Federal Grants

October 1, 2005       Ted Needleman      

The work doesn’t stop once your federal grant app lication is accepted. With approximately 31 percent of nonprofits funded with some amount of federal money, and additional funds generated from similar grants from state and local governments, making sure that the nonprofit is fully compliant with regulatory accounting requirements is no easy task.

That was the basis of the session entitled I’ve Got The Federal Grant — Now What? presented at the recent AICPA’s NPO Industry Conference in Washington, D.C.

The session, presented by Robert Mims, controller at Ducks Unlimited in Memphis, and Alex Weekes, partner in ML Weekes & Co. PC, Stamford, Conn., detailed many of the compliance issues that arise from funding your nonprofit with federal grant money.

Still, according to Weekes and Mims, federal funding has a lot going for it. “It’s an excellent source of revenue, and is generally very consistent once your grants are approved,” Weekes said. “Government receivables are good receivables. They are paid timely. Sometimes you can even get paid daily on incurred cost.”

Depending on how the grant is structured, “it often generally pays overhead and fixed costs,” Weekes added. “Though many state and local grants don’t cover overhead.”

At the same time, it’s not all positives when you have federal grants, Weekes pointed out. “Federal grants require compliance with rules and regulations, imposed additional administration and related burdens, and require all sorts of audits.”

These audits include A-133 audits, internal audits, and external audits and oversight by federal, state, and local funding sources, he explained..

Following all the compliance rules is where things sometimes get difficult. Proper compliance is necessary, however, to get all of the cost reimbursement coming to you. The rules are laid out in two Office of Management and Budget (OMB) circulars — OMB Circular A-122 (for Not-for-profits) and OMB Circular A-110 (Administrative Requirements (applies to all types of entities).

Each of these circulars covers different compliance issues. OMB A-122 details how to handle allowable costs and the allocation of them, as well as time and effort reporting.

Grant administration is detailed in OMB Circular A-110, including billing, records retention, cash management, and property management. The contracting officer may disallow all or part of a claimed cost which is inadequately supported, so proper documentation is a must.

Weekes detailed some of the areas where nonprofits should pay particular attention. “In managing risk, you need to make certain that you have good communications, both internally and with external auditors. This means disclosing your practices and making sure that whatever you do is well documented,” he said. “It’s a good idea to institutionalize your communications processes with partners, staff, and volunteers and your board.”

Consistency in estimating and other areas is important, as are strong internal controls, Weekes added. “If you are new to grants and their compliance issues, it pays to consult with experts at the beginning of the cycle, not later when it’s too late to correct your mistakes. You also need to be aware of the 90 day limit on fixing an account error. The clock starts running the moment that the error is discovered.”

Type of cost is important

When accounting for grants, there are two types of costs, direct and indirect. Weekes pointed out that direct costs are usually pretty easy to identify, and include such items as labor and fringe benefits, travel, supplies, equipment, and contracted services.

Indirect costs are harder to identify and handle, and generally include such costs as operations and maintenance, depreciation and use allowance, administration costs, and legal, accounting, and finance costs and fees.

How much you get reimbursed for indirect costs depends on the method used to account for them. “Personal and salary costs are generally the largest component of costs,” Weekes said. “A good method is to adopt a Time & Effort reporting system,” he said. This lets you accurately determine what portion of these costs are reimbursable as direct costs. This is an after-the-fact determination of the actual activity of each employee and must be prepared at least monthly.

“The report provides that the distribution of activity represents a reasonable estimate of the actual work performed by the employee,” Weekes said. “Lots of award recipients are getting dinged on this,” Weekes continued, offering additional support for adopting this method.

Another area in which to exercise caution is contracted service, Weekes said. You need to document whether the supplier of these services is a vendor or sub-recipient, and be careful to follow OMB Circular A-110 purchasing requirements including getting three bids. “If you can’t get three bids,” Weekes cautioned, “you’ll need to document why. You also have to document your reasons if you don’t go with the lowest bid.”

How do you rate?

Indirect costs are usually allocated according to a rate detailed in the OMB circular (the default rate), or one that has been negotiated with the federal agency that awarded the grant. With a negotiated rate, you are allowed to charge a fixed percentage of indirect costs for every dollar of direct costs. These rates are negotiated between one and four years, though most nonprofits get one-year rates.

“You need to leave plenty of time once you’ve submitted your rate proposal before you actually negotiate your rate,” Weekes cautioned. “And you must continue to follow up with the cognizant agency. Otherwise, they may never look at your proposal,” he said.

Weekes closed the session with a reminder: “Pay lots of attention to indirect cost rates. Lack of attention could make or break the financial goals of an organization. Remember that rates need to be in the budgets to get recovery and management of indirect rates will be visible in the bottom line.” Ted Needleman is a contributing editor of The NonProfit Times.