General Principles & Basic Premises

• Describe the regulations underlying the uniform administrative requirements applicable to state and local governments and nonprofits
• Identify key government regulators and their related acronyms
• Differentiate among the four layers of regulations regarding federal award administration

1-1 Note

For the past few years, the Office of Management and Budget (OMB), in conjunction with the Council on Financial Assistance Reform (COFAR), has worked to streamline and improve the federal grant requirements.  In February 2012, OMB sent out its first thoughts on ways to improve the regulations.  It received hundreds of responses, and in February 2013, it published its proposed regulations.  Again, it received hundreds of comments from professional associations, from grantees, from federal granting agencies and from auditors.  It published the final set of grant regulations on December 26, 2013.  Because of the size and the impact of the new issuance, it is frequently referred to as the “Supercircular,” although it is known more commonly as the Uniform Grant Guidance.  The Uniform Grant Guidance was codified in Title 2 Section 200 of the Code of Federal Regulations (CFR).

The revised regulations address all aspects of federal grants:  the administrative rules, the federal cost principles and the Single Audit requirements.  The new regulations took effect on December 26, 2014, exactly twelve months after their issuance. After that date, whenever a federal grantee receives incremental funding on a continuation grant or initial funding on a new grant, that grantee will be required to implement the revised administrative rules and the revised cost principles.  For many grantees, that will mean that some grants will have to be administered with the old rules and some with the new. (Ain’t government grants fun?)

The requirements for Single Audits will take effect for each grantee for its first fiscal year starting after December 26, 2014.  That means that a grantee that uses the calendar year for its fiscal year would have needed to apply the new Single Audit requirements for the Single Audit covering calendar 2015.  Most state and local governments use a fiscal year that runs from July 1 through the following June 30.  For such organizations, the first fiscal year to be covered by the new Single Audit requirements would be the fiscal year ended June 30, 2016.

In this text, we will address the uniform administrative requirements contained in the Supercircular.  We will not deal with the cost principles or the Single Audit requirements in this text.

For almost all grants, the new rules are now in effect.  That means that grantees and grant auditors must understand and apply the new rules.  The good news is that the administrative requirements will not change too much; so individuals who are familiar with the previous rules will realize that they already have a good working knowledge of the new requirements.

1-1-1 Inclusion of 2 CFR 200 Sections

Throughout this guide, we include the 2 CFR 200 sections, or portions from the relevant section, that relate to the subject matter.  This information is italicized and is located within the discussion of the subject matter to facilitate the use of this self-study guide as a quick use reference document.  You can find 2 CFR with a quick Google search.  Simply type “2 Code of Federal Regulations Part 200 ecfr” in the search bar.

While the citations are current at the time of this writing, regulations are subject to change.  Therefore, we encourage you to read more comprehensively the relevant CFR sections and/or consult with program officials whenever there is doubt regarding the uniform administrative requirements.

1-1-2  What This Course Covers & What It Does Not Cover

This course covers the administrative requirements for state and local governments and for nonprofit organizations contained in Subparts C and D of the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.  The course does not cover the administrative requirements covering for-profit entities.

In addition, to facilitate an understanding of this text, we also cover the Acronyms and Definitions – Subpart A and the General Provisions – Subpart B of the Uniform Grant Guidance.

1-2 Introduction to Federal Administrative Requirements

James Newcomer was assigned to conduct his first audit of federal grants.  He started to research the various regulations, but soon his head hurt and his eyes were spinning around in their sockets.  There was just too much stuff to absorb.  Then he had an idea.  He visited the office of Oliver “Ollie” Veteran.   Ollie had been auditing federal grants for years and even worked for the “feds” back when James was in grade school.

When Ollie heard James’ dilemma, he smiled.  “No problem,” he said.  “I think I can put things into perspective for you.  Federal grants can be very tricky.  They have loads of strings attached.  But the feds try to be specific about their expectations regarding how the resources are to be administered.

“In general, governments want to increase accountability and transparency in grants’ administration.  The citizens have a right to know what happened to their tax money and that it was spent properly.

“What this means for us, the professionals working with these grants, is that we have to dot every ‘I’ and cross every ‘t.’  Most grants undergo lots of scrutiny.  Grantees need to be aware that they are always under threat of cost disallowances (which means the feds ask for their money back) if they don’t follow the rules.  We need to consider the Federal Government’s expectations regarding the use of taxpayers’ dollars.”

After talking with Ollie for a while, James felt more comfortable.  He decided to first examine the federal administrative requirements applicable to organizations that receive federal grants.  The federal administrative requirements apply to almost all federal grant programs, although some do have exceptions contained in their program regulations or individual grant terms and conditions.  Title 2 CFR 200 applies to state, local and Indian Tribal governments, to institutions of higher education and to nonprofit entities.

When an entity receives federal grants, or expects to in the near future, it is essential that at least one, but preferably more, of its employees has a sound working knowledge of the applicable federal administrative requirements.

1-2-1 Why Uniform Administrative Rules?

James wondered why the Federal Government issued uniform administrative rules.  After all, each set of programmatic regulations is different.  How come there was a single set of administrative rules?  He decided to ask Ollie.
Ollie smiled at the question, “Before the feds issued uniform administrative rules, each federal agency had its own rules.  While the various agency rules were similar, they were not identical.  As a result, entities receiving federal awards had to look up the rules for each agency separately.  The multiplicity of rules created uncertainty and confusion, as well as additional cost burdens for recipients and the federal community.

“The Intergovernmental Cooperation Act of 1968 enabled OMB to issue standardized rules for the administration of federal awards to similar types of entities.  In 1971, OMB issued the first version of Circular A-102, Uniform Administrative Requirements for Grants-In-Aid to State and Local Governments.  In 1976, OMB issued Circular A-110, Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations: Uniform Administrative Requirements.  OMB wanted to establish standards for federal agencies to consistently administer their grants and other agreements. Over time, OMB has modified and consolidated the administrative rules, cost principles and audit requirements for recipients of federal awards.  On December 26, 2013, OMB issued Supercircular, 2 CFR 200, Subparts A through F.”

James realized that when an entity accepts a federal award, it must spend the grant funds within the federal guidelines and follow specific rules in administrating the award.   An administrator (and a grant auditor) should be able to confidently answer questions similar to these:

• What property records must be maintained regarding grant related equipment?
• What rights are granted the Federal Government regarding the use of copyrighted material developed using award funds?
• Is a grantor obligated to use a minority-controlled business?
• Must a grantee monitor its subgrantees?

If you are unsure about the applicable administrative rules, other parties (whether auditors or grantors) will wonder whether you are competent.  And when auditors or grantors start to doubt your credibility, they will automatically dig a little deeper.  It is never pleasant to be on the receiving end of a dig.

On the other hand, if you are an auditor, you need to be able to detect when administrative rules have not been followed, the cause and effect of the omission, and help the client come into compliance with grant regulations.  You also don’t want a Federal Office of Inspector General or a grantor to raise questions regarding the quality of your audit.

1-2-2  Acronyms, Definitions & Relationships

Before we dig into the federal regulations, we’d better master a few key acronyms, definitions and relationships.  The Federal Government is ripe with them.
We will address the most common acronyms and definitions included in 2 CFR 200, Subpart A later in this guide.  However, here are some more general acronyms and definitions you will see frequently in this text.

CFR – Code of Federal Regulations – The Code of Federal Regulations is authored by the federal agencies that administer the grants.  So the Department of Defense and the Department of Health and Human Services write these regulations.  Each of 50 broad titles usually (but not always) indicates the issuing agency.  Each title is further subdivided into parts, similar to chapters that cover specific regulatory areas.

OMB:  Office of Management and Budget – An agency in the executive branch of the Federal Government.  OMB works with the president to help him direct all of the federal agencies at his command, such as the Department of Defense, the Department of Health and Human Services, Department of Housing and Urban Development, etc.

Non-federal entity — A state, local government, Indian tribe, institution of higher education (IHE) or nonprofit organization that carries out a federal award as a recipient or subrecipient.  Note that the term non-federal entity does not include for-profit organizations.

Pass-through entity — A non-federal entity that provides a subaward to a subrecipient to carry out part of a federal program.

A further word about OMB:  OMB helps the president design the federal budget.  It also issues directives, referred to as “bulletins” and ”circulars,” to executive branch agencies.  These issuances convert law and executive directions into implementable actions and are to be used by the federal agencies in carrying out their missions.  The circulars define terms and fill in the blanks that may not be clearly set forth in the law.  They are usually fairly easy to read as OMB does its best to speak in plain English, but they are often long and detailed.

OMB, in an effort to make it easier to find the information they need to manage grants, has relocated its circulars regarding federal grants to Title 2 of the Code of Federal Regulations.  For example, the uniform administrative requirements, cost principles and other material previously were in several circulars, but now they all reside in 2 CFR 200.  This makes sense, as the circulars are directions for federal agencies, and grantees are used to looking for federal rules in the CFRs.

This relocation is part of a broader initiative to make Title 2 of the CFR the single location where the public can find guidance for grants and agreements. The broader initiative provides a good foundation for streamlining and simplifying the policy framework for grants and agreements.

1-2-3 Four Types of Regulations Applicable to Each Grant

After James reviewed the many regulations he found pertaining to the grants he was concerned about, he went back to Ollie for another discussion.  He had more knowledge and comfort than he had at the start, but the many different sets of rules didn’t always appear to be consistent.  “How do we put all of these rules in context?” he wanted to know.

Ollie explained that there are almost always four layers of regulations applicable to each federal grant:

1. Cross-cutting administrative rules (the subject of this text);
2. Cross-cutting cost principles;
3. Program rules;  and
4. Individual grant terms and conditions.

1-2-3a  Layer 1: Cross-Cutting Administrative Rules

Cross-cutting administrative rules cover issues such as:

• Budget revisions,
• Procurement, and
• Property standards.

For governmental units and nonprofits, these rules, which differ by type of entity, are set out in 2 CFR 200, Subparts C and D.  They are called cross-cutting rules because they apply to most federal grant programs, thereby cutting across the various program requirements.

1-2-3b  Layer 2: Cross-Cutting Cost Principles

Cross-cutting cost principles address the general rules on what makes a cost allowable and the rules on specific types of costs. These rules are set out in 2 CFR 200, Subpart E.

Title 2 CFR, Part 200, Subpart E does not apply to hospitals, regardless of whether the entity is organized as a governmental organization or as a private nonprofit.  The cost principles for research and development grants at hospitals, which are not the focus of this text, are covered under 45 CFR 75, Appendix IX.

If you work with a for-profit entity (such as a defense contractor), the Federal Acquisition Regulations (known as FAR) apply.

The cost principles in 2 CFR 200, Subpart E

…must be used in determining the allowable costs of work performed by the non-Federal entity under Federal awards.  These principles also must be used by the non-Federal entity as a guide in the pricing of fixed-price contracts and subcontracts where costs are used in determining the appropriate price… (§ 200.401(a))

There is one exception.  The Federal Government requires a small number of very large nonprofit organizations to follow the FAR rather than 2 CFR 200, Subpart E^[1].  There is a list of these large nonprofits in Appendix VIII to Part 200—Nonprofit Organizations Exempted From Subpart E—Cost Principles of Part 200.

There is a lot of stuff to know, I’m afraid.  That’s why we all make the big bucks!

1-2-3c  Layer 3: Program Rules

Program rules, which differ by federal program, are customarily cited in the grant award.  They may conflict with, and override, cross-cutting administrative rules and cost principles.  The program rules take precedence over the cross-cutting rules because they are more specific, and a general concept of law is that the more specific rules have priority over the more general rules.  Of course, it also makes it loads of fun to keep up with grants from more than one granting agency.

1-2-3d  Layer 4: Individual Grant Terms & Conditions

The federal grantor can go one step farther than allowing or restricting actions in the program rules.  It can write specific terms and conditions for a grant going to a particular entity.

For instance, if a grantee has a history of violating grant rules, the federal grantor may consider the grantee ”high risk.”  As a result, the grantor can spell out terms for the grantee that other recipients are not required to meet.  Of course, if there are any objections, the grantee does not have to sign the agreement or take the money.   But once the agreement is signed, the grantee is locked into the terms negotiated with the grantor.

By the way, this brings up a significant point that too many grantees ignore or are not aware of.  In practice, almost all grants require some contribution of funds or extra time from the grantee.  If the grant requires cost sharing, that contribution is very clear.  But sometimes, the grant requirements limit certain expenses such as indirect costs.  That restriction frequently becomes a de facto cost-sharing requirement.  Even without either of those situations, it is likely that: some costs will be considered unallowable; the grantee will have to contribute more time than expected in the direct activities of the grant; or the grantee will have to spend more administrative time than expected.

For that reason, we recommend that a grantee accept federal grants for only those activities that help it accomplish its core mission.  The advocates for the grant will often claim that it’s free money.  It ain’t free money!  The deal with the feds is essentially that they will reimburse you for your expenses that meet the grant requirements.  They don’t give you anything.

1-3 Overview of Uniform Administrative Requirements & Basic Premises

The intent of OMB in consolidating the administrative rules is expressed in the Summary section to 2 CFR 200.  It states:

Title 2 CFR 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, establishes consistency and uniformity among federal agencies in the management of grants and cooperative agreements with federal award recipients (state, local and federally recognized Indian tribal governments, not-for-profit organizations and institutions of higher education [IHEs]).  Subparts A through F are organized as follows:

• Subpart A – Acronyms and Definitionshas general applicability and is addressed in this text.
• Subpart B – General Provisions has general applicability and is addressed in this text.
• Subpart C – Pre-Federal Award Requirements and Contents of Federal Awards lays out the uniform administrative requirements for award recipients and is addressed in this guide.
• Subpart D – Post Federal Award Requirements lays out uniform administrative requirements for award recipients and is addressed in this guide.
• Subpart E – Cost Principles is addressed in another self-study guide.
• Subpart F – (Single) Audit Requirements is addressed in another self-study guide.

Subparts C and D provide the administrative requirements for before the grant is awarded and after the grant is awarded.  The administrative requirements are designed to assure that federal awards are appropriately administered.

1-4 Application of the Uniform Administrative Requirements

There is a hierarchy of laws, regulations, rules, etc. that govern the grantee administration of federal awards:

• U.S. Constitution (about which we are not scholars, but have lots of opinions, anyway)
• Federal laws
• Federal regulations (CFRs, OMB Circulars, etc.)
• State laws
• State regulations

Section 200.100 provides:

Such awards can include:

• Grants,
• Cost reimbursement contracts, and
• Other agreements with the Federal Government.

Title 2 CFR 200 provides that, when a statute or any enabling legislation prescribes policies or requirements that differ from those in the guidance included in CFR 200, the provisions of the statute or enabling legislation shall govern.  This makes sense.  No federal agency, not even OMB, can decide to violate the law.
The administrative requirements are designed to assure that federal agencies follow uniform guidance in the administration of awards to award recipients.  The uniform administrative requirements are among the federal regulations and, therefore, take precedence over state and local regulations governing similar activities.   For example, when a state passes a law that permits an activity that is illegal under federal laws, the federal law governs.

Similarly, when a conflict is present between the federal rules governing grant activity and state law, the situation must be resolved in order to relieve the tension between the conflicting rules.  In the absence of a resolution, the grantee should apply the federal rules in governing the award activity.

When a conflict between federal rules and state and/or local rules presents itself, we urge you to
(1) contact the awarding agency to advise it of the conflict, and obtain its guidance (preferably in writing) and (2) seek competent legal advice in resolving the matter.

1-5  Role of the Office of Management & Budget

The Office of Management and Budget (OMB) is an organization within the executive branch of the Federal Government.  OMB works directly for the president and is headquartered in the White House.

A part of OMB’s mission is to assist in supervising the administration of executive branch agencies.  OMB ensures that agency reports, rules, testimony and proposed legislation are consistent with the president’s budget and with his administration’s policies.  In addition, OMB oversees and coordinates the administration’s procurement, financial management, information and regulatory policies. In each of these areas, OMB’s role is to help improve administrative management, to develop better performance measures and coordinating mechanisms and to reduce any unnecessary burdens on the public.

1-6 Basic Premises

Because the federal grantor is a steward of the public’s resources, it does not want to award public funds to entities that can’t administer them properly.  For example, entities receiving awards must have and maintain financial management systems that enable users to determine the sources and applications of grant resources.  In addition, these systems must ensure the efficient and effective administration of federal awards through the application of sound management practices.

The grantee is expected to manage the grant so that the program accomplishes its goals.  The Federal Government expects the grantee to:

• Manage efficiently,
• Administer federal funds in accordance with:
• Applicable underlying agreements,
• The specific award agreement and
• The program’s objectives; and
  • Establish its own organizational structure.

Compliance with the applicable uniform administrative requirements is a condition of receiving federal awards.  Conversely, the failure to comply with the applicable requirements can result in the federal awarding agency withdrawing funding, terminating the grant, disallowing costs or adding special award conditions.

1-6-1  Split that Contract? No, Don’t Split that Contract! 

Many years ago, we were auditing a California County Office of Education.  It had received a grant from the U.S. Department of Education to evaluate the Migrant Education Program in the State of California.  It decided to contract out one aspect of the evaluation.

Title 2 CFR, Part 200 requires grantees to follow their own procedures (as did its predecessors).  The county’s procedures at that time required getting three bids for all procurements over $10,000.  The estimate for this evaluation was between $25,000 and $30,000.

However, the CFO for the county wanted to issue the contract to a favored vendor.  Accordingly, he had the purchasing clerk issue three purchase orders to that vendor, each for about $9,500.  The first purchase required an evaluation of the program in Northern California, the second required an evaluation of the program in Southern California and the third required the vendor to integrate the two reports.

Everyone outside the county who looked at this transaction came to the same conclusion:  contract splitting!  All of the payments for the three purchases were disallowed (meaning the federal grantor would not pay for the contracts), and the CFO lost his job.