Highlights of the OMB Grant Reform

In case you missed it, in late December 2013, the U.S. Office of Management and Budget (OMB) issued new guidelines for federal grants that will offer a streamlined and game changing approach that has been over two years in the making.  Now the once eight Federal regulations (including OMB Circulars A-110, A-122, and A-133) are combined into a single, comprehensive policy guide and affords the Federal government the ability to better administer the $600 billion awarded annually for grants, cooperative agreements, and various types of financial assistance. This change affects everyone that receives government grants or contracts that use federal funds. The guidelines are long and complex, but the National Council of Nonprofits reported on the highlights:

• Indirect Costs: The OMB Guidance explicitly requires pass-through entities (typically states and local governments receiving federal funding) to either honor a nonprofit’s negotiated indirect cost rate if one already exists or negotiate a rate in accordance with federal guidelines. Nonprofits will be empowered to elect an automatic indirect cost rate of 10 percent of modified total direct costs (MTDC) – which can be used indefinitely if they so choose – or negotiate a higher rate.
• Direct Costs: In some cases, administrative expenses associated with a particular project (such as secretarial support) can be reported as direct, rather than indirect, costs, which are treated more generously in contracting policies.
• Audit Rules: The new guidelines will raise the Single Audit (A-133) threshold from $500,000 to $750,000, eliminating duplicate and unnecessary audit criteria, and clarifying various costs allocation rules.

In order to really benefit from these new guidelines nonprofits will have to accurately identify and track all overhead costs while negotiating for higher reimbursement rates with government organizations. This seems pretty straight forward and easy enough, however it's not always so black and white

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Indirect costs, administrative costs, and overhead costs are accounting terms that are often used interchangeably causing a lot of confusion. A great example of this inconsistent use of terminology can be found in the report, "Indirect Costs Are Essential for Success" by the National Council of Nonprofits

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The report described how federal agencies issuing grants to nonprofits to categorize overhead costs as either direct costs or facilities costs while further separating indirect costs into two sub categories: either administrative costs or facilities costs. To get a little more confusing the federal government, through the IRS Form 990 tells nonprofits to categorize and annually report their costs as management general costs, program costs, and fundraising costs. Lets define these terms below:

1. Administrative costs: management and general expenses such as the salaries of executives and accounting personnel and library expenses
2. Facilities costs: items such as depreciation and capital improvement, interest on debt associated with certain buildings, and operations and maintenance expenses
3. Management & General costs: activities that are required by organizations to operate, but may support multiple programs and the organization as a whole, such as accounting, human resources, staff development, rent, and utilities
4. Program costs: activities associated with a specific program or project, such as direct program staff, program supplies, program management, and administration
5. Fundraising costs: various activities, such as special events campaigns, direct solicitations, mailings, fundraising consultants, development staff, grant application prep

Correctly defining and categorizing all overhead costs will not only assist with negotiating for higher reimbursement rates with government organizations, but it will also paint a clear monetary picture in budgeting terms. The new regulations means that nonprofits should be able to focus more on delivering services in their communities and should feel free of raising additional funds to essentially subsidize governments. Also, charities with no government grants or contracts could see less competition for scarce philanthropic dollars. This is a major gain in the charitable nonprofit community

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For more information about the OMB grant reform check out these links below:

• Notice of Proposed Guidance in Federal Register (Summary and Description of Changes)
• Proposed OMB Uniform Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards (FULL TEXT)
• Crosswalk from existing to proposed guidance
• Crosswalk from proposed guidance to predominant source in existing guidance
• Administrative Requirements Text Comparison
• Cost Principles Text Comparison
• Audit Requirements Text Comparison
• Definitions Text Comparison

Let us know your thoughts on the OMB grant reform and thanks for reading!

-Rebecca