Knowledge and Insights

Is Your Nonprofit Addressing the New Cost Principle Reforms?


It’s not too late to get up to speed on new federal and state cost principles and other requirements for your federal and New Jersey grants. As you may be aware, the federal Office of Management & Budget (OMB) recently issued final regulations entitled, “Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards,” commonly referred to as the Uniform Guidance. If your organization is a non-federal agency, you must implement new administrative requirements and cost principles for all new federal awards received after December 26, 2014, as well as for additional funding amounts granted for existing awards made after that date. This would include direct federal funding, as well as federal funding your agency receives from non-federal pass-through entities, such as the New Jersey Department of Human Services (DHS).

The Uniform Guidance, also known as the Super Circular, consolidated and streamlined eight existing OMB circulars that covered administrative requirements, cost principles and audit requirements. While there are significant changes to the administrative and audit requirements, our focus herein is on the reforms to the cost principles. Under general provisions to cost principles, changes were made to the definition of certain elements of cost. Some items of cost have little or no change, while others have changed substantively, particular compensation for personal services and depreciation. The costs you were charging to your contracts in the past may no longer be allowable under the new rules.

In addition, there are significant reforms to the indirect cost rules and calculations. If a nonprofit organization has only one major function, or in the situation where all of its major functions benefit from its indirect costs to the same degree, the allocation of indirect costs may be accomplished through new simplified allocation procedures. Under the simplified method, total costs are separated into direct and indirect cost pools. A distribution base is determined, which can be total direct costs, direct salaries, and wages, or any other base that results in an equitable distribution.

If your organization receives more than $10 million in federal funding of direct costs in a fiscal year, you must now break out your indirect costs into two broad categories, Facilities and Administration (F&A).  If you have already negotiated an F&A rate with the federal government, the negotiated rate must be used for funding received from pass-through entities. Under the new rules, if you have never negotiated an indirect cost rate with the federal government, you may use a deminimis rate of 10% of modified total direct costs. Pass-through entities such as DHS may, but are not required to, negotiate an indirect cost rate if you request to do so.

You and your grants management and fiscal teams need to carefully review the new Uniform Guidance requirements. Program, grant and financial officials need to be prepared to implement the new cost principles and administrative requirements, which may require revisions to internal control processes over budgeting and financial reporting. The amount of direct federal funding, federal pass-through funding, and state grant funding will dictate whether an indirect cost rate or an indirect cost proposal approved by the cognizant federal agency is required.

Mercadien’s nonprofit team can help with your organization’s cost allocation challenges and ensure that your organization-wide cost allocation plan complies with the new federal Uniform Guidance and state guidance.