Title 2: Grants and Agreements PART 225 COST PRINCIPLES FOR STATE, LOCAL, AND INDIAN TRIBAL GOVERNMENTS (OMB A 87)

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1 GHSA and NHTSA examine 2 CFR 225 May June 2010 Discussion of time keeping requirements in support of salaries, wages and related costs 8/5/2010rev Title 2: Grants and Agreements PART 225 COST PRINCIPLES FOR STATE, LOCAL, AND INDIAN TRIBAL GOVERNMENTS (OMB A 87) (excerpts in black, highlights in bold underline and annotations in blue) Appendix A to Part 225 General Principles for Determining Allowable Costs B. Definitions 2. Award means grants, cost reimbursement contracts and other agreements between a State, local and Indian tribal government and the Federal Government. 11. Cost objective means a function, organizational subdivision, contract, grant, or other activity for which cost data are needed and for which costs are incurred. Q1: What constitutes an Award or cost objective for highway safety program purposes? A: Each of the sections of Title 23, Chapter 4, Highway Safety ( ) and Chapter 1, Federal Aid Highways (153, 154, 157, 158, 161, 163, 164) and the Un codified sections of SAFETEA LU (1906, 2010, and 2011) are separate and distinct awards, I.E. S402 is an award and S.410 is another award. Further, each constitutes a discrete cost objective. Though alike in their traffic safety focus, each has unique match and funding limitations that may be compromised with inaccurate salary and wage charges. Personnel activity reports are required whenever salaries and wages are being split charged to multiple awards. Harm to one or more of the award programs may result if the split is inaccurate. Examples: A SHSO employee that works on multiple program priorities but charges all costs to a single award may be considered as addressing one cost objective. In these cases, cost data assigned to the different priorities may be based on an informed, logical proportion derived from a representative sample of time spent on each or on the number of projects managed or proportion of total funds in each program area. A manager spends time working on multiple 402 priority areas or on managing S.405, 410, and 2010 programs but 100% of her time is billed to the S 402 program but split coded in GTS among 402OP, 402AL and 402MC. The documentation test for this type of distribution would be less robust and stringent than a personnel activity report. Here, a before the fact proportion is acceptable as the employee is charging time worked under a single award/cost objective. The proportion coded to each priority area may be based on the number of projects in each area or amount of funding assigned to each priority area. Since cost data is being reported in GTS, the SHSO should take care to be as accurate as possible and to periodically examine it for continued accuracy and amended when a significant change occurs. This before the fact distribution should be included in the HSP. It is important that we ensure these cost ratios are 1

2 as representative as possible so that information on funds expended for occupant protection, impaired driving, police traffic services and other priority funding areas is conveyed accurately to all GTS data users, including Congressional committees. In a similar case, a manager spends time working on multiple 402 priority areas or on managing S.405, 410, and 2010 programs and charges his divided time to each award. In this case, a personnel activity report is required because each activity is charged to a separate award. The documentation must reflect an after the fact distribution, must be prepared at least monthly, and must be signed by the employee. So too, if any part of the employee s time is spent on an activity that is unallowable under the highway safety program, then a personnel activity report is required. Additional reporting requirements for personal activity reports, and substitute systems are found in 2 CFR 225, Appendix B, 8h 5 and 6. Q2: What about 402 P&A? A: When a manager s time is split coded and charged to P&A and program(s), the procedures found in 23 CFR apply (reprinted on page 4). The State, at its option, may allocate salary and related costs of SHSO employees to a combination of P&A administration and planning functions and program management functions of a program area. Costs must be allocated based on actual time worked on an activity. The SHSO must keep accurate time records showing the work activities for each employee. The State s record keeping system must be approved by the appropriate NHTSA official. This may be in the HSP or in a separate document retained for review and audit. This approval step is required by 23 CFR d. Inaccurate records may affect the matching requirement of P&A and have a negative effect on Federal costs. Q3: How often must the SHSO validate a before the fact time distribution? A: If the time charged takes place exclusively within one award, then it must be adjusted only when a significant change in workload occurs. No credit/debit entries for past reimbursements will be necessary. Revisions to the P&A/Program split must be approved, as indicated in the previous question. If the time charged takes place between two awards or among several awards, or between eligible and unallowable activity, then it must be supported by personnel activity reports that must be prepared at least monthly. Q4: 2 CFR Part 225, Appendix B, subpart 8(h), 4 requires personnel activity reports or equivalent documentation for employees working on multiple activities or cost objectives. Please give a highway safety program example? A: The term activities is not defined in 2 CFR 225. For the purposes of requiring a personal activity report, NHTSA guidance sets the multiple activities test at the award level. 2

3 Q5: Has anything changed for employees that work solely on a single Federal award or cost objective? A: No. Where employees work solely on a single Federal award or cost objective, charges for their salaries and wages will be supported by periodic certifications. These certifications will be prepared at least semi annually and will be signed by the employee or supervisory official having firsthand knowledge of the work performed by the employee. However, according to ASMB C 10 this requirement can be met through certain payroll codings and time and attendance certifications pursuant to payroll authorizations. For example, if (1) employees work in a dedicated function; (2) their potential assignment to multiple programs/activities is not within the authority, function, or purview of the supervisor responsible for certifying payroll time and attendance; and (3) the employee is coded to a dedicated function not benefitting multiple functions or programs, the payroll certification shall be accepted in lieu of the semi annual certification of time and effort. Q6: Where can the SHSO find a listing of their State s cognizant agency (CA)? A: Appendix 2 of ASMB C 10 this appendix has not been updated by DHHS. States seeking information on their cognizant agency may ask their State Comptroller, Budget or Audit offices. The ASMB C 10, 2 8 states that the US Department of Health and Human Services is cognizant for all state wide allocation plans. For those entities not listed by OMB, cognizance is generally established based on the Federal agency providing the greatest dollar support that is subject to indirect cost rates. Further, C 10, states that cognizant agencies for major local governments are assigned according to the predominance of Federal funding, although other factors such as availability of resources and past history may also be considered. Q7: Can the CA designation be transferred to the NHTSA RA for the purposes of timekeeping (ref. Appendix B to Part 225, 8h Support of Salaries and Wages)? A: NHTSA will not seek this authority at this time. Q8: Can NHTSA recommend systems that meet this standard for distributions supported by personnel activity reports, an equivalent, and/or substitute systems? A: NHTSA can provide examples of personnel activity reports currently being used by SHSOs. Send requests to the NHTSA Regional Office. We are unaware of approved statistical sampling systems or substitute systems. States should send proposed systems to the cognizant agency for review and approval. Q9: Can NHTSA approve a narrative in the HSP Program Management section that describes the salaries and wages distribution application and justification for use as a substitute system for multiple award cost sharing? A: NHTSA defers to the cognizant agency for the purpose of approving personnel activity report equivalents (statistical sampling system or other substitute system) when billing time to multiple awards. 3

4 23 CFR Procedures. (c) A State at its option may allocate salary and related costs of State highway safety agency employees to one of the following: (1) The administration and planning functions in the P&A module; (2) The program management functions in one or more Program modules; or (3) A combination of administration and planning functions in the P&A module and the program management functions in one or more program modules. (d) If an employee is principally performing administration and planning functions under a P&A module, the total salary and related costs may be allocated to the P&A module. If the employee is principally performing program management functions under one or more program modules, the total salary and related costs may be charged directly to the appropriate module(s). If an employee is spending time on a combination of administration and planning functions and program management functions, the total salary and related costs may be charged to the appropriate module(s) based on the actual time worked under each module. If the State highway safety agency elects to allocate costs based on actual time spent on an activity, the State highway safety agency must keep accurate time records showing the work activities for each employee. The State's record keeping system must be approved by the appropriate FHWA and NHTSA officials. (e) Those tasks and related costs contained in the P&A module, not defined as P&A costs under (d) of this part, are not subject to the planning and administration cost matching requirement. Note: all timekeeping requirements apply to sub recipients, as well the primary recipient. See page 4 for the citation. Appendix A to Part 225 General Principles for Determining Allowable Costs A. Purpose and Scope 3. Application. a. These principles will be applied by all Federal agencies in determining costs incurred by governmental units under Federal awards (including subawards) except those with (1) publicly financed educational institutions subject to, 2 CFR part 220, Cost Principles for Educational Institutions (OMB Circular A 21), and (2) programs administered by publicly owned hospitals and other providers of medical care that are subject to requirements promulgated by the sponsoring Federal agencies. However, 2 CFR part 225 does apply to all central service and department/agency costs that are allocated or billed to those educational institutions, hospitals, and other providers of medical care or services by other State and local government departments and agencies. b. All subawards are subject to those Federal cost principles applicable to the particular organization concerned. Thus, if a subaward is to a governmental unit (other than a college, university or hospital), 2 CFR part 225 shall apply; if a subaward is to a commercial organization, the cost principles applicable to commercial organizations shall apply; if a subaward is to a college or university, 2 CFR part 220 (Circular A 21) shall apply; if a subaward is to a hospital, the cost principles used by the Federal awarding agency for awards to hospitals shall apply, subject to the provisions of subsection A.3.a. of this Appendix; if a subaward is to some other non profit organization, 2 CFR part 230, Cost Principles for Non Profit Organizations (Circular A 122), shall apply. 4

5 Additional background and discussion (select Q&As from above are repeated with additional context): 6. Cognizant agency means the Federal agency responsible for reviewing, negotiating, and approving cost allocation plans or indirect cost proposals developed under 2 CFR part 225 on behalf of all Federal agencies. OMB publishes a listing of cognizant agencies. Q6: Where can the SHSO find a listing of their State s cognizant agency (CA)? A: Appendix 2 of ASMB C 10 this appendix has not been updated by DHHS. States seeking information on their cognizant agency may ask their State Comptroller, Budget or Audit offices. The ASMB C 10, 2 8 states that the US Department of Health and Human Services is cognizant for all state wide allocation plans. For those entities not listed by OMB, cognizance is generally established based on the Federal agency providing the greatest dollar support that is subject to indirect cost rates. Further, C 10, states that cognizant agencies for major local governments are assigned according to the predominance of Federal funding, although other factors such as availability of resources and past history may also be considered. Q7: Can the CA designation be transferred to the NHTSA RA for the purposes of timekeeping (ref. Appendix B to Part 225, 8h Support of Salaries and Wages)? A: NHTSA will not seek this authority at this time. C. Basic Guidelines e. Be consistent with policies, regulations, and procedures that apply uniformly to both Federal awards and other activities of the governmental unit. f. Be accorded consistent treatment. A cost may not be assigned to a Federal award as a direct cost if any other cost incurred for the same purpose in like circumstances has been allocated to the Federal award as an indirect cost. j. Be adequately documented. Comment: Whatever a SHSO decides to do, it must be consistent with how other State agencies treat similar costs and must be documented adequately. 2 CFR 225 places high emphasis on consistency of treatment for similar cost items throughout State government whether it be for indirect vs. direct rate charges or timekeeping. D. Composition of Cost 1. Total cost. The total cost of Federal awards is comprised of the allowable direct cost of the program, plus its allocable portion of allowable indirect costs, less applicable credits. 2. Classification of costs. There is no universal rule for classifying certain costs as either direct or indirect under every accounting system. A cost may be direct with respect to some specific service or function, but indirect with respect to the Federal award or other final cost objective. Therefore, it is essential that each item of cost be treated consistently in like circumstances either as a direct or an indirect cost. Guidelines for determining direct and indirect costs charged to Federal awards are provided in the sections that follow. E. Direct Costs 1. General. Direct costs are those that can be identified specifically with a particular final cost objective. 2. Application. Typical direct costs chargeable to Federal awards are: 5

6 a. Compensation of employees for the time devoted and identified specifically to the performance of those awards. 6

7 Appendix B to Part 225 Selected Items of Cost h. Support of salaries and wages. These standards regarding time distribution are in addition to the standards for payroll documentation. (1) Charges to Federal awards for salaries and wages, whether treated as direct or indirect costs, will be based on payrolls documented in accordance with generally accepted practice of the governmental unit and approved by a responsible official(s) of the governmental unit. (2) No further documentation is required for the salaries and wages of employees who work in a single indirect cost activity. (3) Where employees are expected to work solely on a single Federal award or cost objective, charges for their salaries and wages will be supported by periodic certifications that the employees worked solely on that program for the period covered by the certification. These certifications will be prepared at least semi annually and will be signed by the employee or supervisory official having firsthand knowledge of the work performed by the employee. (4) Where employees work on multiple activities or cost objectives, a distribution of their salaries or wages will be supported by personnel activity reports or equivalent documentation which meets the standards in subsection 8.h. (5) of this appendix unless a statistical sampling system (see subsection 8.h.(6) of this appendix) or other substitute system has been approved by the cognizant Federal agency. (note: 8.h.5 and 6 are excerpted below) Q8: Can NHTSA recommend systems that meet this standard for distributions supported by personnel activity reports, an equivalent, and/or substitute systems? A: NHTSA can provide examples of personnel activity reports currently being used by SHSOs. Send requests to the NHTSA Regional Office. We are unaware of approved statistical sampling systems or substitute systems. States should send proposed systems to the cognizant agency for review and approval. 2.3 Alternative Methods of Cost Recovery The Circular permits Federal agencies to work with governmental units that wish to test alternative methods for cost recovery in all or a portion of a Federal award. Such methods include, where permitted, fixed amount awards, fee for service arrangements, and pre determined indirect cost rates. Alternative methods must comply with the 2 CFR 225 "benefits received" concept. (avoid disproportional effort for benefit received) Such documentary support will be required where employees work on: (a) More than one Federal award, (b) A Federal award and a non Federal award, (c) An indirect cost activity and a direct cost activity, (d) Two or more indirect activities which are allocated using different allocation bases, or (e) An unallowable activity and a direct or indirect cost activity. 7

8 2 1 2 CFR 225 now permits testing of alternative methods of reimbursement, such as fee for service. Under what circumstances may such alternative systems be used? [Att. A, A.2.b] Alternative reimbursement systems for administrative costs might involve a rate system whereby a single rate is paid for outputs, such as the number of programmatic services performed. As with billed services, such alternatives are acceptable for payment purposes, provided that the payments are periodically reconciled to actual costs. Reimbursement systems not based on costs are only allowable where the Federal funding legislation permits such a practice. However, where it can be demonstrated clearly that an alternative system will result in less costs to the Federal Government, the cognizant/awarding agency may deem that such a system satisfies statutory language limiting reimbursement to "expenditures." 3.2 Prior Approval In the past, because of concerns about the allocability of certain items of cost, OMB usually required that these items be subject to the prior approval of Federal agencies. The 1995 revision to the Circular changed the frequency and precision with which these approvals must be obtained. First, through definition changes and other means, it streamlined the award administration process by reducing the number of transactions subject to prior approval. Second, it expanded the actual definition of what constitutes approval. Under the new definition, the term "approval or authorization of the awarding or cognizant Federal agency" means "documentation evidencing consent prior to incurring a specific cost." However, the definition goes on to state that if costs are specifically identified in a Federal award document, approval of the document constitutes approval of the costs. If the costs are covered by a state/local wide cost allocation plan or an indirect cost rate proposal, approval of the plan constitutes the approval of costs requiring prior approval. The addition of these policies in the 1995 revision is intended to preclude prior approval seeking for costs requiring prior approval when a cost has already been considered and analyzed as part of another review process. While not specifically mentioned in the Circular, most Federal awards will also identify the official(s) of the awarding agency who are authorized to issue approvals. Approval should always be documented in writing by the authorized Federal official. Q9: Can NHTSA approve a narrative in the HSP Program Management section that describes the salaries and wages distribution application and justification for use as a substitute system for multiple award cost sharing? A: NHTSA defers to the cognizant agency for the purpose of approving personnel activity report equivalents (statistical sampling system or other substitute system) when billing time to multiple awards. 8

9 Notes from the ASMB C 10 Q&A: re general costs of government that may include payroll record keeping: costs allocable to general or routine costs of government continue to be unallowable under the general provisions of Attachment B, paragraph 23, "General Government Expenses." ASMB C 10 Q&A What is a personnel activity report (PAR)? [Att. B, 11.h] o Note there are several references in the ASMB C 10 document to Att. B, 11.h. The correct 2 CFR 225 reference is Att. B, 8.h. A PAR is a timesheet or log maintained by the employee which contemporaneously accounts for 100% of their time. The objective is to identify effort spent on multiple activities or programs. Breaks, meals, generic training, etc. can all be coded to a single activity such as "admin" or "other," which in turn would be reallocated to the activities or programs. In limited situations a PAR can be a time certification relying on an informal log or calendar notations. For example, an attorney working in an agency general counsel office routinely works on general management activities, which are allowable, and his time is charged 100% to an indirect cost center. However, in one month he works three weeks with the state attorney general on a lawsuit against the Federal Government. For that month, it would be acceptable for him to complete an end of the month certification reflecting a 25% distribution of time to the IDC pool and 75% to a cost center representing unallowable legal costs (pursuing claims against the Federal Government). Caution must be exercised when using time certifications. Their use is only suitable where few activities are involved and the effort involved covers long periods without diversions to other efforts. Where effort is expended on a number of activities with constant variations throughout the day as well as from day to day, a month end certification would be unacceptable. It would be at best a rough estimate of time expended and would not meet the requirement of an afterthe fact reporting of actual effort Attachment B, paragraph 11.h establishes acceptable standards for a personnel activity reporting (PAR) system. One standard requires an employee signature when working on multiple activities. If a government component maintains an ADP on line PAR system which is fully computerized and paperless, would a "digital signature" (occurring when an employee logs on to the PAR system with a logon ID and a secret password) constitute an acceptable alternative to an employee signature? [Att. B, 11.h] As long as the governmental unit can demonstrate and document that only the employees' actions would result in the identification of the activities to be charged, and that it complies with the other criteria in Attachment B, paragraph 11.h(5), the procedure would be acceptable Some central services activities are billed based on the service hours provided to user agencies. Circular A 87 requires that "personnel activity reports or equivalent documentation...must reflect an after the fact distribution of the actual activity of each employee." Based on the requirements at Attachment B, paragraph 11.h, are timesheets reflecting actual effort required or are monthly estimates sufficient? [Att. B, 11.h] If an employee is assigned to and expected to work solely in one billed activity (cost objective), only periodic certifications, as required by Attachment B, paragraph 11.h(3), must be generated. However, if that employee is assigned to a billed activity in which multiple rates are developed, then personnel activity reports or equivalent documentation set forth in 11.h(4) and (5) are required. Monthly estimates can only be used for interim billing purposes. Such billings must be 9

10 adjusted to actual effort based on the criteria set forth in 11.h(5)(e). 10

11 3 19 If an employee works on only one Federal award, is a certification required? [Att. B, 11.h(3)] Yes. However, this requirement can be met through certain payroll codings and time and attendance certifications pursuant to payroll authorizations. For example, if (1) employees work in a dedicated function; (2) their potential assignment to multiple programs/activities is not within the authority, function, or purview of the supervisor responsible for certifying payroll time and attendance; and (3) the employee is coded to a dedicated function not benefitting multiple functions or programs, the payroll certification shall be accepted in lieu of the semiannual certification of time and effort. Q: Can the SHSO exercise this option for appropriate SHSO employees? A: Yes Will an employee working on two indirect cost activities subject to different allocation bases be required to maintain a personnel activity report? [Att. B, 11.h(4)(d)] Attachment B, paragraph 11.h(4)(d) requires that employees in these circumstances must complete personnel activity reports, whether through time sheets or some form of statistical sampling. References from above: 8. Compensation for personal services. h. Support of salaries and wages. These standards regarding time distribution are in addition to the standards for payroll documentation. (5) Personnel activity reports or equivalent documentation must meet the following standards: (a) They must reflect an after the fact distribution of the actual activity of each employee, (b) They must account for the total activity, for which each employee is compensated, (c) They must be prepared at least monthly and must coincide with one or more pay periods, and (d) They must be signed by the employee. (e) Budget estimates or other distribution percentages determined before the services are performed do not qualify as support for charges to Federal awards but may be used for interim accounting purposes, provided that: (i) The governmental unit's system for establishing the estimates produces reasonable approximations of the activity actually performed; (ii) At least quarterly, comparisons of actual costs to budgeted distributions based on the monthly activity reports are made. Costs charged to Federal awards to reflect adjustments made as a result of the activity actually performed may be recorded annually if the quarterly comparisons show the differences between budgeted and actual costs are less than ten percent; and (iii) The budget estimates or other distribution percentages are revised at least quarterly, if necessary, to reflect changed circumstances. Note: element (5) above applies unless a statistical sampling system or other substitute system has been approved. See the next element (6) for a discussion on sampling systems and substitute systems. 11

12 (6) Substitute systems for allocating salaries and wages to Federal awards may be used in place of activity reports. These systems are subject to approval if required by the cognizant agency. Comment: GHSA notes that this seems counter to section (4) that states the substitute system must be approved by the CA. NHTSA has requested clarification from HHS. Such systems may include, but are not limited to, random moment sampling, case counts, or other quantifiable measures of employee effort. (a) Substitute systems which use sampling methods (primarily for Temporary Assistance to Needy Families (TANF), Medicaid, and other public assistance programs) must meet acceptable statistical sampling standards including: (i) The sampling universe must include all of the employees whose salaries and wages are to be allocated based on sample results except as provided in subsection 8.h.(6)(c) of this appendix; (excerpted below) (ii) The entire time period involved must be covered by the sample; and (iii) The results must be statistically valid and applied to the period being sampled. (b) Allocating charges for the sampled employees' supervisors, clerical and support staffs, based on the results of the sampled employees, will be acceptable. (c) Less than full compliance with the statistical sampling standards noted in subsection 8.h.(6)(a) of this appendix may be accepted by the cognizant agency if it concludes that the amounts to be allocated to Federal awards will be minimal, or if it concludes that the system proposed by the governmental unit will result in lower costs to Federal awards than a system which complies with the standards. Comment: GHSA is seeking to have the NHTSA RA designated in lieu of the CA for this purpose I.E. approving equivalent documentation or a sampling system in place of a personnel activity report when required for working on multiple awards. As stated previously in this discussion, NHTSA defers to the cognizant agency for this purpose (multiple award time splitting that requires a personal activity report). Excerpt from ASMB C Relationship of Circular A 87 to Other Cost Principles Determining which cost principles apply to a particular recipient entity is governed by the type of recipient. The chart below illustrates the cost principles and their applicability, by recipient type. The applicability of the cost principles flows through to the subrecipient. EXAMPLE: The State of Macedonia receives a Federal award: Macedonia subawards funds to Meerkat County: Meerkat County subawards funds to ProYouth, a nonprofit: A 87 applies A 87 applies A 122 applies In other words, the type of recipient or subrecipient determines the applicable cost principles, regardless of whether funds are received directly from the Federal Government or through a subaward from a primary recipient. The exception to the above is where statutory or regulatory provisions applicable to the prime recipient are more restrictive than the cost or administrative principles applicable to the subrecipient. For example, many awards to nonprofits permit the nonfederal share to be met through in kind matching rather than matching actual expenditures. Where the matching of actual expenditures is required of the prime recipient, then subrecipients must also match in this same manner. 12