Costs and Unlike Circumstances.
And be careful when characterizing expenses as Direct costs or F&A costs - we cannot charge a sponsor twice (in both categories) for the same cost!
Click the site excerpt below to go to the Direct vs. Facilities and Administrative (F&A) Costs section of the CNG site for a primer on the definitions, criteria and specifics regarding this important determination of the correct category for your expenses.
Pay particular attention to the following excerpts from the Direct vs. F&A Costs page linked above:
You may also go to the F&A Costs index of the CNG site or click any of the links below for additional specifics including:
In the previous section, you read the following statement: Costs must be applied in the same manner in "like circumstances." This means that costs incurred for the same purpose in like circumstances must be treated consistently as either direct or F&A costs. To explain further, think of asking "How is this usually handled?" if you are trying to make sure that you are correctly classifying an expense as Direct or Indirect (F&A).
For example, if you can say that it is common practice to classify postage as a F&A expense, including postage in F&A fits the "like circumstances" concept.
Sometimes, however, even though postage is normally treated as an F&A cost, a particular project may have a special need for extra postage for mailing hundreds of survey questionnaires. In this case, it would be appropriate to charge the postage to mail the questionnaires as a Direct Cost for this project, since this would constitute "unlike circumstances" compared to routine postage requirements.
A narrative budget justification that explains the nature of "unlike circumstances" must be prepared if any of the following types of costs are budgeted as Direct Costs:
1. Administrative and clerical salaries (Salaries/Wages)
2. General office supplies (Supplies and Materials)
3. Postage (Current Services)
4. Telephone (Current Services)
5. Individual memberships and subscriptions (Fixed Charges)
For more detail on these expenses and the meaning of "unlike circumstances," click the image below to review this section carefully if you have not already done so:
The following types of "off the map / out of the norm" projects are likely to incur costs that meet the definition of unlike circumstances:
The following are "red flags" to avoid when trying to use the "unlike circumstances" justification for charging expenses as Direct Costs:
Cost representing a financial need versus being directly related to the purpose of the award
Pooling proposals together for the sole reason of justifying expenses as direct costs
Making up for insufficient or no F&A cost money from the sponsor
Sponsor willing to pay the cost as Direct even though the university consistently charges these types of costs as F&A for other projects
Review the following cautions to make sure that your college is not responsible for negative audit findings.
Additional Financial Compliance Tools
Click the RAMP link below to return to the RAMP Guide Table of Contents.