Cost Principles and Allowability of Costs for Grants and Contracts, Lecture notes of Accounting

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STATE OF HAWAII

STATE PROCUREMENT OFFICE

COST PRINCIPLES

HRS Chapter 103F

Purchases of Health and Human Services

September 2011

HRS CHAPTER 103F

COST PRINCIPLES Table of Contents

• 1. Purpose SECTION 1: ABOUT COST PRINCIPLES
• 2. Federal Cost Principles
• 3. Factors Affecting the Allowability of Costs
  • 3.1 Criteria........................................................................................................................................................................................................
  • 3.2 Reasonable Costs
  • 3.3 Allocable Costs
  • 3.4 Conform to Limitations or Exclusion
  • 3.5 Consistent Costing Treatment
  • 3.6. Generally Accepted Accounting Principles (GAAP)
• 4. Direct Costs
• 5. Indirect Costs (Joint Costs)
• 6. Negotiated Federal Indirect Cost Rates
• 7. Method of Allocation
  • 7.1 Basis and Documentation
  • 7.2 Allocation to Cost Objective.......................................................................................................................................................................
  • 7.3 Basis for Allocation.....................................................................................................................................................................................
  • 7.4 Unallowable Allocation of Costs
• 8. Unallowable Costs
  • 8.1 Bad Debts
  • 8.2 Contingencies
  • 8.3 Capital Expenditures for Land or Buildings
  • 8.4 Capital Expenditures for Improvement......................................................................................................................................................
  • 8.5 Entertainment
  • 8.6. Fines and Penalties....................................................................................................................................................................................

HRS CHAPTER 103F

COST PRINCIPLES

Table of Contents

Category B: Operating Costs (continued)

Contractual Services - Administrative ............................................................................................................................................................... 9

Professional and Consultant Services, Legal Fees

Contractual Services - Subcontracts ............................................................................................................................................................... 10

Professional and Consultant Services

Depreciation.................................................................................................................................................................................................... 10

Equipment, Motor Vehicles, Buildings and Capital Improvements, Idle Facilities,

Assets Acquired Through State or Federal Government

Food ................................................................................................................................................................................................................ 10

Meals and Snacks

Indirect Costs (Negotiated Federal Rate)........................................................................................................................................................ 11

General Operating Costs, Indirect Costs

Insurance......................................................................................................................................................................................................... 11

Indemnification Coverage, General Liability, Bonding, Automobiles, Fire, Hurricane, Flood, Life Insurance Premiums

Interest ............................................................................................................................................................................................................ 12

Interest on Borrowed Capital, Other Interest Rates

Lease/Rental of Equipment ............................................................................................................................................................................ 12

Lease Rental of Program Equipment, Security Deposits, Loan Payments

Lease/Rental of Motor Vehicles...................................................................................................................................................................... 12

Leased Vehicles, Security Deposits, Loan Payments

Lease/Rental of Space ..................................................................................................................................................................................... 13

Office Lease Rental, Common Area Charges, Security Deposits, Unused Space

Mileage ........................................................................................................................................................................................................... 13

Mileage Reimbursement, Monthly Allowances, Relocation Costs, Reimbursement for Personal Use

Postage, Freight and Delivery ......................................................................................................................................................................... 13

Stamps, Mailing Costs, Delivery Charges

Program Activities ........................................................................................................................................................................................... 14

Other Cost Items to Deliver Services

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HRS CHAPTER 103F

COST PRINCIPLES

Table of Contents

Category B: Operating Costs (continued)

Publication, Printing and Advertising.............................................................................................................................................................. 14

Printing, Binding, Subscriptions, Media Services, Media Advertising, Books and Journals, Recruitment of Personnel

Repairs and Maintenance ............................................................................................................................................................................... 14

Facilities and Equipment, Leased Space, Capital Asset

Staff Training ................................................................................................................................................................................................... 15

Registration and Tuition, Materials, Out-of-State Training, Administrative Personnel Entertainment, Training Courses

Subsistence/Per Diem ..................................................................................................................................................................................... 15

Room and Board, Tips and Gratuities

Supplies ........................................................................................................................................................................................................... 16

Office, Vehicle, Education, Medical, Recreational, Janitorial Program

Telecommunication ........................................................................................................................................................................................ 16

Telephone, Facsimile, Long Distance, Installation

Transportation ................................................................................................................................................................................................ 16

Taxi, Bus, Auto Rental, parking, Tips and Gratuities, Parking Tickets and Fines

Utilities ............................................................................................................................................................................................................ 16

Water/Sewer, Electricity, Gas, Refuse

CATEGORY C: Equipment Purchases .......................................................................................................................................................................... 17

CATEGORY D: Motor Vehicle Purchases .................................................................................................................................................................... 17

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HRS Chapter 103F

3.3 Allocable Costs

a. A cost is allocable to a particular cost objective, such as a grant, contract, project, service, or other activity, in accordance with the relative

benefits received. A cost is allocable if it is treated consistently with other costs incurred for the same purpose in like circumstances and if it:

(1) Is incurred specifically for the contract;

(2) Benefits both the contract and other work and can be distributed in reasonable proportion to the benefits received; or

(3) Is necessary to the overall operation of the provider, although a direct relationship to any particular cost objectives cannot be shown.

b. Any cost allocable to a particular contract, award or other cost objective under these principles may not be shifted to other State contracts to

overcome funding deficiencies, or to avoid restrictions imposed by law or by the terms of the contract.

3.4 Conform to Limitations or Exclusion

Many costs are subject to various restrictions, conditions, and/or documentation requirements that must be followed before such cost is allowable.

Certain types of costs require prior approval before they are allowable, while other types of costs are unallowable.

3.5 Consistent Costing Treatment

The budgeting, recording and reporting of all costs of a particular nature must be done in the same manner regardless of the source of funding (i.e.,

Federal or Non-Federal) associated with a project or activity.

3.6 Generally Accepted Accounting Principles (GAAP)

These are standards and guidelines promulgated by the Financial Accounting Standards Board and the Governmental Accounting Standard Board,

depending upon the type of organization involved. These principles direct how and when they should recognize costs on accounting records and

financial statements.

4. DIRECT COSTS

Direct costs are those that can be identified specifically with a particular final cost objective, i.e., a particular award, project, service, or other direct

activity of an organization. Costs identified specifically with a final cost objective of the organization are direct costs of that cost objective and are not to

be assigned to other cost objectives directly or indirectly.

5. INDIRECT COSTS (JOINT COSTS)

Indirect costs are those that have been incurred for common joint objectives and cannot be readily identified with a particular final cost objective.

HRS Chapter 103F

6. NEGOTIATED FEDERAL INDIRECT COST RATES

Indirect costs are equitably distributed to benefiting cost objectives by using current rate(s) negotiated with the federal government. To utilize the

indirect cost rate, the rate must be approved by the cognizant federal agency.

7. METHOD OF ALLOCATION (Must be used by organizations without a negotiated federal indirect cost rate)

7.1 Basis and Documentation

Organizations incurring costs that benefit more than one cost objective such as a grant, contract, project, services, or other activity must allocate

these costs using a reasonable base. Organizations must have a written cost allocation plan.

7.2 Allocation to Cost Objective

Joint costs, such as depreciation, rental costs, operation and maintenance of facilities, telephone expenses, administrative salaries, and the like

must be allocated individually to each objective using a base most appropriate to the particular cost being allocated. An allocation for any expense

item exceeding 100% of its total cost, or its depreciation value, is unallowable.

7.3 Basis for Allocation

Each joint cost must be allocated using a base which accurately measures the benefits provided to each cost objective. The bases must be

established in accordance with reasonable criteria and be supported by current data. Actual conditions must be taken into account in selecting a

base to be used in allocating the joint costs. In general, any cost element or cost related factor associated with the organization’s work is

potentially adaptable for use as an allocation base, provided:

a. It can readily be expressed in terms of dollars or other quantitative measures (total direct costs, direct salaries and wages, staff hours applied,

square feet used, hours of usage, number of documents processed, population served, and the like); and

b. It is common to the benefiting functions during the base period.

7.4 Allocation of costs based on forecasts, revenues received, budgeted revenues, budgeted costs, or anticipated contract reimbursements are not

acceptable or allowable.

8. UNALLOWABLE COSTS

The following costs are unallowable:

8.1 Bad Debts

Any portion of the accounts receivable which has been determined to be uncollectible, is termed “Bad Debts.” Any losses arising from uncollectible

accounts, other claims and related costs that are actual or estimated are unallowable.

HRS Chapter 103F

8.10 Lobbying

All costs associated with attempts to influence the enactment or modification of any pending legislation through communication with any member

or employee of the state legislature, or with any government official or employee concerning a decision to sign or veto enrolled legislation are

unallowable.

8.11 Losses Incurred Under Other Contracts

A loss incurred under one contract may not be charged to any other contract. Losses incurred on other contracts are unallowable.

8.12 Organization Costs

Costs incurred under one contract may not be charged to any other contract. Losses incurred on other contracts are unallowable.

8.13 Perquisite

A privilege furnished or a service rendered by an organization to an employee, officer, director, or member of that organization to reduce the

individual’s personal expenses is unallowable.

8.14 Security Deposits

Funds held as a guaranty or assurance required by agreement is unallowable

8.15 Idle Facilities

Facilities that are not being used are unallowable.

9. DEFINITION OF COLUMN TITLES FOR FORM SPOH-

9.1 “Cost Item”

“Cost item” refers to the items within budget categories. For example, “Compensation for Personal Services,” should appear within the budget

element category for “Personnel Costs.”

9.2 “Description”

A description of each line item is provided to briefly characterize applicable costs within the category. Descriptions are intended to be informative.

HRS Chapter 103F

9.3 “Allowable/Unallowable”

Costs are allowable when they are reasonable, allocable, lawful, and for costs invoiced for reimbursement, actually incurred or accrued and

accounted for in accordance with generally accepted accounting principles, for contract related expenditures. Certain costs are treated specially

and are specifically identified as “Allowable” or “Unallowable” costs. The list of unallowable costs is not all-inclusive.

• Costs indentified as “Allowable with Prior Approval” are generally unallowable. Providers must receive approval of these costs, prior to

expenditure. The head of the state purchasing agency may approve “unallowable” costs, if it is in the best interests of the State and all costs

are reasonable, lawful and allocable.

9.4 “Remarks”

This column describes special instructions, restrictions on the allowable limits, and required documentation that the State purchasing agency may

require. All required documentation should be available upon request by the state purchasing agency. RFPs may require that certain documents

be submitted at the time of application.

HRS Chapter 103F

Cost Item Description Allowable/Unallowable Remarks

CATEGORY A:

Personnel Costs

Compensation for personal services

currently paid or accrued (cont’d)

• Vacation Leave
• Sick Leave

Unallowable payment for leave in lieu of leave not taken

• Bonuses
• Severance Pay
• Excessive Compensation
• Accrued leave payout for terminating employees

Unallowable

Payroll Taxes and Assessments

All Federal and State requirements

• Employer’s portion of FICA, workers compensation, unemployment insurance and temporary disability insurance.

Allowable Required Documentation: Schedule detailing applicable percentages of statutory ceilings for each payroll tax, insurance and other costs.

• Fines and penalties due to late filing and/or payment

Unallowable

Fringe Benefits:

Employers’ portion of health care

and retirement benefits

• Health care insurance Allowable Required Documentation: Each benefit should be clearly detailed in the personnel policies and procedures.
• Retirement plans Allowable with prior approval
• All costs considered as perquisites (e.g.,

non-wage compensations provided

to employees in addition to their

normal wages or salaries)

Unallowable

CATEGORY B:

Operating Costs

Airfare (Inter-Island)

• Costs for airline tickets or coupons Allowable with prior approval. Required Documentation: Schedule of inter-island travel detailing staff, destination, purpose, fare costs, per diem/subsistence and dates of travel.

Personnel policies and procedures governing travel.

Cost of cancelled travel shall not be charged to the contract.

• First class travel Unallowable

HRS Chapter 103F

Cost Item Description Allowable/Unallowable Remarks

CATEGORY B:

Operating Costs Airfare (Out-of-State)

• Costs for airline tickets Allowable with prior approval^ Required Documentation: Schedule of out-of-state travel detailing staff, destination, purpose, fare costs, per diem/subsistence and dates of travel. Personnel policies and procedures governing travel. Cost of cancelled travel shall not be charged to the contract.
• First class travel Unallowable

Audit Services

Cost of an audit by an independent

certified public accountant

• Federal funds a. Audits completed in accordance with OMB Circular A-133, required for providers expending $300,000 or more in federal funds during the fiscal year. b. Limited scope audits arranged and paid for by pass through entities to monitor subrecipients.

Allowable Required Documentation: Financial statements and schedule of expenditures of Federal awards, summary schedule of prior audit findings, auditor’s reports, and corrective action plans. If the audit does not contain questioned costs or audit findings related to the pass through federal funds, a notification letter may be sent to the pass through entity (see OMB Circular A-133, Subpart C.)

Copy of limited scope audit report.

• State funds only a. Financial audits of the organization b. Special audits required by the State

Allowable Copies of the audit report and management letter issued by the auditor.

Contractual Services -

Administrative

• Costs of administrative professional and consultant services, which cannot be performed by the applicant/provider's staff, e.g., accounting, bookkeeping, payroll, and secretarial services.

Allowable Required Documentation: Schedule detailing business or individual’s name, description of the service, and contract amount or fee.

• Legal fees for defense and prosecution of criminal and civil proceedings. Retainer payments to attorneys.

Unallowable

HRS Chapter 103F

Cost Item Description Allowable/Unallowable Remarks

CATEGORY B:

Operating Costs

Indirect Costs (Negotiated Federal

Rate)

Costs incurred for common or joint objectives that cannot be readily identified with a particular final cost objective, e.g., general administration and general expenses, such as the salaries and expenses of executive officers, personnel administration, and accounting.

• General operating costs equitably distributed to benefiting objectives by using a current rate negotiated with the federal government.

Allowable Required Documentation: A valid copy of the written agreement with the federal agency for the negotiated rate. Attach to Proposal Budget if used.

• Indirect costs based on a rate that has not been negotiated with the federal government.

Unallowable

Insurance

Cost of insurance required or approved pursuant to the contract.

• Indemnification Coverage
• General Liability
• Bonding
• Applicant/Provider’s Automobiles
• Fire
• Hurricane
• Flood

Allowable Required Documentation: A valid Certificate of Insurance which shows the following:

1. Policy in effect during the contract period.
2. Liability coverage(s) as specified in the agreement.
3. The contracted services or type of services.
4. The State of Hawaii and the state purchasing agency as the certificate holder.
5. Address of the state purchasing agency.
6. The State of Hawaii named as additionally insured.

• Life insurance premiums of officers, employees, or Board members where the applicant/provider is the beneficiary

Unallowable

HRS Chapter 103F

Cost Item Description Allowable/Unallowable Remarks

CATEGORY B:

Operating Costs

Interest

Costs incurred for interest on borrowed capital

• Interest on debt incurred after May 14, 1997 to acquire or replace capital assets (including renovations, alterations, equipment, land, and capital assets acquired through capital leases), acquired after May 14, 1997 and used in support of the State contracts.

Allowable with prior approval Required Documentation for prior approval: A statement of purpose and justification for facility acquisition or replacement. A statement as to why current facilities are not adequate. A statement of planned future use of the facility. A description of the financing agreement to be arranged for the facility. A summary of the building contract with estimated cost information and statement of source and use of funds. A lease/purchase analysis which shows that a financed purchase or capital lease is less costly to the organization than other leasing alternatives (See OMB Circular A-122.)

Reimbursements will be limited to the least costly alternative.

• All other interest costs Unallowable

Lease/Rental of Equipment

Lease rent of program equipment used for contractual services

• Rental or lease cost in connection with the program for office and program requirements.

Allowable with prior approval Required Documentation: Schedule detailing item, purpose, cost and usage. Lease/rental agreement.

• Security deposits
• Loan payments made in connection with purchase of equipment

Unallowable

Lease/Rental of Motor Vehicles

Motor vehicle lease costs related to contracted services

• Leasing costs of vehicles used directly in connection with the program

Allowable with prior approval Required Documentation: Schedule detailing vehicle, purpose, cost and usage. Lease/rental agreement.

• Security deposits
• Loan payments made in connection with purchase of vehicle

Unallowable

HRS Chapter 103F

Cost Item Description Allowable/Unallowable Remarks

CATEGORY B:

Operating Costs Program Activities

• All other cost items directly related to or required in order to deliver services to clients, e.g., client incentives, client excursions, training wages, and client/volunteer stipends.

Allowable with prior approval Required Documentation: A schedule detailing:

1. Description of program activity.
2. Frequency of activity.
3. Number of participants.
4. Cost per person. Restrictions: All program activities are limited to contract provisions; and costs must be incurred on behalf of clients.

Publication, Printing and

Advertising

Costs of printing and binding, and subscriptions. Costs of media services. Media advertising includes magazines, newspapers, radio and television programs, direct mail, exhibit, and the like.

• Publications used directly in the program
• Professional books and journals
• Recruitment of personnel
• Procurement of goods and services
• Advertisements specifically required by contract

Allowable Required Documentation: Schedule providing basis for estimating cost of postage, printing and copying. Schedule for subscriptions and publications detailing titles and costs.

Repairs and Maintenance

Necessary maintenance, repair and upkeep of facilities, buildings and equipment.

• Costs incurred for repair and maintenance of facilities and equipment, e.g., janitorial services, painting, plumbing and electrical repairs
• For leased space, allowed for lessee if responsibility by lessor is not specified in the rental agreement.

Allowable

• Expenditures which will increase the life of a capital asset

Unallowable

HRS Chapter 103F

Cost Item Description Allowable/Unallowable Remarks

CATEGORY B:

Operating Costs Staff Training

Cost of preparation and maintenance of on- the-job, classroom and other training to increase the employees’ vocational effectiveness.

• Registration and tuition costs
• Costs of materials, including books

Allowable Required Documentation: Schedule detailing title of training, date, persons attending and purpose.

Training for staff who provide direct service to recipients. Conference and workshops for the purpose of dissemination of technical information to improve the delivery of the service.

• Out of State training
• Training for administrative personnel

Allowable with prior approval

• Entertainment costs, e.g., office parties
• Training courses taken by an employee to acquire basic skills which should have been brought to the job or to qualify for duties other than the position held.

Unallowable

Subsistence/Per Diem

Costs for room and board while on official travel status

• Subsistence or per diem rates may be used.

Allowable Required Documentation: Travel policies and procedures. Receipts for subsistence payments. For overnight accommodations, room rates must be reasonable and ordinary in relation to accommodations within the surrounding area and type of accommodation.

Restriction: Not to exceed State per diem allowances

• All tips and gratuities Unallowable