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Moving Forward Under Revised OMB Guidance

Not-for-profit organizations working on government contracts recently received some hard-and-fast revised guidance from the Office of Management and Budget (OMB) related to costs incurred when completing federal contracts.

Although the revised MB Uniform Guidance does not resolve all the problems not-for-profits may encounter, industry leaders are calling it a definite improvement and a step in the right direction.

The revised Guidance was published in its final form on December 26, 2014. The changes streamline many of the rules affecting administrative requirements, cost principles and audit requirements, but they should not be viewed as the be-all and end-all.

Numerous problems are expected to persist, including lack of full funding for service delivery costs and complications when contract terms are changed before project completion. But the OMB Guidance does address many previous inconsistencies and — perhaps, most significantly — establishes firm parameters for reasonable overhead costs.

Background Information

The new Guidance merges eight separate OMB circulars into a single Code of Federal Regulations. The aim was to develop consistency between government units and not-for-profit contractors to reduce administrative burdens, increase efficiency, improve effectiveness of the awards process and eliminate waste, fraud and other abuses.

Under the Uniform Guidance, government entities that employ not-for-profit contractors must reimburse those organizations for their reasonable indirect costs. These generally are overhead and other administrative expenses.

New Rights

The revised Guidance includes the following:

  • More costs will be reimbursed as direct costs. For example, in some cases the costs of administering a special program — such as assigning a separate staff to the project — may be reported as a direct expense and be fully reimbursed.Pass-through entities using federal funds must reimburse reasonable indirect costs incurred in related activities. If a not-for-profit has not used a federally approved indirect cost rate, it can rely on a de minimis ten percent rate of modified total direct costs or it can negotiate a higher rate. Generally, the mandate to pay indirect costs applies to federal discretionary funds, but any federal statute capping the reimbursement rate will continue to apply.
  •  The threshold for compliance audits of entities that receive federal award money has been raised from to $750,000 from $500,000 per fiscal year. These audits, commonly called single audits, require comprehensive testing of compliance and internal controls. This revision is expected to reduce administrative costs for approximately 5,000 nonprofit organizations.
  •  Consistently documented procurement processes are required when purchases are made using federal funds. This applies to government and non-government units alike.

Action Steps

The Uniform Guidance is an important step forward, but it is by no means the final step. Not-for-profits can have an impact on future developments. Consider the following three actions:

1. Fully understand the rules, learn all your rights and responsibilities and protect your interests through continued advocacy.

2. Work hand-in-hand with state and local governments to promote consistent and equitable interpretations and application of the Uniform Guidance. These collaborations may help further streamline procedures and improve efficiency, saving more time and money.

3. Be a leader, not a follower. Move to the forefront of efforts to strengthen relationships and increase funding to help further your organization’s mission and objectives. Take steps that are likely to reduce the need to fill the types of gaps in government funding that have occurred in the past.

Finally, be aware that the OMB has published an interim final rule updating the regulations of all federal departments and agencies that must adhere to the OMB Uniform Guidance. Although these regulations went into effect on December 26, 2014, stakeholders were granted 60 days in which to propose changes. Not-for-profit managers involved in government grants and contracts should carefully review the regulations and respond when appropriate. Comments are required by February 17, 2015.

Lessons to be learned: By doing the necessary homework, not-for-profit managers may be able to secure reimbursements for more administrative expenses than they could previously. In addition, if you understand the intricacies of the OMB Guidance, you can put your organization in a better position to negotiate an indirect cost rate greater than the ten percent de minimis rate.

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