OMB Uniform Guidance

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 [1] 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.

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 [2].

Clarity, Promising Practices, Respect Featured in OMB Uniform Guidance Training

Nonprofits providing services on behalf of governments pursuant to federally funded grants should be reimbursed for their indirect costs, and governments at all levels have a responsibility to learn and follow the federal grants reforms, according to a newly released video training series from the federal Office of Management and Budget (OMB). At issue in the eight-segment series, entitled Uniform Guidance: Promising Practices in Implementation [3], is the OMB Uniform Guidance that went into effect at the end of December 2014, but is still causing confusion among government officials and nonprofit leaders. The training program is designed to clarify recurring questions and highlight solutions developed in some regions.

[3]Of most interest to nonprofits with government grants and contracts, the panel on Indirect Costs Rates reinforced that the mandate to pay nonprofits their indirect costs is binding on pass-through entities (typically state, tribal, local governments and some nonprofits) using federal funds. An OMB official, Gil Tran, explained that the 10 percent de minimis rate in the Uniform Guidance is available to new grantees/subgrantees and those that have never negotiated an approved rate with the federal government. Contrary to misinterpretations by some government officials, Mr. Tran stated directly that the 10 percent de minimis rate is the floor, not a default rate for pass-through entities to apply across the board.

Carol Kraus, Director of the Grants Accountability and Transparency Unit (GATU) for the State of Illinois shared how Illinois has centralized the process for negotiating indirect cost rates with nonprofits. Ms. Kraus emphasized that states, as pass-through entities, need to pay their fair share. “Nonprofits are our partners and we need to treat them as partners,” she stressed. “If they’re not successful, neither are we.”

Read the full article [4]

What the Uniform Guidance Means to Nonprofits

The OMB Uniform Guidance establishes important rights for nonprofits:

Reimbursement for More of Your Direct Costs [5]. 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 Nonprofit's Indirect Costs [5]. 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.

Other reforms in the Uniform Guidance directly affecting nonprofits include the following:

Audit Threshold [5]: 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 [5]: The Uniform Guidance requires that government and non-governmental organizations alike use consistent documented procurement processes when purchases are made using federal funds.

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.

To help nonprofits get started, the National Council of Nonprofits has prepared a overview paper, “Know Your Rights … and How to Protect Them [6].” This analysis summarizes nonprofit rights and highlights potential compliance challenges and how the Uniform Guidance should be properly interpreted.

Take Action: Share What You See

Charitable nonprofits are invited to share their experiences under the Uniform Guidance – whether positive or negative – and help build the evidence for best practices and additional reforms. Fill out the Council of Nonprofits’ Uniform Guidance Implementation Report Form [7].

Background

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.

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.

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 [6].
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.
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.