New Rules on Costs, Reimbursement of Nonprofits Finalized

New Rules on Costs, Reimbursement of Nonprofits Finalized

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Major Victory for People Who Rely on Nonprofits

New Rules on Costs, Reimbursement of Nonprofits Finalized

Governments at all levels – local, state, and federal – that hire nonprofits to deliver services are now required to reimburse nonprofits for the reasonable indirect costs (sometimes called “overhead” or “administrative” costs) they incur on behalf of governments when federal dollars are part of the funding stream. The new mandate is embedded in grantmaking rules that the federal Office of Management and Budget (OMB) put into effect at the end of 2014. In addition, the new OMB Uniform Guidance streamlines and clarifies cost allocation and other rules related to government grants and contracts, removing some areas of confusion and inconsistency while treating more of a nonprofit’s expenses as direct (reimbursable) costs.

Writing about the Uniform Guidance, the Controller of OMB declared that “this historic reform will transform the landscape … for generations to come." Controller Mader noted that the Uniform Guidance will, among other things, “reduce the total volume of financial management regulations for Federal grants and other assistance by 75%” and relax “overly prescriptive and obsolete procedural requirements.” In particular, he stressed the importance of the policy reform of reimbursing nonprofits for their indirect costs, a necessary expense that “supports the fundamental operations of the organization.”

In a statement, the National Council of Nonprofits highlighted the significance to nonprofits of the OMB Uniform Guidance: “The final rules … implementing the OMB Uniform Guidance represent the federal government’s official recognition that all governments entering into written agreements with nonprofits to deliver services to the public have an affirmative duty to pay their fair share of the costs that those nonprofits incur. The changes promised by the new rules are a major victory for people who depend on nonprofits every day.” See the full statement from the National Council of Nonprofits.

The rules apply to new written agreements (whether called “contracts” or “grants”) signed after December 26, 2014, and require changes in the accounting, procurement, audit, and contracting procedures within individual nonprofits and between these organizations and their government partners. The extent of the changes depends on whether the nonprofit is a direct recipient of federal grant funds or a recipient of federal funds (subrecipient) from another entity. Each nonprofit needs to learn its rights and responsibilities under the Uniform Guidance and take affirmative steps to protect those rights.

Nonprofit Rights Under the OMB Uniform Guidance

The OMB Uniform Guidance establishes two sets of important rights for nonprofits:

Reimbursement for More of Your Direct Costs. The OMB Uniform Guidance clarifies numerous cost allocation rules and specifies more costs that are reimbursable as direct costs. For instance, in certain circumstances, program administration (e.g., secretarial staff dedicated to a specific program) can be reported as direct, rather than as indirect, costs, and therefore are fully recoverable.

Reimbursement for Your Indirect Costs. The Uniform Guidance expressly requires pass-through entities using any federal funds (typically states and local governments, as well as some larger nonprofits) and all federal departments/agencies to reimburse a nonprofit for the reasonable indirect costs it incurs in performing services on behalf of governments. Nonprofits that have never had a federally approved indirect cost rate can elect either the de minimis rate of 10 percent of their modified total direct costs (MTDC) or negotiate a higher rate in accordance with the federal cost principles. Nonprofits that have already negotiated a federal indirect cost rate must be paid that amount. Generally, the mandate to pay indirect costs applies to federal discretionary funds and certain entitlement funds. The mandate does not apply in cases where a federal statute expressly caps the rate at which indirect costs can be reimbursed.

Protecting Nonprofit Rights

The OMB Uniform Guidance only provides a promise of better treatment of nonprofits providing services under programs funded in whole or in part by the federal government. Turning that promise into reality requires actions on the part of every nonprofit earning federal funds, either directly or from pass-through entities. By understanding what the new cost allocation rules allow, and managing costs accordingly, nonprofits can secure reimbursement for more of their costs than formerly allowed. Likewise, nonprofits that understand the new rules and accurately allocate costs will be in a better position to negotiate an indirect cost rate higher than the 10 percent minimum.

The OMB Uniform Guidance signals a major change in how the federal government is directing that its funds are to be used. Changing longstanding practices overnight is challenging, and that challenge is significantly compounded when implementation depends on the individual decisions and actions of tens of thousands of different federal, state, and local government employees who may not know all of the details of the new federal requirements. Therefore, while the new OMB Uniform Guidance is the law of the land, it is possible – especially in the early stages of implementation – that nonprofits will encounter challenges when seeking full compliance by pass-through entities.

To help nonprofits get started, the National Council of Nonprofits is publishing today a overview paper, “Know Your Rights … and How to Protect Them.” This analysis summarizes nonprofit rights and highlights potential compliance challenges and how the Uniform Guidance should be properly interpreted.

In each and every instance involving a problem or roadblock, nonprofits can help themselves and others by reporting the situation using the National Council of Nonprofits’ Uniform Guidance Implementation Report Form. The information that nonprofits share will help the National Council of Nonprofits and the network of state associations of nonprofits monitor compliance, compile data and patterns that can be addressed at a government-wide level, and identify good processes and solutions that can be replicated to help nonprofits across the country meet their missions.

Interim Final Rules – Nonprofit Input Needed

OMB has published a joint Interim Final Rule designed to update the regulations of all federal departments and agencies required to follow the OMB Uniform Guidance. The new regulations went into effect on December 26, 2014, but stakeholders have 60 days to propose changes. Nonprofit personnel are encouraged to review these regulations in general, and certainly with respect to the federal departments/agencies that provide funding through state and local governments that pay for the work performed under grants or contracts. Let federal officials know if changes are needed by filing comments before the comment period expires on February 17, 2015.

Background on the OMB Uniform Guidance

OMB launched the process for establishing the Uniform Guidance (sometimes misidentified as the “Super Circular”) more than three years ago to overhaul the decades-old federal grantmaking process. The Uniform Guidance merges eight separate yet overlapping OMB circulars into the Code of Federal Regulations, eliminating the circulars. The resulting consistency across governments and the entities with which they contract to provide services are intended to ease administrative burdens, increase efficiency and effectiveness of federal awards, and strengthen the oversight of federal funds to reduce the risks of waste, fraud, and abuse.

The Uniform Guidance contains four areas of greatest importance to charitable nonprofits:

  • Reimbursement for Indirect Costs: The Uniform Guidance expressly requires pass-through entities utilizing federal funds (typically states and local governments, as well as some larger nonprofits) and all federal departments/agencies to reimburse a nonprofit for the reasonable indirect costs it incurs in performing services on behalf of governments. Nonprofits that have never had a federally approved indirect cost rate can elect either thede minimis rate of 10 percent of their modified total direct costs (MTDC) or negotiate a higher rate in accordance with the federal cost principles. Nonprofits that have a federally negotiated rate must be paid that amount.
  • Cost Allocation: The Uniform Guidance specifies more costs that are directly reimbursable, and clarifies numerous definitions and cost allocation rules.
  • Audit Threshold: The Uniform Guidance raises the threshold for single audits to $750,000, reducing the administrative costs for approximately 5,000 nonprofits, as well as governments.
  • Procurement: The Uniform Guidance requires that government and non-governmental organizations alike use consistent documented procurement processes when purchases are made using federal funds. 

Call to Action

The updating of antiquated policies by OMB reflects the reality that, for the federal government to successfully deliver its programs through contracts and grants, its nonprofit partners – just like for-profit contractors and governments themselves – must pay for necessary internal procedures and organizational infrastructure required to efficiently and effectively deliver those services. All stakeholders in the success of government programs and nonprofit operations now have a role to play in turning the promise of the OMB Uniform Guidance into reality.

  • State and Local Governments are invited to work in collaboration with the network of the National Council of Nonprofits and other nonprofits to promote consistent interpretations and application of the Uniform Guidance and ensure full and fair implementation of the cost principles and other federal grants reform. As processes are adjusted to implement these new rules, governments and nonprofits have the opportunity, working together, to streamline the entire contracting process, from application to final reporting, and save countless hours and taxpayer dollars.
  • Charitable Nonprofits: The Uniform Guidance provides only the promise of improved treatment; it is incumbent upon each organization to (1) take action to own its own costs, (2) learn its responsibilities and rights under the new rules, and (3) protect those rights through advocacy, both on its own behalf with each grant and contract, as well as by engaging in efforts with the broader nonprofit community. See Know Your Rights … and How to Protect Them.
  • Foundation Leaders and Program Officers are encouraged to alert grantees to the promise of the Uniform Guidance and their need to utilize and protect their rights. If funding is needed to establish stronger cost allocation systems in individual grantees, to provide opportunities for professional development for grantees and/or the sector in your region, and to help the sector to engage in broader advocacy efforts so pass-through entities fully comply, we hope you will see these as mission-based investments that will strengthen the organizations you support and take steps toward reducing the need for your foundation to constantly fill gaps in government funding.

The National Council of Nonprofits and its nationwide network of state associations of nonprofits will be actively monitoring implementation of the Uniform Guidance, continuing our work with OMB to improve the Uniform Guidance, equipping nonprofits with the tools they need to properly allocate and manage their costs and stand up for their rights to be reimbursed, as well as collaborating with government officials to fix broken systems to increase efficiency and save taxpayer dollars. At the end of the day, this is a win-win-win for nonprofits, governments, and most importantly, people in communities across America.

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