GAP 200.320, Direct Costing on Sponsored Projects
- Direct Costs: Definition and Criteria
- Proper Coding
- Inappropriate Practices
- Review and Audit
(Note: 2 CFR Part 220 replaces the OMB Circular A-21. This Part speaks to the purpose, scope, policy, and other issues relevant to cost principles. When determining costs applicable to grants, contracts, and other agreements with educational institutions, Federal program Directors and Fiscal Officerswill refer to this title.)
In accepting federal funds for sponsored projects (grants, contracts, and other types of assistance agreements) Duke University agrees to abide by government regulations regarding the use of those funds. Code of Federal Regulations 2 CFR Part 220 (formerly Office of Management and Budget Circular A-21) sets forth general criteria for determining the allowability of direct costs on government sponsored projects at educational institutions. Many government agencies publish additional cost guidelines specific to those agencies, and familiarity with such regulations is also necessary.
Although generally not as stringent as government requirements, non-governmental agencies may also have cost guidelines with which Duke faculty, departmental business officers, and grant administrators should be familiar.
This procedure summarizes pertinent overall government regulations and Duke practices used to determine whether or not a particular cost item would be considered an allowable direct cost for budgeting and/or charging on a government sponsored project. Auditors may use the same guidelines when conducting audits of externally sponsored projects awarded to Duke.
Government Definition of Direct Costs
Direct costs are those costs that can be identified specifically with a particular sponsored project, or that can be directly assigned to such activity relatively easily with a high degree of accuracy.
For purposes of determining whether it would be appropriate to budget or charge a certain direct cost to a sponsored project, principal investigators, departmental business officers and grant administrators should be familiar with the criteria used to define allowable direct costs. They are:
- The cost must conform to any limitations or exclusions stated in generally accepted accounting principles or in the sponsored agreement. The cost must be "allowable" and not specifically designated as unallowable by regulation or grant/contract specific award conditions.
- It must be allocable to the sponsored project A cost is allocable to a particular sponsored project if the goods or services involved are chargeable or assignable to the sponsored project. Specifically, a cost is allocable if:
- it solely benefits the project;
- it benefits the project and other work of the institution in proportions that can be approximated using reasonable methods.
- The cost must be reasonable. The item/service charged must be generally recognized as necessary for the performance of the project and the cost must be consistent with the same amount a prudent person would consider reasonable given the same set of circumstances.
- The cost must be treated consistently with other similar costs incurred in like circumstances in accordance with generally accepted accounting principles. Please refer to GAP 200.330, Facilities and Administrative (Indirect) Costs on Sponsored Projects and GAP 200.360 Charging Clerical and/or Administrative Expenses to Federally Funded Projects for further information.
If sponsor funds are available, appropriate direct cost items should be charged to the appropriate sponsored activity fund code. If sponsor funds are not available and it is determined that the scope of work of the project cannot be modified to eliminate the need for the item, then the direct cost item should be charged to an appropriate cost-share account (note: internal approvals for cost sharing may be required) and reflected as a cost of the project, but one borne by Duke. GAP 200.140, Indirect Cost Recovery & Cost Sharing on Sponsored Projects will assist you with cost sharing. Please note that costs reflected as cost share must meet the same allowability standards as costs directly charged to a federal fund code.
NOTE: In the event that a discount, rebate or other similar adjustment is realized, the amount charged directly to the federal award cannot exceed the resulting discounted/reduced cost. Typical examples of such transactions are: purchase discounts, rebates, or allowances; recoveries or indemnities on losses; and adjustments of overpayments or erroneous charges. This term also includes 'educational discounts' on products or services provided specifically to educational institutions, such as discounts on computer equipment, except where the arrangement is clearly and explicitly identified as a gift by the vendor.
Clarification of Direct Costing Criteria
Section J of 2 CFR, Part 220 (formerly OMB Circular A-21) provides a detailed listing of costs that may be charged to federal awards (with the disclaimer that these costs must not be deemed unallowable under a specific award notice from the federal sponsor. Typically, the following costs meet the standard of allowability. Please keep in mind that these costs must be necessary to perform the project's stated scope of work.
Typically allowable as direct costs:
- Salaries and fringe benefits of faculty, technicians, post docs, graduate research assistants and other personnel directly engaged in performing sponsored project's scope of work
- Laboratory supplies and materials necessary for performing sponsored project's scope of work
- Other costs such as travel, subcontracts, scientific/specialty equipment repairs and maintenance, long distance telephone expenses, and other directly related costs necessary for performing sponsored project's specific scope of work
- Capital equipment that is approved by the sponsor (or internally approved if allowed by the sponsor)
- Service/maintenance agreements on capital equipment approved by the sponsor (or internally approved if allowed by the sponsor)
- Identification with the sponsored work (i.e., the scope of work) rather than the nature of the goods or services is the determining factor in determining direct costs.
Typically unallowable on federal awards:
- Advertising for general promotion of the University, including printed materials, promotional items, memorabilia, gifts, and souvenirs
- Advertising for recruitment purposes that includes color or is excessive in size
- Alcoholic beverages
- Alumni or fund-raising activities
- Bad debt write-offs
- Donations or Contributions
- Commencement expenses
- Cost Overruns; any costs allocable to a particular sponsored agreement 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.
- Costs on Industry, Foreign Government or Other Non-Government Grants/Contracts; any costs allocable to activities sponsored by industry, foreign governments or other sponsors may not be shifted to federally-sponsored agreements.
- Decorative objects for private offices
- Fine/original art
- Fines and penalties
- First-class/business-class air travel differentials
- Gifts, prizes, and awards
- Goods or services for personal use
- Memberships in airline travel clubs
- Memberships in civic, social, community organizations or country clubs
- Faculty and exempt staff salary in excess of base rates paid by the institution. Refer to 25 below for additional guidance.
- Selling or marketing products or services of the University
- Social events
- Other limitations may apply, such as the Public Health Service salary cap. [See below full text of government regulation concerning allowable rates of pay for faculty.]
A cost is allocable to a federally sponsored agreement if:
- It is incurred solely to advance the work under the sponsored agreement; or
- It benefits both the sponsored agreement and other work of the institution, in proportions that can be approximated through use of reasonable methods. [2 CFR Part 220] allows costs that can be identified specifically with a particular sponsored project, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. In accordance with this, pro-rating of expenses is not considered a reasonable method of allocation.
Exception to General Allocability Rule:
Where the purchase of equipment or other capital items is specifically authorized by the sponsor [note: "authorized" means approved by the sponsor (or internally approved, if such internal approvals are allowed by the sponsor)], the amounts thus authorized for purchase are assignable to the sponsored agreement regardless of the use that may subsequently be made of the equipment or other capital items involved.
Cost Benefits Two or More Projects
If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, 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, then the costs may be allocated or transferred to benefited projects on any reasonable basis. However, this allocation cannot be used to eliminate cost overruns.
A cost may be considered reasonable if the nature of the goods or services acquired or applied, and the amount involved therefore, reflect the action that a prudent person would have taken under circumstances prevailing at the time the decision to incur the cost was made. Major considerations involved in the determination of the reasonableness of a cost are:
- Whether or not the cost is of a type generally recognized as necessary for the performance of the sponsored agreement;
- The restraints or requirements imposed by such factors as arm's-length bargaining, federal and state laws and regulations, and sponsored agreement terms and conditions;
- Whether or not the individuals concerned acted with due prudence in the circumstances, considering their responsibilities to the institution, its employees, its students, the federal government, and the public at large; and,
- The extent to which the actions taken with respect to the incurrence of the cost are consistent with established institutional policies and practices applicable to the work of the institution generally, including sponsored agreements.
Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or Facilities and Administrative (F&A) costs. Duke University has established formal review processes to determine if certain types of costs are allowable as direct charges to federal awards. In general, the following types of costs are treated as Facilities and Administrative costs and may not be directly charged to federal awards unless:
- at the time of proposal submission these costs have been specifically identified in the proposal budget and budget narrative;
- the federal sponsor has approved the budget; and,
- Duke University has formally approved these costs through the Direct Cost Exception Approval process.
Costs normally charged as F&A:
- Salaries of clerical and administrative personnel engaged in routine departmental or administrative work that benefits all activities of the department (instruction, research, training, public service, etc.), i.e., there is no direct relationship to a specific sponsored project's scope of work.
- Supplies and materials for routine departmental or administrative activities of the department that benefit all activities of the department (instruction, research, training, public service, etc.), i.e., there is no direct relationship to a specific sponsored project's scope of work.
- Other costs such as travel, repairs, fees and services, local and long distance telephone expenses, copying and postage that are for routine departmental or administrative use, and do not have a direct relationship to a specific sponsored project's scope of work.
- General office items with multi-functional use such as computers, fax machines, answering machines, staplers, hole punches, filing cabinets, chairs, desks, calculators, waste baskets, etc.), that do not have a direct relationship to a specific sponsored project's scope of work.
For further, please refer to GAP 200.360 Charging Clerical and Administrative Expenses to Federally Funded Projects.
Justification and approval required in proposals that budget certain costs as direct costs:
For the following cost items (and for any others that a layperson may consider routine and administrative in nature), specific written justification as to the relationship between the cost and the proposed project's scope of work should be completed as a part of the proposal’s budget narrative and submitted to the Office of Research Support or the Medical Center Office of Research Administration as a part of the proposal to the sponsoring agency.
The documentation should explain the direct benefit relationship between these cost items and the proposed scope of work. ORA/ORS may notify the PI that these costs have been included in the budget and that a formal internal exception and approval process will be required if the project is funded.
Upon award, appropriate exception forms for both administrative salaries and non-salaried items must be completed, signed by the PI and the department business manager, and approved by the appropriate pre-award office.
If the administrative items have not been included in a proposal budget, or if the appropriate exception form is not completed and approved at time of award, rebudgeting to include these items in the funded budget may be requested. A Request for Rebudgeting of Funds form should be completed that also includes justification for the clerical/administrative expense. These forms should be signed by the PI and the Business Manager and sent to the appropriate pre-award office for approval. The form is then sent to OSP for further review and approval.
Timing for Submission of Forms:
- For new awards, the appropriate Exception Form will be required as part of the award process.
- For existing awards, an Exception Form will be required at time of each non-competing renewal.
- An Exception Form was not submitted at time of award AND
- Administrative/clerical expenses are necessary
- The administrative items were not included in the original budget
- A Request for Rebudgeting of Funds Form will be required. You must rebudget even small amounts - <25%; Note: this is a departure from the standard rebudgeting requirements.
- If administrative items have been included in a proposal budget but an Exception Form is not reviewed and approved at time of award, then you must complete the Request for Rebudgeting of Funds form to move funds from a general GL budget line to a CAS-specific GL budget line.
Salary rates for faculty members.
- Salary rates for academic year. Charges for work performed on sponsored agreements by faculty members during the academic year will be based on the individual faculty member’s regular compensation for the continuous period which, under the policy of the institution concerned, constitutes the basis of his salary. Charges for work performed on sponsored agreements during all or any portion of such period are allowable at the base salary rate. In no event will charges to sponsored agreements, irrespective of the basis of computation, exceed the proportionate share of the base salary for that period. This principle applies to all members of the faculty at an institution.
Since intra-university consulting is assumed to be undertaken as a university obligation requiring no compensation in addition to full-time base salary, the principle also applies to faculty members who function as consultants or otherwise contribute to a sponsored agreement conducted by another faculty member of the same institution. However, in unusual cases where consultation is across departmental lines or involves a separate or remote operation, and the work performed by the consultant is in addition to his regular departmental load, any charges for such work representing extra compensation above the base salary are allowable provided that such consulting arrangements are specifically provided for in the agreement or approved in writing by the sponsoring agency.
- Periods outside the academic year.
(a) Except as otherwise specified for teaching activity, charges for work performed by faculty members on sponsored agreements during the summer months or other period not included in the base salary period will be determined for each faculty member at a rate not in excess of the base salary divided by the period to which the base salary relates, and will be limited to charges made in accordance with other parts of this section. The base salary period used in computing charges for work performed during the summer months will be the number of months covered by the faculty member’s official academic year appointment.
(b) Charges for teaching activities performed by faculty members on sponsored agreements during the summer months or other periods not included in the base salary period will be based on the normal policy of the institution governing compensation to faculty members for teaching assignments during such periods.
- Part-time faculty. Charges for work performed on sponsored agreements by faculty members having only part-time appointments will be determined at a rate not in excess of that regularly paid for the part-time assignments. For example, an institution pays $5000 to a faculty member for half-time teaching during the academic year. He devoted one-half of his remaining time to a sponsored agreement. Thus, his additional compensation, chargeable by the institution to the agreement, would be one-half of $5000, or $2500.
If sponsor funds are available, appropriate direct cost items should be charged to sponsor funds in accordance with the account coding instructions in section IV.
If funds are NOT available and it is determined that the scope of work of the sponsored project cannot be modified to eliminate the need for the item, then the direct cost item should be charged to an appropriate cost share account and reflected as a cost of the project, but one borne by Duke. GAP 200.140, Indirect Cost Recovery & Cost Sharing on Sponsored Projects provides guidance on how to do this.
At Duke, budget line items and individual expense transactions are identified by a 6 digit G/L Account. The G/L account classifies the transaction as salaries, fringes, supplies, travel, etc. To select the correct account for sponsored project budget line items or expense transactions, the principal investigator and/or grant administrator should be familiar with Duke's account structure.
A complete listing of the G/L accounts is maintained on the web. Each grant administrator should be familiar with the accounts available for use on sponsored projects and other centers.
Why the emphasis on proper account coding?
One of the elements most critical to successful financial administration of sponsored projects is the assignment of appropriate accounts to budget line items and expense transactions, for the following reasons.
- Miscoded expenses can result in incorrect F&A cost charges. The coding determines whether or not the cost will be included in "modified total direct cost" and therefore subject to F&A or indirect cost.
- Failure to identify capital equipment purchases can result in noncompliance with internal and external property management regulations. Federal regulations require that all capital equipment purchases be added to the central inventory system. The account used on the capital equipment requisition is one method used by Plant Accounting to identify capital equipment purchases to be added to central inventories.
- Errors in account coding can result in inappropriate conclusions by the principal investigator and/or sponsor regarding financial status.
- Improperly coded expenses can result in inappropriate conclusions by auditors and can adversely impact Duke's ability to effectively monitor for compliance with federal regulations regarding allowability. In an internal or external review or audit, the account determines the type of review or audit procedure to which the expense is subjected, and whether the expense is viewed initially as allowable or unallowable.
- The account distinguishes between costs funded by the agency and those cost-shared by Duke. Failure to use a cost sharing account on cost-shared expenditures will understate Duke's contribution to the project.
Do all proposal budgets need to be detailed at the account level?
No, not all proposal budgets need to be prepared at the account level. However, funded proposals must have budgets at the account level per OMB Circular A-21, Section C.10.:
"Section C. 10. Consistency in estimating, accumulating and reporting costs.
- An educational institution's practices used in estimating costs in pricing a proposal shall be consistent with the educational institution's cost accounting practices used in accumulating and reporting costs.
- An educational institution's cost accounting practices used in accumulating and reporting actual costs for a sponsored agreement shall be consistent with the educational institution's practices used in estimating costs in pricing the related proposal or application.
- The grouping of homogeneous costs in estimates prepared for proposal purposes shall not per se be deemed an inconsistent application of cost accounting practices under subsection a when such costs are accumulated and reported in greater detail on an actual cost basis during performance of the sponsored agreement."
What are some of the special circumstances related to account coding?
In many situations, there are several accounts that could appropriately be used, and it is up to the grant administrator, based on guidance from the appropriate Dean, Director, or Department Head, to choose the account that best describes the good or service being acquired. Following are general comments on selected expense areas.
Personnel Costs: 60xxxx-61xxxx
Salaries and wages and related fringe benefit accounts, 60xxxx - 61xxxx, are used for individuals hired and paid through the Duke Payroll system and the accounts used are determined by the job code assigned to the position. Rewards and Recognition will assist you in determining the appropriate job code for new positions or in reclassifying existing positions.
Payments for services to an individual outside the Duke Payroll system should be charged to the appropriate account in the Professional Services 62xxxx range.
Supplies and Materials: 64xxxx
For allowability reasons discussed later, proper distinction between office supplies and lab/research supplies is critical, particularly on government-funded projects.
Meetings - Business Related: 696000
Meeting, meal or refreshment expenses that are not specifically approved by the funding agency are unallowable.
Travel for the purpose of development, fund raising, public relations, alumni meetings, and student recruitment must be coded to either 699000 (domestic) or 699100(foreign). Travel for these purposes is specifically unallowable.
Trainee Travel 698900: is to record costs for travel necessary to a trainee's training and incurred during the period of grant supported training. This G/L account should be used only to record payments made under training grants (3x2 WBS elements).
Any alcoholic beverages or entertainment costs to be reimbursed to a traveler must be charged to 693200.
Experimental Subjects: 622500
All experimental subject payments should be charged to account 622500.
The first $25,000 in payments to a subcontractor on a sponsored project should be charged to 691600. Payments in excess of $25,000 should be charged to 697100.
Capital Equipment: 66xxxx
Capital equipment funded by the sponsor should be charged to accounts in the 66xxxx range.
- All capital purchases funded by the sponsor must also follow GAP 200.080, Equipment Screening & Shared Use on Federal Grants & Contracts.
- Cost-shared capital equipment should be charged in accordance with GAP 200.140, Cost Sharing on Sponsored Projects.
- For definitions and the Capitalization Policy see GAP 200.050, Plant & Equipment Capitalization.
The following examples are not all-inclusive. They are intended to be illustrative of certain practices that can result in direct cost disallowance during audits of sponsored agreements.
- Purchasing goods, supplies, or equipment at the end of the project simply to use up unspent funds. [For example, the Public Health Service Grants Policy Statement, section 8-16 states that "If for any reason equipment that has been ordered in good faith will not be received until after a project has terminated or will be received too late in the project for effective use, all reasonable effort must be made to cancel the order or to charge the equipment to other funds."]
- Charging 100% of a direct cost item to a sponsored project if part of the item will be used by other projects or non-sponsored activities [capital equipment approved by the sponsor (or approved internally if allowed by the sponsor) is excluded from this requirement].
- Replenishing departmental office supplies with grant funds.
- "Rotating" charges among sponsored projects by month without establishing that the rotation schedule credibly reflects the relative benefit to each grant.
- Assigning charges to the sponsored project with the largest remaining balance.
- Identifying a cost as something other than what it actually is by using an incorrect account code.
- Direct charging of administrative/clerical salaries and administrative expenses are generally not allowable. See GAP 200.360 Charging Clerical and/or Administrative Expenses to Federally Funded Projects for specific details.
In order to be allowable, direct charges must be assignable to a sponsored project "in accordance with benefits received". If the sponsored project could not have reasonably benefited from the items purchased, then the cost would not be allocable to the sponsored project.
Research Costing Compliance monitors direct charges to ensure appropriate coding, required internal controls, and adequate justification. Inadequately justified charges are noted, and the department is required to remove these charges from federal codes. The Office of Sponsored Programs will periodically perform transactional reviews to ensure that the direct costing procedures are being consistently applied. OSP also reviews pre-determined reviewable charges at closeout and requires departmental adjustment if sufficient documentation and justification are not provided. During the closeout process, OSP and departments use checklists and other reports to ensure that the procedure is consistently applied. (GAP 200.180, Closeout of Sponsored Projects)
On an annual basis external auditors perform an OMB Circular A-133 audit.
For Pre-Award administration contact either:
For Post-Award administration contact:
- Office of Sponsored Programs (919-684-5442)
For questions regarding selection of a G/L Account contact:
- Accounting Systems Administration (919-684-2752)
Note: This guidance is administrative in nature and is not a cost reimbursement policy. Failure to comply may or may not result in adjustments of charges to the award. Noncompliance with this policy does not mean this cost is unallowable from an external perspective. Any adjustments of charges will be as required under applicable federal cost reimbursement principles. If a cost is removed from an award for any reason, whether or not related to this guidance, the cost will generally be charged to departmental funds.