Federal Rules Q&A: Nonprofit procurement under the new Super Circular

March 13, 2015       Barbara Floersh      

The procurement rules governing purchases made with grant funds changed when the new Uniform Guidance on grant administration was implemented as an interim final rule in late December 2014. Procedures must become more structured and purchases of more than $3,000 will have to be accompanied by varying levels of documentation as the dollar value of purchases increases.

Understanding and implementing the new guidance on short notice will be difficult for many nonprofit managers. That’s why The Grantsmanship Center (the Center) has asked Henry Flood, the center’s senior advisor for grant administration, to address procurement issues that are raising concern.

Center: When compared to the old A-110 rules, how drastic are the procurement rule changes in the Super Circular?

Flood: I wouldn’t characterize the changes as radical. The philosophies and broad policies articulated in the new procurement guidance are very similar to the old rules. The revised procurement policies are somewhat more prescriptive. The standards of competition, the types of procurements authorized, and the documentation requirements are a bit more specific. There will be less flexibility.

Center: How can the nonprofit community best prepare for the new procurement requirements?

Flood: The good news is that the Office of Management and Budget (OMB) and the Council on Financial Assistance Reform (COFAR) announced there will be a year’s grace period to make policies, procedures, and procurement operations conform to the new Super Circular.

So now is the time to carefully examine existing policies and procedures and compare them to the new procurement requirements. The precise citation for the new rules is 2 CFR 200.317 to 326. If you compare these rules to your current procedures and take all necessary steps to meet the new requirements, you’ll avoid rushed, last-minute work.

The new rules will have varying impacts on how nonprofit managers handle small and large purchases in the future.

Center: You said the impacts will vary. Please elaborate.

Flood: The impact will vary depending on the size of the organization, its experience handling procurement with federal funding, skill of the staff, and efficiency of the procurement operations. I envision three situations.

First, managers at small nonprofits with limited funding streams and little or no experience with federal funding might need training and capacity-building assistance to handle substantial new procurement actions that could accompany a sudden influx of federal funding. These nonprofits could need to significantly revise old procurement policies and procedures, or write new ones to conform to the Super Circular. They’ll probably also have to make changes in other areas of operation, as well, to conform to the new regulations.

Second, there are the medium and large nonprofits. These generally have fully functioning procurement systems and staff with considerable experience handling a range of purchases with federal funding. Leaders will need to adjust policies to ensure that micro, small, and large purchases are properly classified and documented to avoid practical and audit compliance issues.

Third, it will be interesting to see how the audit community will handle the procurement changes in audits starting in 2016. It seems to me that no one is talking about the auditors, but they have a huge footprint on the grant reform initiative. This is a story in itself. Will auditors be prepared?

I expect, for example, that the audit community and nonprofits might have different views on how purchases from $3,000 to $150,000 are handled. The auditors are likely to be more conservative than nonprofits in their view of procurement decisions. Seeking flexibility, the nonprofit community is more likely to desire the most liberal decision environment possible while still being within the bounds of regulatory compliance.

Center: Let’s talk about small purchases or purchases less than the small purchase threshold, now set at $150,000. One issue addressed at the recent OMB/COFAR webinar concerned how purchases between $3,000 and $150,000 should be handled. The concerns were the burden of documentation and the defense of decisions. What is your response to these concerns?

Flood: Relax. Take a deep breath. Approach this situation carefully and strategically. First, consider what a small purchase really is from a policy point of view. Purchases less than the simplified acquisition threshold ($3,000 to $150,000) are described as “simple and informal” by 2 CFR 200.320 (b). As such, these purchases require a lower threshold of competition, require fewer terms and conditions, can be solicited informally, and do not require a cost and price analysis, which would be required with bid and negotiated purchases that exceed the $150,000 simple acquisition threshold.

Second, it matters greatly how you classify and describe the range of purchases that are possible below the simple acquisition threshold. The key to begin addressing classification and description is to have a uniform small purchase face sheet that acts simultaneously as your solicitation, acceptance, and small purchase record of procurement. Federal, state, municipal, and county governments have done this for years and with great success.

The vast majority of all purchases (80 percent or more) are small purchases. The uniform small purchase face sheet (or an electronic equivalent) is a highly efficient and effective tool.

Third, as small purchases increase in value, managers need to consider a series of graduated competition requirements, approvals, and policy requirements. This will help avoid complaints, abuse, arbitrary decisions, audit, or compliance prob­lems. It can all be accomplished without being overly burdensome if people are properly trained and the correct graduated policies and procedures are in place.

Finally, there is another important issue concerning small purchases or simplified acquisitions. What does an organization do if its own small procurement threshold is substantially less than the $150,000 threshold? What you cannot do is have one threshold for purchases made with non-federal funds and another for purchases made with federal grant funds. The federal rule has always required that the more restrictive threshold prevail for defining a small purchase and capitalized assets.

Therefore, nonprofit managers should adopt the simplified acquisition threshold as official policy but institute a series of graduated authorities and documentation as the dollar value of the small purchase rises. This prevents abuse and ensures accountable and reasonable decision-making. It still allows your organization to benefit from what the simplified acquisition threshold has to offer.

Center: What about larger nonprofits from where hundreds of thousands of dollars have been invested in high-end procurement systems and now face having to tweak those procurement systems to comply with the new rules?

Flood: Again, I go to fundamental advice. Whether electronic or on paper, the uniform face sheet documenting the procurement action is very important. But some organizations with systems built on customized programming could face technical hurdles that could be costly.

During this transition and year-long compliance grace period, organizations that are heavily invested in customized electronic systems should compare the time and costs of tweaking those systems against the time and costs of going to more modern software or web-based procurement systems that are flexible enough to meet future needs. Now is the time to engage in this review and to determine what should be done during the transition so that by 2016 your organization will be compliant.

Center: Why is property management included with procurement?

Flood: The simplest answer to this important question is found in two words: Accountable Assets. When you purchase assets with a value of $5,000 or greater with federal grants or pass-through funds, you are required to report annually on the status of such property for the life of the grant, even though title is vested in the grant recipient.

However, whether or not capitalized property is purchased with grant funds, it remains an accountable asset. Both the balance sheet of financial statements and the audit will be negatively impacted if capitalized assets are not dealt with properly.

Both granting agencies and grant recipients tend to put property management tasks at the bottom of the administrative pile. Recent changes in property management rules and reporting requirements mean these tasks can no longer be shoved to the curb without putting your organization and its funding at risk. NPT

Barbara Floersch is executive director of The Grantsmanship Center in Los Angeles, Calif. Her email is barbara@tgci.com