Common questions nonprofits have about accessing federal funds

INSIGHTS

In working with nonprofits to access federal funds and comply with 2 CFR Part 200 requirements for grant awards, we are often asked the following questions:

What do we need to do if we receive direct grant awards?

Your organization will likely need to comply with certain federal regulations, which will be specified in the grant award. These regulations may include 2 Code of Federal Regulations (CFR), Part 200 (2 CFR Part 200), also called the Uniform Administrative Requirements for Grant Awards, Cost Principles, and Audit Requirements (Uniform Guidance). Several federal grants have separate cost principles (e.g., Legal Services Corporation, etc.) or have not adopted all of the requirements in the Uniform Guidance. But the vast majority of grants do require full compliance. It is also important to note that while 2 CFR provides the basis for allocating costs, the ultimate allocation of costs is based on 2 CFR and programmatic requirements.

Compliance can require changes to internal cost controls and accounting processes. Potential issues may not be identified in annual outside audits as the Uniform Guidance is specific to federal awards, especially those administered by the United States Department of Health and Human Services (HHS), Department of Labor (DOL), Department of the Interior (DOI), Department of Education (ED), and various other federal agencies.

Does your nonprofit organization have an Indirect Cost Rate (and is it compliant)?

It is important for your nonprofit to identify if you have a current Indirect Cost Rate, which is a key tool when accessing both private and public funding. Most federal grants allow for indirect costs to be included as part of grant awards. However, indirect cost rate calculations must comply with requirements in 2 CFR Part 200, whether or not the rates are approved by Cost Allocation Services (CAS), which sits at Health and Human Services (HHS) or other federal agencies. Certain organizations may elect to utilize the de minimis rate of 10%, assuming they qualify to use it. Organizations may use the de minimis in some cases and another mechanism in others. However, they must apply a consistent process across the organization.

Depending on the total amount of funding received and whether funding is received directly or indirectly, state agencies may be the entity that reviews and/or approves the indirect rate. Federal agencies may defer to state agencies that pass federal funds to nonprofits. Certain nonprofits may also need to prepare a cost allocation plan rather than an indirect cost rate. Regardless of who reviews and/or approves indirect costs, or the methodology used, compliance with the appropriate regulations is necessary when accessing federal funds.

What is an Indirect Cost Rate versus a Grant Ceiling?

An indirect cost rate approximates the amount of indirect cost incurred to perform “direct” functions. Many grants also have caps on how much indirect and/or administrative costs may be charged to a particular grant. These ceilings should not be confused with an indirect cost rate. The indirect cost rate is organization-specific to costs that support the entire organization and must be allocated to all activities regardless of grant ceilings. The ceiling is grant specific. Nonprofits that have an indirect rate may only charge up to that amount for a grant. If the ceiling is higher than the rate, a nonprofit can only charge its rate. If the ceiling is lower than the rate, the entity must cover the difference with unrestricted funds. As a rule of thumb, nonprofits should assume that grants will not cover the entire cost of operating a grant when factoring indirect costs into the mix.

Do staff need to track time?

Staff often work across multiple programs, activities, and funding sources. Some functions may be indirect and others programmatic or unallowable (e.g., fundraising, etc.). 2 CFR Part 200 has specific instructions for how to allocate the cost of staff that have multiple roles. Nonprofits receiving federal funds, either directly or as a sub-recipient, must have methodologies to support staff cost allocation. Estimates or approximations of time are not allowable under 2 CFR Part 200. Time tracking or other justifiable methods that are defensible are necessary to appropriately allocate costs across various activities and minimize audit risks.

What are audit thresholds?

Some nonprofits incorrectly believe that if total annual expenses related to federal awards are less than $750,000 (an audit threshold set in 2 CFR Part 200), they are not subject to 2 CFR Part 200 requirements. This belief is inaccurate. While organizations are not required to complete an audit, they are required to comply with the 2 CFR Part 200 requirements if it is in the grant award (or other requirements in the grant award). Lack of compliance can result in payback of the federal award or the inability to receive the funds in the future.

How do you identify costs?

Finally, any federal award requires specific cost tracking. Nonprofits must be able to provide information that shows exactly what the funds were used for (i.e., to fulfill the requirements of the specific grant). Many nonprofits budget and spend at program levels. Receipt of federal funds, including sub-recipient funds, requires cost accounting at the activity level. Direct receipt of federal funds allows nonprofits to do their important work, along with furthering their missions and reach. At the same time, these funds introduce new requirements that require specialized expertise. It is important to make sure that all organization staff understand requirements so that everyone can participate in ensuring compliance with grant requirements.

If you are interested in how MGT can help your nonprofit navigate the information above, please contact Jon Hartford (jhartford@mgtconsulting.com).

Publish Date

Posted on October 17, 2022

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