For most nonprofit organizations, personnel salary is among the largest costs of federal grants. Proper documentation of charges for compensation, or “time and effort reporting,” is critical for proper grant compliance and the avoidance of audit findings or cost disallowances.
The new 2 CFR 200 guidance released in 2014 was the first update to these rules in approximately 40 years, in addition to some changes to the old A-122 guidance. We will highlight the key requirements of documenting and charging costs, in addition to some of the changes in the guidance and common problems.
Michael Brustein, of Brustein & Manasevit, recently gave an presentation on Time and Effort Certification under the Uniform Grant Guidance Update, which highlighted ten common problems he has encountered when “time and effort” reporting. They are as follows:
- Paying employees based on budgets, not effort – Federal grant rules require employees to be reimbursed based upon actual recorded effort on grants not merely budgeted amounts.
- Developing position descriptions or budgets based on funding source – Base the position description based on the funding source. Employees must be paid based on actual recorded effort, not on the funding source.
- Not understanding cost objectives – Effort must be recorded towards specific cost objectives, not just to a specific grant. For example, a single grant may have three different cost objectives.
- Relying on esoteric percentages – This is a similar theme to the concept that an employee’s time is allocated based on percentages of grant funding. For instance, 13.5% to one grant and 27.7% to another grant.
- Managers not taking the process seriously – Managers should make sure that employees record the actual time they spent on different cost objectives.
- Using real time software and exhausting federal dollars prior to end of funding period – Cost charges on federal awards must be continuously monitored to make sure you do not exhaust all dollars before the end of the funding period. You may end up needing the funds to make payroll.
- Executing certifications prior to the end of any funding period – Certifying of time needs to occur after the end of the period that is being certified. For example, time for August cannot be certified on August 28th.
- Adopting overly cumbersome systems – Any system that is used by the organization should be understood by all employees. Don’t make it so difficult that they don’t know where to charge their time.
- 100% means 100% – The total of time charges must always equal 100% of your time. You cannot charge time exceeding 100% of your time. Even if you work overtime you could not say that you spent 80% of your time on one particular federal project and 40% of your time on a privately funded project.
- Not appreciating the scope of the False Claims Act – Incorrectly charging time to federal awards means that you are making a false claim against the government, which carries criminal penalties.
Per CFR 200.403, to be allowable as a charge to a federal award the cost must be :
- Necessary, reasonable, and allocable
- Conform with federal law and grant terms
- Be consistent with state and local policies
- Consistently treated
- In accordance with GAAP
- Not included as match
- Net of applicable credits
- Adequately documented
Direct costs are those costs that can be identified specifically with a particular final cost objective, such as a federal award, other internally or externally funded activity, or can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect (F&A) costs.
The guidance at CFR 200.413(c) also specifically states that the salaries of administrative and clerical staff should normally be treated as indirect (F&A) costs. Direct charging of these costs may be appropriate only if all of the following conditions are met:
- Such services are integral to the activity
- Individuals can be specifically identified with the activity
- Such costs are explicitly included in the budget
- Coats are also not recovered as indirect
With this in mind, what is necessary to document salaries and wages?
Per CFR 200.430, charges to federal awards for salaries and wages must be based on records that accurately reflect the work performed. They must also:
- Be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated.
- Be incorporated into the official records of the non-federal entity.
- Reasonably reflect the total activity for which the employee is compensated by the non-federal entity, not exceeding 100% of compensated activities.
- 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.
- Comply with the established accounting policies and practices of the non-federal entity.
- 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.
- Budget estimates, or estimates determined before the services are performed, alone do not qualify as support for charges to federal awards. However, they may be used for interim accounting purposes in certain circumstances. If estimates are used for interim reporting, the nonprofit system of internal controls must include processes to adjust these after-the-fact so that the final amount charged to the federal award is accurate, allowable, and properly allocated. In theory not much has changed, but certain items are left out. Nowhere does it say that the personnel activity reports or timesheets must be prepared at least monthly or that they must be signed by the employee or a responsible supervisory official. This is most likely in response to electronic systems replacing paper ones.
Proper documentation of personnel compensation is very important to properly administer federal grants. Please do not hesitate to contact Aronson’s Nonprofit & Association Services Group with any questions you may have at 301.231.6200.