6.1 Allowable Direct Costs * 1

Determination Factors

When incurring costs against sponsored funds (i.e., making payments utilizing funds from outside agencies in support of Health Science Center projects), the academic unit administering the project is responsible for determining three factors regarding the cost prior to authorizing the cost and processing the financial paperwork. These three factors are:

Allowability of Costs
This factor determines whether the cost being considered would be authorized for payment under the terms of the award made by the sponsor. The basic question to be answered under this factor is "Will the sponsor pay for this expense?"

The tests of allowability of costs are:

1. they must be reasonable;
2. they must be allocable to sponsored projects under the principles and methods provided herein
3. they must be given consistent treatment appropriate to the circumstances and must comply with the Health Science Center's Cost Accounting Standards Disclosure Statement; and
4. they must conform to any limitations or exclusions set forth in OMB Circular A-21, the award document, or the agency's guidelines as to the types or amounts of cost items.

Allocability of Costs
A cost is applicable to a particular cost objective (i.e., a specific function, project, department or the like) if the goods or services involved are chargeable or assignable to the cost objective in accordance with the relative benefits received or other equitable relationship. The basic question of allocability is "Is the expense related to the project?"

Subject to the foregoing, a cost is allocable to a sponsored project if:

1. it is incurred solely to advance the work under the sponsored project;
2. it benefits both the sponsored project and other work of the Health Science Center, in proportions that can be approximated through using reasonable methods; or
3. it is necessary to the overall operation of the Health Science Center and, in light of the principles provided in OMB Circular A-21, is deemed to be assignable in part to sponsored projects.

Where the purchase of equipment or other capital items is specifically authorized under a sponsored project, the amounts thus authorized for such purchases are assignable to the sponsored project regardless of the use that may be subsequently be made of the equipment or other capital items involved.

Note:

Any costs allocable to a particular sponsored project under the standards provided herein may not be shifted to other sponsored projects in order to meet deficiencies caused by overruns or other fund considerations, to avoid restrictions imposed by law or by terms of the sponsored project, or for other reasons of convenience. In addition, any costs allocable to activities sponsored by industry, foreign governments, or other sponsors may not be shifted to federally sponsored projects.

Reasonableness of Costs

A cost may be considered reasonable if the nature of the goods or services acquired or applied, and the amount of funds involved reflects the action that a prudent person would have taken under the circumstances prevailing at the time the decision to incur the cost was made. In other words, "Is the expense reasonable?"

Considerations involved in the determination of the reasonableness of a cost are:

1. whether or not the cost is a type generally recognized as necessary for the operation of the Health Science Center or the performance of a sponsored project;
2. the restraints or requirements imposed by such factors as Federal and State laws and regulations, sponsored agreement terms and conditions, or agency guidelines.
3. whether or not the individuals concerned acted with due prudence in the circumstances, considering their responsibilities to the Health Science Center, its employees, its students, the Government, and the public at large; and
4. the extent to which the actions taken with respect to the incurrence of the cost are consistent with established Health Science Center policies and practices applicable to the work of the Health Science Center generally, including sponsored projects.

In determining the above, the following documents should be reviewed:

Approved Project Budget
The allowability of a cost is first determined by examining the budget that the agency approved for the project. Does the proposed expense show up under a line of the budget? If the item does not appear on the budget, then other reviews must be conducted to determine if the charge is allowable under a rebudgeting authority that may be granted to the Health Science Center, or if the item may be allowable only if prior approval is obtained in writing from the agency. If the budget has not been incorporated into the award document, then allowability must be determined in accordance with allowable cost principles of the agreement ( OMB Circular A-21 plus any agency deviations from the Circular).

The Award Document or Contract
Allowability of certain costs may be addressed within the award document or the contract/agreement that was issued for the sponsored project. For example, grant awards may identify certain costs that are specifically unallowed by the agency based upon recommendations from the peer review system.

Agency Guidelines
Even if the type of expenses proposed appear on the budget, the specific expense may not be allowable. Most Federal agencies have guidelines for administering grants. These guidelines give direction on the allowability of certain costs. For example, travel costs may appear in the budget, but a specific trip taken to a foreign country may require further approval from an agency pursuant to their guidelines.

OMB Circulars OMB CIRCULAR A-21 and OMB CIRCULAR A-21
The primary governing regulations for determining the reasonableness, allocability, and allowability of costs on Federal awards, in addition to all other sponsored projects, are the Office of Management and Budget (OMB) Circulars A-21, "Cost Principles for Educational Institutions" and OMB Circular A-21, 'Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education." Section J of OMB Circular A-21 identifies the allowability of costs. For example, that section dictates certain salaries are allowable, but alcoholic beverages are not. OMB CIRCULAR A-21 also gives guidance on how allowable costs are to be charged as other direct charges to a sponsored project or allocated as facilities and administrative (F&A or indirect) costs. For example, while the costs of telephone equipment costs are allowable, another section in OMB CIRCULAR A-21 says that those costs should be placed in the Health Science Center's indirect cost rate. Section J also requires that the "determination as to allowability in each case should be based on the treatment provided for similar or related items of cost", i.e., consistent treatment is required.

Frequent (not less than monthly) monitoring of project/grant ledgers should be made to assure that all charges have been applied correctly. If errors are made, they should be corrected promptly and procedures implemented that minimize future occurrences.

To comply with the cost allowability and allocability requirements of federal cost regulations it is necessary to explain, justify, and document transfers of charges into federal awards from other federal or non-federal projects…
This is just a summary of the Policy on Cost Transfers to Federal Awards, for the full policy please visit the webpage:
http://www.uthscsa.edu/ogm/forms/Cost_Transfers_to_Federal_Awards_Policy.doc OR http://www.uthscsa.edu/ogm/forms/Cost_Transfers_to_Federal_Awards_Policy.pdf

Except as provided below, program income earned during the project period shall be retained by the Health Science Center, and in accordance with federal awarding agency regulations or the specific terms and conditions of the award, shall be used in one or more of the ways listed in the following:

1. Added to funds committed to the project by the federal awarding agency and used to further eligible project or program objectives;
2. Used to finance the non federal share of the project or program; or
3. Deducted from the total project or program cost.

Program income earned outside of the funded project period does not need to be accounted for nor reported to the federal agency. As well, royalties and license fees from copyrights or patents developed with federal funding is excluded from any reporting requirements as program income.

It is the responsibility of the Principal Investigator/Project Director to track, document, and report program income. In most cases, this reporting is made at the time of a continuation or renewal proposal for the existing project. The Grants Management staff can assist the Investigator in making a determination as to whether income meets the definition of program income.

6.8 Accounting for Cost Sharing 1

The federal regulation OMB Circular A-21, Subpart C.23 permits all contributions that further the program objectives to be used for meeting cost sharing or matching requirements when the costs are:

1. Verifiable from the records of the institution;
2. Not used as cost sharing or matching on another federal project;
3. Necessary and reasonable for the conduct of the project;
4. Allowable under the applicable cost principles;
5. Not funded by the federal government (except where provided by statute)
6. Included in the program budget when required by the sponsoring agency; and
7. In conformance with the requirements listed in OMB Circular A-21.

Grants Management staff review all sponsored agreement budgets to identify those that include effort (salaries) budgeted but not funded. This cost shared effort is accumulated and reported in the Time and Effort Reporting System (See Section 6.5). Grants Management staff will advise the Investigator and academic department staff when there are cost sharing requirements other than effort that must be documented. It is the responsibility of the Investigator and the academic department to maintain records on cost shared items other than effort including actual costs contributed and documentation for such costs not only for inclusion in financial reports submitted to sponsors, but for eventual accumulation in the Health Science Center's indirect cost rate proposal. Such costs and documentation must be available upon request by Grants Management.

Unrecovered indirect costs may be used to meet cost sharing or matching requirement only when the specific sponsoring agency allows such use. When unrecovered indirect costs are used as cost sharing, Grants Management will be responsible for accumulating those costs.

6.9 Billing and Financial Reporting