An important section of OMB’s Uniform Grant Guidance dives into establishing better performance and accountability for federal awards—specifically as it relates to how indirect and direct costs are tracked and reimbursed.
This will change the relationship between public sector funders and nonprofit grantees by altering compliance and funding affairs, as well as increasing the urgency for organizations to adopt workflows to conform to new regulations and standards.
The New Rules for Tracking Indirect and Direct Costs
A few problems currently exist with the way indirect and direct costs are treated and reported. First, naming conventions are inconsistent across the board. What one organization considers to be an indirect cost is billed as a direct cost by another. This creates great difficulty when aggregating programmatic expense data.
To make reporting more transparent and consistent, OMB’s Uniform Grant Guidance requires standardized processes for all stakeholders involved in a grant’s program execution. In a nutshell:
- Funds must be administered according to program agreements and award terms, and proper documentation must be kept of costs expensed.
- Organizations can choose the organization and management techniques that work best for their staff. The key is that whatever processes are created, recipients need to put them in writing in their polices or procedures (or establish the process as a policy or procedure), so that they are followed consistently and used to manage sub-recipients.
- You cannot force one process on anther organization. The prime recipient is responsible for managing sub-recipients. To do this, they must have policies and procedures in place for oversight.
- Non-federal entities cannot mix and match how they treat costs, but must treat them consistently once they are designated as direct or indirect. As stated in the Guidance, “A cost cannot be assigned as direct, if any other cost incurred for the same purpose, in like circumstances, has been allocated as an indirect cost to the federal award.”
- Costs that would have historically been deemed indirect might be able to be tracked as direct if they can be tied to a specific award (i.e. if the services are integral to the project, have been included in the approved budget and are not tracked elsewhere as indirect costs.)
How This Impacts Nonprofits
Currently, nonprofits contracted by government agencies are rarely compensated for indirect costs—such as overhead and utilities—associated with fulfilling programmatic responsibilities. The Uniform Grant Guidance obliges government agencies using federal funds to recognize grantees’ and contractors’ indirect costs as legitimate expenses.
When a grantee or sub-recipient has a federally recognized negotiated indirect cost rate, it must be accepted by the federal awarding agency or prime recipient (if the prime does not want to negotiate a rate). Or, in lieu of a negotiated indirect cost rate, grantees can use the “de minimis” rate of 10%.
New regulations take the burden off nonprofits who otherwise would have to scramble to subsidize indirect costs elsewhere. However, these new rules are not guaranteed, as each program and grant is different. According to the National Council of Nonprofits, nonprofits can do the following to better secure newly provided benefits:
- Develop skills to negotiate higher government reimbursement rates and fairer contract terms.
- Become more skilled at advocacy on appropriation and tax matters.
- Have the ability to accurately identify and track overhead costs. Note: Proper cost tracking is the only concrete way to ensure correct compensation, without having to rely on external parties to act in your favor.
Regarding the National Council of Nonprofits final point, grant management software can make identifying and tracking overhead costs a tangible reality. Nonprofits who utilize such technology solutions also put themselves ahead of the game for other OMB Uniform Grant Guidance standards and regulations.
How will OMB Uniform Grant Guidance impact your organization’s processes? Share your thoughts in the comments below.
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