October 30, 1990
Subject: Guidelines for Implementing the Allocation and Documentation Pilot Under the FDP
The Allocation and Documentation Pilot was initiated under the Federal Demonstration Project effective July 15, 1990. Information on the Pilot was distributed in Supplement No. 5 to Contract and Grant Memo 89-27 (July 6, 1990). The wording of the Pilot raised questions about how to interpret and implement the Pilot and the Research Administration Office and Corporate Accounting are jointly issuing the attached sets of guidelines to assist the campuses.
As promised in Supplement No. 5 to Contract and Grant Memo 89-27, we are sending along a Question and Answer sheet (see Attachment 1). This sheet was signed out by the co-chairs of the Task Group that developed the Pilot, David Mears/UC and Geoff Grant/NIH Grants Policy Office. The questions and answers were written as general guidance for all FDP schools.
More specific guidelines and suggestions, addressing concerns raised by campus Extramural Funds Accounting units, are also attached (see Attachment 2). Although this document was written with a University of California audience in mind, it will be shared with other FDP schools as an illustration of how we are interpreting the Pilot.
In conjunction with the review of the proposed Pilot, the Office of Management and Budget clarified the wording of Circular A-21 with respect to allocating shared costs. This clarification, we believe, allows campuses to change the way they handle the sharing of costs among projects subject to the Circular, and details on that clarification are included in Section c. of Attachment 2.
We view this Pilot, and the FDP as a whole, as presenting significant opportunities to streamline research administration and reduce paperwork burdens on Principal Investigators with FDP grants.
Campuses are encouraged to make every effort to realize the potential benefits of the FDP. We would appreciate hearing about any systems changes you make as a result of the Allocation and Documentation Pilot.
If you have questions about these attached sets of guidelines, please contact Bill Sellers.
Refer: Bill Sellers
Subject Index: 02, 19
Organization Index: U-115
David F. Mears
Research Administration Office
cc: Campus Accounting Officers
October 30, 1990
July 27, 1990
TO: Participants in the Federal Demonstration Project
RE: New Rules For Allocating and Documenting Costs Charged to FDP Awards: Questions and Answers for Guidance
Effective July 15, 1990, the Federal Demonstration Project (FDP) General Terms and Conditions have been amended to allow principal investigators (PIs) greater flexibility in the management of their research support funding. The amendment to the FDP General Terms and Conditions, referred to as the allocation and documentation demonstration or 'pilot,' was sent to you by Dr. Raub on July 2. A copy for your information is found in Enclosure 1. Please note that NIH and ADAMHA grants awarded under the FDP will contain alternate provisions that allow these agencies to take advantage of most of the features of this pilot while alleviating concerns related to the appropriations structure of the two agencies.
It should be noted at the outset that this new flexibility will operate within an existing framework that promotes prudent stewardship of federal funds. Specifically, institutional controls will be in place to ensure that allocable costs are reasonable and not specifically unallowable under OMB Circular A-21; in addition, institutional controls will ensure that no one person has complete control over all aspects of a financial transaction.
The significant features of the pilot are that:
The PI may be authorized as the individual who has primary responsibility to decide when a cost is allocable to an FDP award;
The PI's or other designee's signature or initials, or use of a password in a computerized system, is adequate to indicate his or her judgment that the cost is allocable to the award, and no additional documentation (such as a written Justification or second signature) is required to support the claim of allocability; and
If costs benefit more than one project,/1 the PI can allocate the costs among those projects in any proportion.
In order to clarify the ramifications of this pilot, and to assist implementation, a list of questions that are likely to arise has been prepared, along with answers (see Enclosure 2).
FDP grantee institutions that are implementing this amendment to the FDP terms should, at a minimum, review their own policies to make sure that principal investigators on extramurally-funded projects have been authorized, in general, to assume primary responsibility for the management of the extramural funds.
FDP grantees should also review their own internal procedures to make sure that, with respect to FDP awards, any excessive documentation requirements are eliminated. This pilot does not require FDP institutions to change their administrative procedures in order to track when principal investigators make use of the pilot.
This allocation and documentation pilot has been endorsed enthusiastically by the FDP Steering Committee and the Interagency Assessment Committee, which believe strongly that it will provide a major contribution to the productivity of research investigators and streamline institutional administration.
David F. Mears
Co-Chair, Task Group 5
1/In the case of NIH and ADAMHA grants under the FDP, if a cost benefits two or more projects or activities in proportions that can be determined, the cost should be allocated to the projects based on the proportional benefit; if a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, the costs may be allocated to benefitted projects on any reasonable basis.
AMENDMENT TO FDP TERMS AND CONDITIONS
CONCERNING ALLOCATION AND DOCUMENTATION OF COSTS
To be added as a new subparagraph 2.h.s
h. Allocability and Documentation Standards
(a) Cost Principles
The recipient institution is responsible for ensuring that costs charged to this award are allowable, allocable, and reasonable under the applicable cost principles.
(b) Internal Controls
The institution's financial management system shall ensure that no one person has complete control over all aspects of a financial transaction.
(c) Multiple Benefit (SEE APPENDIX FOR NIH/ADAMHA LANGUAGE)
If a cost benefits two or more projects or activities, the costs may be charged or transferred to either or any of the awards involved as long as the productivity and the approved scope of those awards are maintained; the costs are otherwise allowable; and the proper internal controls are in effect (see (a) and (b) above).
Federal requirements for documentation are specified in OMB Circulars A-110 and A-21 and agency policies on cost transfers. If the institution authorizes the Principal Investigator to have primary responsibility for the management of grant funds, then the institution's documentation requirements (e.g. signature or initials of .the Principal Investigator or designee or use of a password) need not provide for additional documentation (explanations or certifications) beyond that required in this paragraph h.
Agency-Specific Terms and Conditions
National Institutes of Health
Alcohol, Drug Abuse, and Mental Health Administration
Delete subparagraph 2.h.(c) and replace with the following:
(c) Direct Cost Allocation Principles
If a cost benefits two or more projects or activities in proportions that can be determined, the cost should be allocated to the projects based on the proportional benefit.
If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, the costs may be allocated to benefitted projects on any reasonable basis.
Guidelines for Implementing the Direct Cost Allocation Principles for
NIH and ADAMHA Awards Covered by the FDP
[NOTE: Although the following guidelines use salary costs as an example, the same principles apply to all other types of direct costs.]
Example #1: An employee works full-time on activities that primarily or solely benefit Project A. 100% of the employee's salary should be charged to Project A.
Example #2: An employee works 60% of his or her time on activities that primarily or solely benefit Project A, and 40% on activities that primarily or solely benefit Project B. The employee's salary should be allocated 60%-40% between the two projects.
Example #3: All of the work performed by an employee provides
common benefit to Project X and Project Y, and it is
not possible to measure the proportional benefit to either project. The employee's salary may be allocated on any reasonable basis between the two projects (including being assigned entirely to one of the projects).
Example #4: An employee works 1/3 of his or her time on activities that primarily or solely benefit Project X, 1/3 on activities that primarily or solely benefit Project Y, and 1/3 on activities that are common to both projects. The employee's salary should be allocated 1/3 to Project X and 1/3 to Project Y; the remaining 1/3 may be allocated on any reasonable basis between the projects (including being assigned entirely to one of the projects).
QUESTIONS AND ANSWERS FOR GUIDANCE
Question: Are the new allocability/documentation principles available to all FDP schools?
Yes, the principles amend the FDP General Terms and Conditions governing all FDP awards.
Question: Does this amendment apply to existing FDP grants?
Yes, starting from the effective date of this amendment, unless there is an award-specific condition of the existing grant that is inconsistent with the amended FDP General Terms and Conditions. If that is the case, the award-specific condition controls.
Question: Do non-FDP awards have different requirements for allocating and documenting costs?
The documentation aspect of the pilot is not experimental. It simply clarifies what is meant by "adequate" when it comes to documenting allocability.
The allocation requirements, however, do differ. In non-FDP awards, costs must be charged in reasonable proportion to benefit.
Under the pilot, if costs on FDP awards benefit two or more projects or activities, they may be charged* to either or any of the awards involved as long as the productivity and the approved scope of those awards are maintained.
For NIH/ADAMHA awards, if proportions of cost benefits of two or more awards or activities cannot be determined, then the costs may be allocated to the benefitted projects on any reasonable basis.
Question: What is the difference, for implementation purposes, between the main pilot language in 2.h.(c) called ,,Multiple Benefit,,, and the alternate language for NIH and ADAMHA called "Direct Cost Allocation Principles"?
The documentation aspect is the same for all FDP agencies including NIH and ADAMHA. On the other hand, there are variations in the allocation aspect. If costs solely benefit Project A, then, in all cases, the costs should be charged to Project A.
If costs benefit two projects and the proportion of benefit can be determined, then with NIH and ADAMHA awards the costs must be allocated proportionally. Under the pilot, the costs may be allocated in any proportion.
If proportions cannot be determined, under NIH and ADAMHA awards the costs can be allocated on any reasonable basis. Under the pilot, costs may be allocated in any proportion.
Accordingly, if an FDP institution wanted to implement this pilot uniformly across all FDP awards, then signature of the PI (or designee) certifying that a particular cost allocation is consistent with the FDP terms and conditions would be adequate to document allocability on all FDP awards.
Question: Will this amendment revise or alter the FDP terms and conditions on formal "relatedness"?
No, institutions may still make use of the formal relatedness option.
Question: What is the difference between the ,,cost relatedness feature- of the General Terms and Conditions and the amended terms of the allocation pilot?
Under the relatedness feature, if a project is determined to be part of a program of related projects and the awarding agency agrees, the recipient may treat the entire program of related projects as a single cost objective.
Thus, a cost that is allocable to the program may be charged to any of the constituent projects that make up the program regardless of benefit.
Under the pilot, all costs charged to a particular project must benefit that project to some extent.
Question: Can a piece of equipment not in the approved budget be charged 100% to an FDP award if the equipment also used on other projects?
Yes, if the equipment is necessary in the performance of that FDP project. (See NIH/ADAMHA specific terms for allocation principles.)
Question: If a PI funded by an FDP grant and a PI funded by a non-FDP source (e.g. from American Cancer Society) agree to share in the cost of a piece of equipment, can the maintenance contract be charged 100% to the FDP grant?
Yes, all or part of the maintenance cost could be charged to the FDP grant. (See NIH/ADAMHA specific terms for allocation principles.)
If a PI has an FDP grant and a non-FDP grant, can supplies, services, and other costs that Jointly benefit both grants be charged solely to the FDP grant?
If a PI has two FDP grants and two Research Technicians both working 100% on his or her overall program of research, can the PI decide to charge all of the time of one Research Technician to one of the FDP grants ("Grant A") and all of the time of the other Research Technician to the other FDP grant ("Grant B")?
Yes. The answer would also be "yes" if the two FDP grants had different PIs.
Question: If the situation described in 9., above, exists, how should the PAR report for each Research Technician be completed?
The PAR report will show 100% effort on "Grant A" for the Research Technician paid from "Grant A" and 100% effort on "Grant B" for the Research Technician paid from "Grant B." (NOTE: Institutions may want to review the certification language that appears on PAR forms to make sure it is not more restrictive than these new FDP rules allow.)
Question: When the amended FDP terms refer to allocating costs, does this apply both to the initial allocation and to future possible cost transfers?
Yes, as long as the original allocation was done under the new rules.
Question: Do the amended FDP terms allow the temporary use of unrelated* fund sources (and subsequent transfers of charges) to help bridge funding gape caused by late awards?
No. This problem should be dealt with using the FDP no-cost extension and pre-award cost provisions.
Question: Can cost transfers be made to FDP grants under the new rules for transactions that originally occurred prior to the effective date of this amendment?
Generally not, because under the old rules the cost should have benefitted the project charged in exact proportion to the amount charged (except for equipment specifically authorized by the award); however, the old rules permit costs to be transferred to other sponsored agreements to correct an error,
*i.e. where there is no joint benefit
Question: Who decides when a cost benefits two or more projects?
The institution authorizes who will decide cost allocation. In most cases, the PI will be authorized.
Question: What are the criteria for determining when a cost has multiple benefit?
No formal criteria have been established. PIs are in the best position to know "multiple benefit" when they see it.
Can the PI's Judgment be overruled by the institution?
Yes. Both the institution and the PI, or other authorized designee, are responsible for ensuring that costs charged to FDP awards are reasonable, allocable, and allowable. While the question of allocability is primarily a matter of scientific Judgment, the institution's own internal controls are expected to operate to monitor the reasonableness and allowability of costs. OMB Circular A-21 defines "reasonableness" as follows:
A cost may be considered reasonable if the nature of the goods or services acquired or applied, and the amount involved therefor, reflect the action that a prudent person would have taken under the circumstances prevailing at the time the decision to incur the cost was made. [C.3.]
Thus a PI can be asked to justify, in layman's terms, allocation decisions that do not appear to make sense given the nature of a project. In addition, to be allowable a cost
must conform to any limitations or exclusions set forth in [A-21] or in the sponsored agreement as to types or amounts of cost items. [C.2.(d)]
Thus a PI can be prevented from charging costs that are specifically listed in A-21 (or other applicable cost principles) or the grant terms as unallowable.
Question: What documentation is required to establish the allocability of a cost to a specific FDP award?
The allocability of a cost to a specific FDP award can be established by the signature or initials of the PI (or designee) on a document initiating or recording the charge in the institution's accounting system. Allocability can also be established by evidence that a password has been used by the PI (or designee) to initiate a transaction in a computerized system (e.g. for making purchases). Other forms of evidence are also acceptable if they conform with the requirements of the FDP terms.
October 30, 1990
UNIVERSITY OF CALIFORNIA
GUIDELINES FOR IMPLEMENTATION OF THE ALLOCATION AND DOCUMENTATION PILOT OF THE
FEDERAL DEMONSTRATION PROJECT
a. ALLOCATING DIRECT COSTS UNDER THE FDP PILOT
The Allocation and Documentation Pilot applies to all costs incurred on FDP funds on or after July 15, 1990. Because the Pilot has a separate allocability provision for NIH and ADAMHA grants under the FDP, two sets of guidelines are needed: one for NIH/ADAMHA and one for all other FDP agencies.
Guidelines for all FDP funds other than NIH/ADAMHA:
With respect to allocating shared costs to FDP funds other than NIH and ADAMHA, the Pilot states that:
If a cost benefits two or more projects or activities, the costs may be charged or transferred to either or any of the awards involved as long as the productivity and the approved scope of those awards are maintained; the costs are otherwise allowable; and the proper internal controls are in effect ....
This provision is interpreted to mean that the amount of a charge placed against an FDP grant (other than NIH and ADAMHA) need not be directly proportional to the degree of benefit to the grant: the cost may be allocated as the PI sees fit. This provision applies both to initial cost allocation decisions and to any subsequent cost transfers. See Section e., below, for further guidance on cost transfers.
Guidelines for FDP funds from NIH/ADAMHA:
NIH/ADAMHA have added agency-specific terms and conditions to the Pilot that restrict how costs are allocated to FDP funds. Basically, these terms mean that if a cost benefits two or more projects or activities, and the relative benefit to the awards can be determined, the cost should be allocated according to relative benefit. If the relative benefit to the awards cannot be determined, the cost can be allocated on any reasonable basis. Because the question of benefit is a primarily a matter of scientific judgment, it is the PI who is in the best position to know whether or not the relative benefit can be determined. No documentation is required to substantiate this judgment.
(See Section c., below, for guidance on what constitutes a "reasonable basis" for allocating the costs when it is decided that the relative benefit cannot be determined.)
DOCUMENTING CHARGES UNDER THE FDP PILOT
The documentation standard set forth in the amendment to the FDP terms includes NIH and ADAMHA. It provides that:
If the institution authorizes the Principal Investigator to have primary responsibility for the management of grant funds, then the institution's documentation requirements (e.g. signature or initials of the Principal Investigator or designee or use of a password) need not provide for additional documentation (explanations or certifications) beyond that required [for prudent business purposes].
This provision is consistent with existing guidance issued in Contract and Grant Memo No. 89-3 (January 20, 1989), titled "Documentation of Costs Directly Charged to Grants Under the FDP." Please refer to that Memo for additional guidance. See also Section e., below, with respect to cost transfers.
SUGGESTIONS FOR DISTRIBUTING SHARED COSTS UNDER THE NIH/ADAMHA RESTRICTIONS
Clarification of A-21 by OMB with respect to shared costs
In a letter dated June 14, 1990, from Frank Hodsol1, Executive Associate Director of the Office of Management and Budget, to the Acting Director of NIH, Mr. Hodsoll stated the following:
The Circular [A-21] calls for costs to be charged to an award in accordance with the benefits received. We recognize that there are circumstances where it is not possible to accurately measure the benefits a cost contributes to a specific award. In these instances, it seems appropriate to give a principal investigator latitude in assigning costs to a specific award. However, in those instances where benefit to an award can be readily determined, the costs should be allocated accordingly.
This clarification of OMB Circular A-21 means that when costs need to be allocated to federal funds receiving benefits in varying amounts that cannot be readily determined, any reasonable rationale for allocating the costs is acceptable. It also means -- for NIH, ADAMHA, and other federal awards not covered by the allocability Pilot discussed in Section a. above -- that costs should be charged in proportion to benefit when those benefits can be readily determined.
You will note that the NIH/ADAMHA special provision for the Allocation and Documentation Pilot is virtually identical with the Hodsol1 clarification of OMB Circular A-21. Accordingly, if a campus wants to implement a uniform standard for allocability for all its federal awards (including non-FDP awards), it may implement the NIH/ADAMHA agency-specific terms and conditions across all federal funds. [Because we regard the Hodsoll letter as a clarification of existing federal policy, it is not necessary to exempt awards made before June 14, 1990 -- the date of Hodsoll's letter -- but campuses may do so at their option.]
What as a reasonable basis for allocating costs when the relative benefits cannot be readily determined?
In the past, interpretation of what constitutes a reasonable basis has evolved out of audit findings and recommendations. This has often resulted in allocation methodologies being developed for dealing with shared costs that substitute for the Principal Investigator's judgment. The letter from Hodsol1, however, allows the University to decide that the Principal Investigator is in the best position to determine what is a reasonable allocation basis when relative benefits cannot be readily determined.
In response to audit concerns, some campuses have developed restrictive policies governing the distribution of shared or common costs among two or more projects or activities. Generally, the Extramural Funds section of each campus Accounting Office has reviewed and approved common costing methodologies. These methodologies, whose goal was always to conform to the A-21 standard that costs must be allocated according to the benefit received by a grant, have often been mechanistic. These methodologies included distributing costs based on actual payroll expense paid on various projects in a given month, or FTE paid, or some similar formula. Since the Hodsoll letter clarifies the A-21 requirement in the case where benefit cannot be readily determined, these methodologies can be replaced by a more flexible approach that allows the PI latitude in assigning costs. If this approach allows the PI to make effective or efficient use of grant funds, then this would be presumptive evidence that the allocation basis was reasonable.
RELATION TO PERSONNEL ACTIVITY REPORTS (PARS)
The documentation standard in this Pilot and now accepted by all FDP agencies, opens up the possibility of being able to develop alternatives to PAR reports for documenting direct effort charged to FDP awards. For example, one possibility to consider is the system that was in place before the PAR system began could be reinstituted for FDP awards. This system entailed Principal Investigator (or designee) review and approval of monthly charges to the PI's grant. This system, under the new FDP rules, could in fact be used to document all charges, including salary, placed against the FDP award.
Of course, making changes in the PAR system is a complex matter and more properly a subject to be treated separately. We would welcome suggestions and ideas from campuses on this topic.
RELATION TO COST TRANSFERS
Section C.4.b. of OMB Circular A-21 is the only place in that document that addresses the issue of cost transfers. This section states that:
Any costs allocable to a particular sponsored agreement under the standards provided in this Circular may not be shifted to other sponsored agreements in order to meet deficiencies caused by overruns or other fund considerations, to avoid restrictions imposed by law or by terms of the sponsored agreement, or for other reasons of convenience.
It was one of the purposes of the Allocation and Documentation Pilot to override this section of A-21, and that is why the Pilot language speaks about costs being charged or transferred.
It is clear that from a federal policy perspective, the FDP agency representatives do not regard cost transfers negatively. They recognize that charges may have to be shifted to clear overdrafts and for other reasons of convenience, in the interest of allowing the PI to make the most efficient and effective use of grant funds. Cost transfers are simply one kind of management tool that PIs may use to administer their FDP awards.
When grants are formally related under the FDP, cost transfers are not even necessary because funds from the different awards can be treated as a single cost center. The question of whether a particular cost benefitted a particular project does not arise when the projects have been formally related.
Under the Pilot, a charge can be allocated (in whole or part) to an FDP grant only if there is some benefit to that grant. The Pilot specifically recognizes that the question of benefit is a scientific matter, determinable by the PI or designee. Thus the federal rules regarding transfers of costs among FDP awards under the Pilot are no different from the rules regarding the allocation and documentation of the initial charge. In particular, there is no restriction on making cost transfers for reasons of convenience, and no restriction on making such transfers within a certain period of time after the end of the grant and before final close-out. This does not mean, however, that there should be no institutional controls on cost transfers, even between FDP awards, to make sure that the systems campuses have for handling such adjustments meet the general financial management standards in OMB Circulars A-110 and A-133.
We believe that with regard to cost transfers the federal intent was specifically to leave existing federal rules unchanged for transfers to or from non-FDP awards. This means that NIH program project grants, for example, continue to operate under Section C.4.b. of A-21 and p. 42, Cost Transfer section, of the PHS Grants Policy Statement.
Current University policy on cost transfers is contained in Business and Finance Bulletin A-47, University Direct Costing Procedures, Section V. This section will be revised in light of the Pilot. In the interim, the following guidelines are offered for FDP awards only:
In addition to the three conditions listed in V.A. of A-47, transfers between FDP awards may be made at the discretion of the Principal Investigator(s) affected.
The cost transfer request should normally be signed by the Principal Investigator of the grant receiving the charge, but may be signed by an individual designated to act on the PI's behalf. If a campus allows designees to sign cost transfers on FDP funds, it will need to have procedures in place for enabling the campus Accounting Office to ensure that the signature is valid.
The signature on the cost transfer constitutes certification that the cost being transferred benefitted the grant charged, and, for NIH/ADAMHA awards under the FDP, that the relative benefits to the grant originally charged and the grant now being charged cannot readily be determined.
No explanation or justification is required. The transfer request may be marked "FDP" to speed processing.
A1l other provisions of Section V of A-47 that do not conflict with these interim guidelines remain in effect. In particular, the time period within which cost transfers should normally be recorded remains 120 days; the tardiness of transfers made after 120 days should be fully explained.