DHHS POLICIES AND PROCEDURES

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

Allowable Costs/Cost Principles

All costs charged to state or federal funds must be reasonable and necessary for the operation and administration of the program(s) for which funding is received. Some funding sources limit the amount of funding available for administration. In that case, to be allowable the costs must not only be reasonable and necessary but must be within the constraints of the funding source. Costs must be reduced by any applicable credits, such as credit memoranda or refunds, and must be supported by appropriate documentation (invoices, purchase orders, etc.) Costs must also be treated consistently, one (1) cost cannot be treated as direct if the same cost is treated as indirect. For example, the executive director’s salary can’t be charged to a specific federal funding source one (1) month and treated as indirect cost the next.

If an agency performs more than one (1) service or receives funding from more than one (1) funding source, an acceptable method of allocating costs must be in place. Different types of agencies are governed by different cost principles promulgated by the federal OMB:

For-profit agencies are governed by the cost principles outlined in the Federal Acquisition Regulation (FAR) and publicly-owned hospitals and other providers of medical care are governed by the regulations at 45 CFR part 74, appendix E. The cost principles for all agencies are fairly consistent, but there are differences between the various regulations. Exhibits 1 and 2 of the Compliance Supplement for OMB Circular A-133 (http://www.whitehouse.gov/omb/grants/grants_circulars.html) show in table form the differences in treatment of various costs between the three (3) OMB Circulars. Subrecipients should be following the appropriate cost principles. All the cost principles outline various allowable and unallowable costs. Examples of common unallowable costs under most federal and state programs are the purchase of alcoholic beverages or the purchase of personal items for employees.

Indirect cost is a specific type of cost that allows an agency to recover a portion of its general administrative expenditures related to the administration of state and federal programs. To be an allowable expense the indirect cost must be computed in accordance with the applicable federal cost principles. Some agencies with which DHHS Divisions contract, such as universities, are large enough to have indirect cost plans approved by a cognizant federal agency. Others, such as most local governments or non-profit agencies, may charge indirect cost if their plan has been prepared in accordance with the applicable cost principle and has been audited by a CPA firm. Indirect cost is not applicable to for-profit agencies since those expenses are covered in their profit margin.

Suggested Monitoring Procedures:

For subrecipients assessed as low risk:

For subrecipients assessed as medium risk:

In addition to activities outlined above for low risk subrecipients:

For subrecipients assessed as high risk:

In addition to activities outlined above for low and medium risk subrecipients:

Documentation:

Monitoring Tool/Instrument

Working Papers

Summaries

Monitoring Results Report