Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards

Written by Mary Karen Wills, Sajeev Malaveetil,  and Ryan D. Byrd at the Berkeley Research Group

To learn more about this topic, sign up for our OMB SuperCircular 2 CFR Part 200 Webinar on July 15, 2014.

On December 26, 2013, the Office of Management and Budget (OMB) released its final “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.”

This guidance is applicable to grants and cooperative agreements and represents a comprehensive consolidation and revision of OMB Circulars currently governing Federal awards to non-Federal entities. The guidance combines A-110 and A-102 into a single set of administrative rules; combines A-21, A-87, and A-122 into a single set of consolidated cost principles with entity-specific appendices describing indirect rate guidance for government, higher education, and nonprofits; revises the language of A-133; and presents all in a single document serving as a “one-stop shop” for financial assistance regulatory requirements.

Key changes in the consolidated regulations, now codified at Title 2 of the Code of Federal Regulations, include:

Revisions to Pre-Award Policies
2 CFR 200.200 et seq.

Before making awards, awarding agencies must evaluate the risks to the program posed by each applicant, and each applicant’s merits and eligibility. These requirements are designed to ensure applicants for Federal assistance receive a fair and consistent review prior to an award decision. This review will assess items such as the applicant’s financial stability, quality of management systems, history of performance, and single audit findings.

Revisions Related to Post-Award Administration
2 CFR 200.300 et seq.

The final guidance consolidates financial, administrative, procurement, and program management standards that had been encompassed in OMB Circulars A-102 and A-110.

The new guidance takes the majority of the procurement standards language from OMB Circular A-102 (with many differences for organizations familiar with A-110) and provides more clarity regarding the expectations on Federal awardees with respect to subrecipient and subaward oversight and management.

Key changes include a new section that explicitly outlines the Government’s expectation of recipients in terms of their internal controls; and more stringent requirements in Section 200.318(b) that non-Federal entities maintain a contract administration oversight system (originally a “contract administration system” in the proposed rule) to ensure contractors perform in accordance with the terms, conditions, and specifications of their contracts and delivery orders.

Significantly, in response to industry comments, the final rule includes a provision at Section 200.113 that was not included in the proposed guidance. Noting that “requirements in procurement regulations for non-Federal entities to disclose in writing any violations… have been effective measures to help prevent or prosecute instances of waste, fraud, and abuse,” OMB included this new provision requiring non-Federal entities, both prime and sub-recipients, to “disclose, in a timely manner, in writing to the Federal awarding agency or pass-through entity all violations of Federal criminal law involving fraud, bribery, or gratuity violations potentially affecting the Federal award.”

Revisions Related To the Cost Principles and Recovery of Indirect Costs
2 CFR 200.400 et seq.

The final guidance incorporates a number of changes to existing cost principles that warrant review. These changes may significantly impact award recipients. Revisions in the new rule include new documentation requirements for travel and conferences expenses, elimination of “morale” costs from allowable employee health and welfare expenditures, a cap on certain relocation costs, allowability of certain computing devices to be expensed as supplies, and alternative methods for time and effort reporting.

One noteworthy change in the final guidance is that non-Federal entities may treat administrative costs as direct costs when such costs meet conditions showing they are directly allocable to a Federal award. (2 CFR 200.413(c))

With regard to indirect rate recovery, entities new to Federal awards may use a “flat” indirect cost rate of 10 percent of modified total direct costs if the non-Federal entity has never had a negotiated indirect cost rate.

The new guidance also requires Federal agencies to accept negotiated indirect cost rates unless an exception is required by statute or regulation, or otherwise approved by a Federal awarding agency head or delegate based on publicly documented justification.

Finally, organizations with a Negotiated Indirect Cost Rate Agreement NICRA have been historically required to submit a new indirect cost proposal to the cognizant agency within six months after the close of each fiscal year. The new policy allows organizations to apply for a one-time extension of current NICRA without further negotiation of Federally approved negotiated indirect cost rates for a period of up to four years (2 CFR 200.414(g)).

Revisions Related to Audit Requirements
2 CFR 200.500 et seq.

The final guidance sets forth new consolidated audit standards for entities receiving Federal financial assistance awards and replaces OMB Circular A-133. The changes within the final guidance primarily combine the guidance in OMB A-133 and A-50 on audit follow-up. The guidance reflects a movement to focus these audits and oversight efforts on higher-dollar, higher-risk awards and focus oversight on improper payments, waste, fraud, and abuse.

Most significantly, the threshold triggering a single audit or program-specific audit requirements is increased to $750,000 or more in annual Federal awards. These requirements apply equally to recipients and subrecipients under Federal programs. The final guidelines incorporate an exception to these audit requirements for non-U.S.–based entities expending Federal awards.

Further, the final guidance increases the minimum threshold for reporting questioned costs from $10,000 to $25,000 to focus on the audit findings presenting the greatest risk. OMB believes this will eliminate smaller-dollar audit findings, which require utilization of resources for follow-up audits that are unlikely to indicate significant weaknesses in internal controls.

These changes necessitate a careful review and analysis of an organization’s current business practices. Although OMB has raised certain thresholds for audit and materiality, it has also beefed up mechanisms of oversight related to mandatory disclosures, pre-award review of risks, standards for financial and program management, sub-recipient monitoring, and remedies for noncompliance.

Agencies have six months to submit to OMB necessary drafts implementing regulations, with the expectation that they will be finalized and effective no later than December 26, 2014. New audit requirements will apply to audits of fiscal years beginning on or after December 26, 2014. In the meantime, entities receiving Federal financial assistance awards are encouraged to comply with the new standards.

The views expressed in this article are those of the author and do not necessarily reflect the position or policy of Berkeley Research Group, LLC.

To learn more about this topic, sign up for our OMB SuperCircular 2 CFR Part 200 Webinar on July 15, 2014.

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