Cost principles for organizations that receive federal grants have traditionally existed in silos. Educational institutions, state and local governments and non-profit organizations faced different cost principle requirements under their respective Office of Management and Budget (OMB) Circulars. The OMB’s latest guidelines do away with the separation among the three entity types and merge them into one combined set of cost principles.

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Cost principles for organizations that receive federal
grants have traditionally existed in silos. Educational
institutions, state and local governments and non-
profit organizations faced different cost principle
requirements under their respective Office of
Management and Budget (OMB) Circulars. The
OMB’s latest guidelines do away with the separation
among the three entity types and merge them into
one combined set of cost principles.
Released in December 2013, “Uniform Administrative
Requirements, Cost Principles, and Audit
Requirements for Federal Awards” consolidates
several OMB Circulars and their cost principles. The
new uniform grant guidance creates several new
provisions and requirements designed to standardize
the reporting requirements for federal grant recipients.
Included in the changes are streamlined cost principle
requirements.
Though not the first attempt at standardizing cost
principles—in 2004 the federal government created
consistent definitions of certain cost principle items—
the uniform grant guidance brings the broadest
changes to date. Organizations subject to OMB
Circulars A-21, A-87 and A-122 will share the same
cost principle requirements for all new federal awards
and additional funding to existing awards made after
December 26, 2014.
July 2014
OMB Grant Reform Standardizes Cost Principles
The expectations under the uniform grant guidance
remain the same as the current regulations.
Grant recipients are responsible for using sound
management procedures and charging practices.
Organizations must not benefit from federal
assistance. Total recovery calculations equal the sum
of allocable costs and allowable indirect costs minus
any applicable credits. In determining whether costs
can be retained, recipients must demonstrate the
costs are: necessary, reasonable and allocable; not
charged elsewhere; adequately documented; conform
to limitations, federal law and grant terms; consistent
with organizational policies; consistently treated
and determined in accordance with U.S. generally
accepted accounting principles (GAAP).
Despite the foundations of the cost principles staying
the same, certain cost principles will undergo
changes. Organizations should carefully consider
their treatment of the following cost principles to
ensure they are prepared for implementation in late
2014.
Compensation – Personal Services
Audits frequently uncover issues in the documentation
of personnel expenses because of the complex rules
and documentation requirements. The uniform grant
guidance makes a number of changes to allow for
more flexibility and consistency in the documentation
of personnel expenses.

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Charges for salaries and wages must:
• be based on records that reflect the work
performed;
• be supported by a system of internal controls
that provide reasonable assurance the amounts
charged are accurate, allowable and properly
allocated; and
• beincorporatedintoofficialrecordsandreasonably
reflect total activity for which employees are
compensated.
Further guidance may be needed to clarify how these
changes will be implemented. For instance, with the
salary charges based on the work performed, the
language leaves questions about whether the records
of work performed could and should be time cards
or perhaps after-the-fact documentation is acceptable
as well. The guidance also does not specify how often
organizations should keep those records (weekly,
monthly, quarterly, etc.).
Organizations should take a good look at their
documentation for compensation of personnel
services to determine if they will be compliant with the
new uniform grant guidance.
Depreciation
OMB Circulars A-21, A-87 and A-122 currently allows
organizations to either use the use allowance method
or negotiate an allowable cost amount after an asset
has been fully depreciated. The grant reform does
away with these provisions and the allowable costs will
be strictly depreciation expenses over the life of the
asset. Although this is a simpler approach, this may
impact allowable costs if assets are fully depreciated.
Equipment and Other Capital Expenditures
The treatment of computing devices has historically
been an ambiguous area under the OMB Cost
Circulars, and the new guidance seeks to clarify how
these costs should be treated.
Computing devices, including tablets, laptops and
smartphones will now be considered supplies if the
acquisition cost falls under whichever is lower, the
organization’s capitalization threshold or $5,000. The
device’s useful life is not considered.
Organizations with capitalization thresholds under
$5,000 may want to revisit their policy and consider
increasing to allow more flexibility.
Proposal Costs
In the current OMB Circulars, A-21 and A-87
allow educational institutions and state and local
governments to classify proposal costs as an indirect
cost, but A-122 had no such provision for not-for-
profit organizations. The new uniform grant guidance
allows all three entity types to classify all costs related
to preparing bids, proposals or applications for federal
and non-federal awards as indirect costs even if the
proposal proves unsuccessful.
More Changes Expected
The above cost principles number among several
that will undergo changes in the new uniform grant
guidance. For the full list and additional specifics
about the changes, organizations should carefully
review the new uniform grant guidance. The OMB
also published a Cost Principles Comparison Chart,
which shows the differences between OMB Circulars
A-21, A-87 and A-122 and the new guidelines, which
will help organizations to review a crosswalk of the
changes from the existing to the new cost principles.

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
For More Information
We will keep you up to date and report any additional
information OMB issues for the uniform grant
guidance. For further questions on how these new
requirements will impact your organization, please
contact Michelle Spriggs of MHM’s Professional
Standards Group or your MHM service professional.
You can reach Michelle at mspriggs@cbiztofias.com
or 774.206.8336.