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CPE for Government Auditors

Compensation for Personal Services

Please enjoy this chapter from “The New Uniform Guidance” self-study course by Sefton Boyars and Bill Allen.  http://yellowbook-cpe.com/product/cost-principles?doing_wp_cron=1481663219.2448880672454833984375

Objective:

  • Clarify which compensation charges are allowable under a federal award and what documentation is required 

General Allowability of Compensation for Personal Services

Having looked at the table of contents for the cost principles, you will have noticed that the types of cost are listed alphabetically.  Many people get confused because they don’t find a listing for salaries under “S” or wages under “W.”  The federal cost principles cover salaries and wages under “C” for “Compensation–-personal services.”[1]

As discussed in §200.430, compensation for personal services includes all compensation paid currently or accrued by the organization for services of employees rendered during the period of the award.  Compensation costs (direct or indirect) are allowable to the extent that they are reasonable for the services provided and conform to the established policy of the organization, consistently applied to both federal and non-Federal activities.

Compensation must be reasonable and consistent with compensation paid for similar work in the organization’s other activities.  In the case of those services that are not found in the organization, compensation will be considered reasonable to the extent that it is comparable to pay for similar work in the labor markets in which the organization competes for the kind of employees involved.

Both direct and indirect costs for compensation for personal services are to be supported by a comprehensive system that clearly supports the amounts charged to federal projects, both directly and through indirect cost allocations.  In addition to being reasonable, salary charges must be consistently treated and documented in accordance with generally accepted practice of the governmental unit or nonprofit organization.  We will discuss the specific documentation requirements a little later in this chapter.

In the cost principles, the rules for compensation for personal services are found in §200.430 Compensation—personal services. The rules for salaries and wages are lengthier than the rules for any other item of cost.  You should carefully read the rules that applies to your entity type to determine whether any specific provisions apply directly to your organization.

In addition, 2 CFR §200.430 provides the guidance regarding the cost of compensation to members of nonprofit organizations, trustees, directors, associates, officers, or the immediate families thereof.

§200.430 Compensation—personal services.

            (a) General. Compensation for personal services includes all remuneration, paid currently or accrued, for services of employees rendered during the period of performance under the Federal award, including but not necessarily limited to wages and salaries. Compensation for personal services may also include fringe benefits which are addressed in §200.431 Compensation—fringe benefits. Costs of compensation are allowable to the extent that they satisfy the specific requirements of this Part, and that the total compensation for individual employees:

               (1) Is reasonable for the services rendered and conforms to the established written policy of the non-Federal entity consistently applied to both Federal and non-Federal activities;

               (2) Follows an appointment made in accordance with a non-Federal entity’s laws and/or rules or written policies and meets the requirements of Federal statute, where applicable; and

               (3) Is determined and supported as provided in paragraph (i) of this section          Standards for Documentation of Personnel Expenses, when applicable.

            (b)  Reasonableness.  Compensation for employees engaged in work on Federal awards will be considered reasonable to the extent that it is consistent with that paid for similar work in other activities of the non-Federal entity.  In cases where the kinds of     employees required for Federal awards are not found in the other activities of the non-Federal entity, compensation will be considered reasonable to the extent that it is comparable to that paid for similar work in the labor market in which the non-Federal entity competes for the kind of employees involved.

            (c) Professional activities outside the non-Federal entity. Unless an arrangement is specifically authorized by a Federal awarding agency, a non-Federal entity must follow its written non-Federal entity-wide policies and practices concerning the permissible extent of professional services that can be provided outside the non-Federal entity for non‑organizational compensation.  Where such non-Federal entity-wide written policies do not exist or do not adequately define the permissible extent of consulting or other non‑organizational activities undertaken for extra outside pay, the Federal government may require that the effort of professional staff working on Federal awards be allocated between:

               (1) Non-Federal entity activities, and

               (2) Non-organizational professional activities.  If the Federal awarding agency considers the extent of non-organizational professional effort excessive or inconsistent with the conflicts-of-interest terms and conditions of the Federal award, appropriate arrangements governing compensation will be negotiated on a case-by-case basis.

            (d) Unallowable costs.

               (1) Costs which are unallowable under other sections of these principles must not be allowable under this section solely on the basis that they constitute          personnel compensation.

               (2) The allowable compensation for certain employees is subject to a ceiling           in accordance with statute. For the amount of the ceiling for cost-reimbursement contracts, the covered compensation subject to the ceiling, the covered employees, and other relevant provisions, see 10 U.S.C. 2324(e)(1)(P), and 41 U.S.C. 1127 and 4304(a)(16).  For other types of Federal awards, other statutory ceilings may apply.

            (e) Special considerations.  Special considerations in determining allowability of compensation will be given to any change in a non-Federal entity’s compensation policy resulting in a substantial increase in its employees’ level of compensation (particularly when the change was concurrent with an increase in the ratio of Federal awards to other activities) or any change in the treatment of allowability of specific types of compensation due to changes in Federal policy.

            (f)  Incentive compensation.  Incentive compensation to employees based on cost reduction, or efficient performance, suggestion awards, safety awards, etc., is allowable to the extent that the overall compensation is determined to be reasonable and such costs are paid or accrued pursuant to an agreement entered into in good faith between the non-Federal entity and the employees before the services were rendered, or pursuant to an established plan followed by the non-Federal entity so consistently as to imply, in effect, an agreement to make such payment.

            (g) Nonprofit organizations.  For compensation to members of nonprofit organizations, trustees, directors, associates, officers, or the immediate families thereof, determination should be made that such compensation is reasonable for the actual personal services rendered rather than a distribution of earnings in excess of costs. This may include director’s and executive committee member’s fees, incentive awards, allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost-of-living differentials.

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Note the first paragraph under (d) Unallowable Costs.  It points out that if a cost is unallowable, the fact that it is claimed as salary will not make it allowable.  This is the same point we made in the last chapter.  It is always important to consider the purpose of the incurred cost, not just the cost category into which it fits.

Fringe Benefits

Fringe benefits are allowances and services provided by employers to their employees as compensation in addition to regular salaries and wages.  Fringe benefits also include time not worked such as vacation and sick leave.  In general, the costs of fringe benefits are allowable to the extent that the benefits are reasonable and are required by law, employee agreement, or an established organizational policy.

§200.431 Compensation—fringe benefits.

            (a) Fringe benefits are allowances and services provided by employers to their employees as compensation in addition to regular salaries and wages.  Fringe benefits include, but are not limited to, the costs of leave (vacation, family-related sick or military), employee insurance, pensions, and unemployment benefit plans.  Except as provided elsewhere in these principles, the costs of fringe benefits are allowable provided that the benefits are reasonable and are required by law, non-Federal entity-employee agreement, or an established policy of the non‑Federal entity.

            (b) Leave. The cost of fringe benefits in the form of regular compensation paid to employees during periods of authorized absences from the job, such as for annual leave, family-related leave, sick leave, holidays, court leave, military leave, administrative leave, and other similar benefits, are allowable if all of the following criteria are met:

               (1) They are provided under established written leave policies;

               (2) The costs are equitably allocated to all related activities, including Federal awards; and,

               (3) The accounting basis (cash or accrual) selected for costing each type of leave is consistently followed by the non-Federal entity or specified grouping of employees.

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In my experience, most non-Federal entities use the cash basis of accounting for paid time off[2].  That is, when an employee goes on leave, the salary is charged to whatever the employee would normally be doing.  A relatively small group of large grantees use the accrual system.  Namely, each dollar of salary, including time not worked, carries with it a charge for fringe benefits.  That charge goes into a fund which is charged for the employee’s salary when he or she is on leave.  Because it’s a more complicated system, only the largest grantees tend to use it.

When entities use the cash basis of accounting for paid leave the grantee shall recognize the cost of leave in the tax year that the employee takes and the employer pays for the leave.

When an organization uses the accrual basis of accounting for fringe benefits:

  1. The type of leave must involve a liability, as defined by GAAP, when earned; and
  2. The amount of leave costs that are allowable is either the amount accrued or the amount funded, whichever is less.

§200.431 Compensation—fringe benefits.

                  (b)(3)(i) When a non-Federal entity uses the cash basis of accounting, the cost of leave is recognized in the period that the leave is taken and paid for. Payments for unused leave when an employee retires or terminates employment are allowable  in the year of payment.

                  (ii) The accrual basis may be only used for those types of leave for which a liability as defined by GAAP exists when the leave is earned.  When a non-Federal entity uses the accrual basis of accounting, allowable leave costs are the lesser of the amount accrued or funded.

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Other fringe benefits in the form of employer contributions for social security, employee health insurance, unemployment, and worker’s compensation insurance are allowable provided that they are equitably allocated to all related activities including federal awards.

§200.431 Compensation—fringe benefits.

(c) The cost of fringe benefits in the form of employer contributions or expenses for social security; employee life, health, unemployment, and worker’s compensation insurance (except as indicated in §200.447 Insurance and indemnification); pension plan costs (see paragraph (i) of this section); and other similar benefits are allowable, provided such benefits are granted under established written policies. Such benefits must be allocated to Federal awards and all other activities in a manner consistent with the pattern of benefits attributable to the individuals or group(s) of employees whose salaries and wages are chargeable to such Federal awards and other activities, and charged as direct or indirect costs in accordance with the non-Federal entity’s accounting practices.

(d) Fringe benefits may be assigned to cost objectives by identifying specific benefits to specific individual employees or by allocating on the basis of entity-wide salaries and wages of the employees receiving the benefits. When the allocation method is used, separate allocations must be made to selective groupings of employees, unless the non-Federal entity demonstrates that costs in relationship to salaries and wages do not differ significantly for different groups of employees. 

Costs of insurance, including self-insurance, are allowable provided that the provisions represent reasonable estimates of the liabilities for such compensation. Further, the regulations provide that the types of coverage, extent of coverage, and rates and premiums should not be extraordinary.

§200.431 Compensation—fringe benefits.

            (e) Insurance.  See also §200.447 Insurance and indemnification, paragraphs (d)(1) and (2).

               (1) Provisions for a reserve under a self-insurance program for unemployment compensation or workers’ compensation are allowable to the extent that the provisions represent reasonable estimates of the liabilities for such compensation, and the types of coverage, extent of coverage, and rates and premiums would have been allowable had insurance been purchased to cover the risks. However, provisions for self-insured liabilities which do not become payable for more than one year after the provision is made must not exceed the present value of the liability.

               (2)          Costs of insurance on the lives of trustees, officers, or other employees holding positions of similar responsibility are allowable only to the extent that the insurance represents additional compensation.  The costs of such insurance when the non-Federal entity is named as beneficiary are unallowable.

               (3)          Actual claims paid to or on behalf of employees or former employees for workers’ compensation, unemployment compensation, severance pay, and similar employee benefits (e.g., post-retirement health benefits), are allowable in the     year of payment provided that the non-Federal entity follows a consistent costing policy and they are allocated as indirect costs.

Costs of an automobile furnished by the entity that related to personal use of the automobile are unallowable.

 §200.431 Compensation—fringe benefits.

            (f) Automobiles.  That portion of automobile costs furnished by the entity that relates to personal use by employees (including transportation to and from work) is unallowable as fringe benefit or indirect (F&A) costs regardless of whether the cost is reported as taxable income to the employees.

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You can easily argue that, if the personal use of cars is considered part of the compensation package and is taxable to the employee, there is no reason for rendering the costs as unallowable.  However, this is another of those instances where the rules are the rules, regardless of what you consider reasonable.  Presumably, the government was concerned that it might appear that some individuals abuse the grant rules for their own benefit, and it wanted to prevent that appearance.

Pension Plan Costs

Under the cost principles, pension plan costs are allowable.  The claimed costs must:

  1. Be reasonable,
  2. Have methods of cost allocation that are not discriminatory,
  3. Conform to GAAP (generally accepted accounting principles), and
  4. Be funded for that year within six months after the end of that year. Costs funded after the six-month period (or a later period agreed to by the cognizant agency) are allowable in the year funded.

§200.431 Compensation—fringe benefits.

            (g) Pension Plan Costs. Pension plan costs which are incurred in accordance with the established policies of the non-Federal entity are allowable, provided that:

               (1) Such policies meet the test of reasonableness.

               (2) The methods of cost allocation are not discriminatory.

               (3) For entities using accrual based accounting, the cost assigned to each fiscal year is determined in accordance with GAAP.

               (4) The costs assigned to a given fiscal year are funded for all plan participants within six months after the end of that year. However, increases to normal and past service pension costs caused by a delay in funding the actuarial liability beyond 30 calendar days after each quarter of the year to which such costs are assignable are unallowable.  Non-Federal entity may elect to follow the “Cost Accounting Standard for Composition and Measurement of Pension Costs” (48 CFR 9904.412).

               (5) Pension plan termination insurance premiums paid pursuant to the Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. 1301-1461) are allowable.  Late payment charges on such premiums are unallowable.  Excise taxes on accumulated funding deficiencies and other penalties imposed under ERISA are unallowable.

               (6) Pension plan costs may be computed using a pay-as-you-go method or an acceptable actuarial cost method in accordance with established written policies of the non-Federal entity.

                  (i) For pension plans financed on a pay-as-you-go method, allowable costs will be limited to those representing actual payments to retirees or their beneficiaries.

                  (ii) Pension costs calculated using an actuarial cost-based method recognized by GAAP are allowable for a given fiscal year if they are funded for that year within six months after the end of that year.  Costs funded after the six month period (or a later period agreed to by the cognizant agency for indirect costs) are allowable in the year funded.  The cognizant agency for indirect costs may agree to an extension of the six month period if an appropriate adjustment is made to compensate for the timing of the charges to the Federal government and related Federal reimbursement and the non-Federal entity’s contribution to the pension fund.  Adjustments may be made by cash refund or other equitable procedures to compensate the Federal government for the time value of Federal reimbursements in excess of contributions to the pension fund.

                  (iii) Amounts funded by the non-Federal entity in excess of the actuarially determined amount for a fiscal year may be used as the non-Federal entity’s contribution in future periods.

                  (iv) When a non-Federal entity converts to an acceptable actuarial cost method, as defined by GAAP, and funds pension costs in accordance with this method, the unfunded liability at the time of conversion is allowable if amortized over a period of years in accordance with GAAP.

                  (v) The Federal government must receive an equitable share of any previously allowed pension costs (including earnings thereon) which revert or inure to the non-Federal entity in the form of a refund, withdrawal, or other credit.

            (h) Post-Retirement Health.  Post-retirement health plans (PRHP) refers to costs of health insurance or health services not included in a pension plan covered by paragraph (g) of this section for retirees and their spouses, dependents, and survivors.  PRHP costs may be computed using a pay-as-you-go method or an acceptable actuarial cost method in accordance with established written policies of the non-Federal entity.

               (1) For PRHP financed on a pay-as-you-go method, allowable costs will be limited to those representing actual payments to retirees or their beneficiaries.

               (2) PRHP costs calculated using an actuarial cost method recognized by GAAP are allowable if they are funded for that year within six months after the end of             that year. Costs funded after the six month period (or a later period agreed to by the cognizant agency) are allowable in the year funded.  The Federal cognizant agency for indirect costs may agree to an extension of the six month period if an appropriate adjustment is made to compensate for the timing of the charges to the Federal government and related Federal reimbursements and the non-Federal entity’s contributions to the PRHP fund.  Adjustments may be made by cash refund, reduction in current year’s PRHP costs, or other equitable procedures to compensate the Federal government for the time value of Federal reimbursements in excess of contributions to the PRHP fund.

               (3) Amounts funded in excess of the actuarially determined amount for a fiscal year may be used as the Federal government’s contribution in a future period.

               (4) When a non-Federal entity converts to an acceptable actuarial cost method and funds PRHP costs in accordance with this method, the initial unfunded liability attributable to prior years is allowable if amortized over a period of years in accordance with GAAP, or, if no such GAAP period exists, over a period negotiated with the cognizant agency for indirect costs.

               (5) To be allowable in the current year, the PRHP costs must be paid either to:

                  (i) An insurer or other benefit provider as current year costs or premiums, or

                  (ii) An insurer or trustee to maintain a trust fund or reserve for the sole purpose of providing post-retirement benefits to retirees and other beneficiaries.

               (6) The Federal government must receive an equitable share of any amounts of previously allowed post-retirement benefit costs (including earnings thereon) which revert or inure to the entity in the form of a refund, withdrawal, or other credit.

Severance Pay

Costs of severance pay are allowable to the extent that, in each case, it is required by:

  • law,
  • employer-employee agreement,
  • established policy that constitutes, in effect, an implied agreement on the non‑Federal entity’s part, or
  • circumstances of the particular employment.

§200.431 Compensation—fringe benefits.

            (i) Severance Pay.

               (1) Severance pay, also commonly referred to as dismissal wages, is a payment in addition to regular salaries and wages, by non-Federal entities to workers whose employment is being terminated.  Costs of severance pay are allowable only to the extent that in each case, it is required by (a) law, (b) employer-employee agreement, (c) established policy that constitutes, in effect, an implied agreement on the non-Federal entity’s part, or (d) circumstances of the particular employment.

While, the cost principles provides that severance payments associated with normal turnover are allowable, it requires that such payments shall be allocated to all activities of the governmental unit as an indirect cost.

 §200.431 Compensation—fringe benefits.

               (i)(2) Costs of severance payments are divided into two categories as follows:

                  (i) Actual normal turnover severance payments must be allocated to all activities; or, where the non-Federal entity provides for a reserve for normal severances, such method will be acceptable if the charge to current operations is reasonable in light of payments actually made for normal severances over a representative past period, and if amounts charged are allocated to all activities of the non-Federal entity.

Abnormal or mass severance pay is so rare that measuring costs via an accrual fails to achieve equity to both parties.  For this reason, such accruals are unallowable. Yet, because the federal government acknowledges its duty to share in the costs, the entity may be able to charge mass severance pay to a federal project. However, the entity first is required to obtain federal approval.

§200.431 Compensation—fringe benefits.

                  (i)(2)(ii) Measurement of costs of abnormal or mass severance pay by means of an accrual will not achieve equity to both parties.  Thus, accruals for this purpose are not allowable. However, the Federal government recognizes its obligation to participate, to the extent of its fair share, in any specific payment.  Prior approval by the Federal awarding agency or cognizant agency for indirect cost, as appropriate, is required.

In addition, the cost principles provide that the costs of “golden parachutes,” pension or severance pay packages that exceed the norm for the entity, are unallowable.

§200.431 Compensation—fringe benefits.

               (i)(3) Costs incurred in certain severance pay packages which are in an amount in excess of the normal severance pay paid by the non-Federal entity to an employee upon termination of employment and are paid to the employee contingent upon a change in management control over, or ownership of, the non-Federal entity’s assets, are unallowable.

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Support for Salaries 

In general, employees’ compensation makes up the majority of costs under federal awards.  As such, it cannot be overemphasized that documentation supporting compensation should be kept current and conform to the rules stipulated in the cost principles. This documentation must include support for salary and wage amounts and the time expended on all employees activities.

Under the revised cost principles, the level of documentation is the same for all employee compensation.  This includes compensation:

  • For staff working on a single project or multiple projects;
  • Charged directly or indirectly;
  • Charged to the grant as regular salary; and
  • Used to meet cost-sharing or matching requirement under the award.

Not maintaining such records can result in the disallowance of claimed costs.  Such a disallowance can result in:

  • Wasted time of all parties (grantee, program officials, auditors, etc.) to address the cost disallowance.  Time could be better spent in delivering grant-related services to recipients.

Note:  Based on our experience, correcting problems usually takes at least three times as long as doing the job right the first time!  Shortcuts, while expedient in the short run, often come back to create problems when viewed long term.

  • The need to return disallowed money that already has been claimed.  Instead, such funds could be used in the delivery of grant-related services.
  • The loss of grantee credibility, which could affect future federal awards.

Support Requirements

The revisions to 2 CFR §200.430 are intended to strengthen the requirements for non-Federal entities to maintain high standards for internal controls over salaries and wages while allowing for additional flexibility in how non-Federal entities implement processes to meet those standards.

The documentation requirements related to compensation become more complicated as individuals work on multiple projects within an organization. Working on multiple projects is common. For instance, a grants controller can be in charge of accounting, budgeting, and reporting on many grants.

While the revised rules do not contain the same level of specificity as the previous requirements, they do have a set of requirements that must be met.

§200.430 Compensation—personal services.

            (i) Standards for Documentation of Personnel Expenses

               (1) Charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must:     

                  (i) Be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated;

                  (ii) Be incorporated into the official records of the non-Federal entity;

                  (iii) Reasonably reflect the total activity for which the employee is compensated by the non-Federal entity, not exceeding 100% of compensated activities…;

                  (iv) Encompass both federally assisted and all other activities compensated by the non‑Federal entity on an integrated basis, but may include the use of subsidiary records as defined in the non-Federal entity’s written policy;

                  (v) Comply with the established accounting policies and practices of the non-Federal entity …; and

                  (vii)[3] Support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity        and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity.

               (2) For records which meet the standards required in paragraph (i)(1) of this section, the non-Federal entity will not be required to provide additional support or documentation for the work performed, other than that referenced in paragraph (i)(3) of this section.

Budget estimates made before the services are performed do not constitute support for charges to federal awards under the Regulations.  Such estimates are permissible for interim accounting purposes provided that they are reasonable.  However, they must be adjusted to reflect the actual time usage.

§200.430 Compensation—personal services.

                  (i)(1)(viii) Budget estimates (i.e., estimates determined before the services are performed) alone do not qualify as support for charges to Federal awards, but may be used for interim accounting purposes, provided that:

                     (A) The system for establishing the estimates produces reasonable approximations of the activity actually performed;

                     (B) Significant changes in the corresponding work activity (as defined by the non‑Federal entity’s written policies) are identified and entered into the records in a timely manner. Short term (such as one or two months) fluctuation between workload categories need not be          considered as long as the distribution of salaries and wages is reasonable over the longer term; and

                     I The non-Federal entity’s system of internal controls includes processes to review after-the-fact interim charges made to a Federal awards based on budget estimates.  All necessary adjustment must be made such that the final amount charged to the Federal award is accurate, allowable, and properly allocated.

The revised cost principles also intend to permit alternative methods of accounting for salaries and wages based on achievement of performance outcomes, including in approved instances where funding from multiple programs is blended to more efficiently achieve a combined outcome.

§200.430 Compensation—personal services.

               (i)(5) For states, local governments and Indian tribes, substitute processes or systems for allocating salaries and wages to Federal awards may be used in place of or in addition to the records described in paragraph (1) if approved by the cognizant agency for indirect cost. …

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               (6) Cognizant agencies for indirect costs are encouraged to approve alternative proposals based on outcomes and milestones for program performance where these are clearly documented. Where approved by the Federal cognizant agency for indirect costs, these plans are acceptable as an alternative to the requirements of paragraph (i)(1) of this section.

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The cost principles provide a remedy for those awardees that do not maintain records that meet the standards for documentation.

 §200.430 Compensation—personal services.

               (i)(8) For a non-Federal entity where the records do not meet the standards described in this section, the Federal government may require personnel activity reports, including prescribed certifications, or equivalent documentation that support the records as required in this section.

I should point out that paragraph (i)(8) of §200.430 above essentially reiterates the previous requirements for documenting salaries.  It may well be that a number of non-Federal agencies will decide to continue using the personnel activity reports rather than taking advantage of the greater flexibility in the revised cost principles.  They may conclude that they have a system with which their employees are familiar and a system that federal agencies have found acceptable as pass-through entities.  As a result, utilizing personnel activity reports may provide a low-risk option.

Compensation as Cost Sharing

Compensation to employees used in meeting cost sharing or matching costs under federal awards must be supported in the same manner as those claimed as allowable costs under federal awards.

 §200.430 Compensation—personal services.

               (i)(4) Salaries and wages of employees used in meeting cost sharing or matching requirements on Federal awards must be supported in the same manner as salaries and wages claimed for reimbursement from Federal awards.

In some instances, outsiders may contribute their time to the organization.  As an example, many nonprofits operate a “Meals on Wheels” program, which provides subsidized meals to the elderly.  Often, the “Meals on Wheels” grantees are churches, synagogues, community action agencies, etc., and their members prepare, serve, and deliver the meals.  The value of such “in-kind” contributions cannot be charged directly to a grant but can be claimed as cost sharing.

§200.434 Contributions and donations.

            (b) The value of services … donated to the non-Federal entity may not be charged to the Federal award either as direct or indirect (F&A) cost. The value of donated services and property may be used to meet cost sharing or matching requirements (see §200.306 Cost sharing or matching)….

            (c) Services donated or volunteered to the non-Federal entity may be furnished to a non‑Federal entity by professional and technical personnel, consultants, and other skilled and unskilled labor.  The value of these services is not allowable either as a direct or indirect cost.  However, the value of donated services may be used to meet cost sharing or matching requirements in accordance with the provisions of §200.306 Cost sharing or matching.

            (d) To the extent feasible, services donated to the non-Federal entity will be supported by the same methods used to support the allocability of regular personnel services.

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Note paragraph (d) above.  Usually, the grantee is unable to document the contributed time in the same way as it documents the salaries that it pays directly.  However, the cost principles will expect that the grantee will provide adequate documentation for the in-kind services contributed.  The three essentials to document are:

  • The type of services provided,
  • The amount of time provided, and
  • The reasonable salary rate to be claimed. (Be sure you can document the basis of the salary rate.)

Additional Rules for Nonprofits

For nonprofit organizations, there are additional rules regarding the valuation of donated services.

§200.434 Contributions and donations.

               (e) The following provisions apply to nonprofit organizations. The value of services           donated to the nonprofit organization utilized in the performance of a direct cost activity must be considered in the determination of the non-Federal entity’s indirect cost rate(s) and, accordingly, must be allocated a proportionate share of applicable indirect costs when the following circumstances exist:

                  (1) The aggregate value of the services is material;

                  (2) The services are supported by a significant amount of the indirect costs incurred by the non-Federal entity;

                     (i) In those instances where there is no basis for determining the fair market value of the services rendered, the non-Federal entity and the cognizant agency for indirect costs must negotiate an appropriate allocation of indirect cost to the services.

                     (ii) Where donated services directly benefit a project supported by the Federal award, the indirect costs allocated to the services will be considered as a part of the total costs of the project. Such indirect costs may be reimbursed under the Federal award or used to meet cost sharing or matching requirements.

               (f) Fair market value of donated services must be computed as described in §200.306 Cost sharing or matching.

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Summary

For most grantees, compensation for personal services is usually the largest cost item in a grant budget.  Therefore, grantees need to be particularly careful in documenting salaries and wages.

Similar to all costs, salary charges must be reasonable, consistently treated, and documented in accordance with generally accepted practice of the governmental unit or nonprofit organization. Nonprofit grantees, in particular, must be diligent in assuring that compensation for trustees, directors, officers, etc., is reasonable and that the services are related to the specific grant to which the costs are charged.

The revised cost principles require a strong system to support salaries and wages.  If an entity does not comply with the new requirements, it will have to document salaries and wages in accordance with the previous cost principles.  That is, it will have to provide personnel activity reports for staff.

Salary charges for cost sharing or matching have the same requirements as regular salary expenses.  Compensation paid to employees used in meeting cost sharing or matching costs under federal awards must be supported in the same manner as those claimed as allowable costs under federal awards.

Please note that, no matter the rules followed regarding time distribution and payroll charges, you must document, document, document!



[1] §200.430 Compensation—personal services.

[2] Entities that usually use accrual accounting can still use the cash basis of accounting for time not worked.

[3] Authors’ Note – there is no paragraph “(vi) between paragraphs (v) and (vii) in this section of the Regulations.

 

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