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Back to Basics: The Foundational Concepts of Grants Management & Compliance

Written by David Clark and Jackie Bernal | Dec 6, 2023 1:00:00 PM

Back to Basics: The Foundational Concepts of Grants Management & Compliance

 

The “Back to Basics” blog series focuses on the critical concepts and most common compliance issues that are integral to managing and maintaining compliance with federal grants, for nonprofit organizations, state and local entities and higher education institutions.

Charging Personnel Costs to Federal Awards

Salary costs represent the bulk of dollars from federal grants and often pose compliance risks and challenges to new and experienced recipients alike. One question we are often asked by clients is, “how can we maintain compliance with federal regulations regarding accurately supporting and recording personnel costs when not all of our employees complete and submit timesheets?”

In this article, we will discuss the federal requirements for charging personnel costs to awards, alternatives to timesheet processes, and common challenges and pitfalls to avoid when charging labor costs to federal grants.

 

Uniform Guidance Expectations for Charging Personnel Costs

The Uniform Guidance (UG) section §200.430 Compensation—personal services details the specific requirements for salary and wages charged to federal awards, including the total compensation for individual employees:

  • Is reasonable for the services rendered and conforms to the established written policy of the non-Federal entity consistently applied to both Federal and non-Federal activities;
  • Follows an appointment made in accordance with a non-Federal entity's laws and/or rules or written policies and meets the requirements of Federal statute, where applicable; and
  • Is determined and supported as provided in paragraph (i), allowable activities, when applicable.

 

The federal government expects payroll-related recordkeeping to be kept to a certain standard. Paragraph (8)(i) of section §200.430 specifies the “Standards for Documentation of Personnel Expenses” and requires that personnel costs charged to awards be supported by records that accurately reflect the work performed. Namely, the records must:

  • Be supported by a system of internal control that provides reasonable assurance that the charges are accurate, allowable, and properly allocated;
  • Be incorporated into the official records of the non-Federal entity;
  • Reasonably reflect the total activity for which the employee is compensated by the non-Federal entity, not exceeding 100% of compensated activities;
  • Comply with the established accounting policies and practices of the non-Federal entity, and
  • Not be based solely on budget estimates.

For many federal grant recipients, timesheets are an effective means of tracking personnel costs and documenting work performed.

 

So, are timesheets the only way to achieve and maintain compliance?

Normally, budget estimates alone are not enough to support charges to federal grants. However, Paragraph (8)(viii) of section §200.430 states that budget estimates are acceptable for interim accounting purposes, provided that:

  • The system for establishing the estimates produces reasonable approximations of the activity actually performed,
  • Significant changes in the corresponding work activity (as defined by the non-Federal entity's written policies) are identified and entered into the records in a timely manner. Short-term (such as one or two months) fluctuation between workload categories need not be considered as long as the distribution of salaries and wages is reasonable over the longer term, and
  • The non-Federal entity's system of internal controls includes processes to review after-the-fact interim charges made to a federal award based on budget estimates, and
  • All necessary adjustment must be made such that the final amount charged to the Federal award is accurate, allowable, and properly allocated.

While using timesheets to allocate payroll charges to projects is the ideal process and provides the strongest linkage from a control perspective, it is not explicitly required by the Uniform Guidance.

Furthermore, while individuals paid hourly must in fact maintain hourly timesheets, salaried employees do not. Therefore, some organizations (especially institutions of higher education [IHE]) do not require employees to maintain timesheets for time charged to federal awards if they would not otherwise be expected to (e.g., university faculty) or if it would be too administratively burdensome to require them do so.

In instances where timesheets are not used, organizations often implement an after-the-fact confirmation or certification process, which involves attestation by employees or other responsible individuals, such as Principal Investigators. The after-the-fact certification is confirmation that the amount of time and effort, or the portion of an employee’s salary, charged to each federal award and non-federal activity during a specific period, accurately reflects the portion of their overall time and effort spent on said award or activity in that period.

The type of organization may cause the name of the after-the-fact certification process, the frequency of reporting, and the roles and responsibilities of personnel throughout the process to vary. For example, in higher education, this type of process is generally referred to as the ‘effort reporting process’ and often occurs quarterly. For higher education institutions, the institutional base salary concept is of key importance to after-the-fact certification. This is the annual compensation a faculty member receives for all of their work at a university, which might include compensation for teaching, research, and administration. When certifying faculty effort during the quarterly effort reporting process, a faculty member’s entire effort and institutional base salary should be reflected.

Besides after-the-fact certification, it is important to understand the role payroll distributions play in maintaining compliance with federal grants. Payroll distributions represent how the organization allocates the cost of an individual’s salary and related costs initially within its financial system (typically based on budget estimates). The certification process for payroll distributions includes an after-the-fact review and confirmation that the effort expended is at least equal to the salary paid (or identifying necessary adjustments to cost charging to be an accurate reflection). When implementing a process to certify effort in payroll distributions, it is essential to recognize that effort distributions will be reasonable estimates of activities, considering that research and other activity may be intertwined. A sound effort certification process and compliance program should have a policy, procedure, and system that addresses the federal requirements.

 

Common Time Charging Pitfalls to Avoid

There are several potential risks and common challenges that we have seen organizations experience when developing and implementing time charging policies and processes, including, but not limited to:

  1. Timesheets Are Submitted Based on Budget Estimates – This occurs when employees are entering daily time based on original budget estimates, rather than actual time worked. For example, let’s say an employee is originally budgeted to spend 25% of their time on four different projects or activities throughout the year. This employee enters two hours for each activity daily, regardless of the work performed that day.
  2. Timesheets Do Not Account for All of an Employee’s Time and Effort – This occurs when an organization establishes a timesheet process whereby employees only record hours worked on federal grants, rather than all hours worked. This is out of compliance with the requirements of the Uniform Guidance as the expectation is that the method used to account for time and effort (whether it be timesheets or after-the-fact certification) must account for all of the individual’s professional effort and then charges should be based on that proportional amount (rather than a static hourly rate).
  3. Effort Reported is Less than 100% of Compensated Activities – This example results in excess charges to grants which occur when an organization employs a reporting process that does not account for all compensated effort/activities. Effort reports must include all effort expended on compensated sponsored research, administration, unsponsored research activities, and other activities (including vacation, PTO, sick leave, etc.).
  4. Effort Reported is Greater than 100% of Compensated Activities – This occurs when the sum of individual effort categories is greater than 100%.If an employee works more than a normal 35-to-40-hour work week (or more than 2,080 hours in a year), an erroneous effort calculation may occur. If the effort percentage for a given grant project is calculated based on a 40-hour week, but the employee worked more than 40 hours, the total effort of all the employee’s activities sum to greater than 100%, thus overcharging the grant. To avoid this problem, effort calculations should be made based on the total number of hours worked, rather than a 35 or 40-hour work week.
  5. Employees Fail to Complete or Submit Timesheets in a Timely Manner – If employees are not completing and submitting timesheets regularly, it is easy to forget the actual nature of activities performed on any given day.
  6. Inappropriate or Ineffective Supervisory Review and Approval – When timesheet approval is required, it is critical that timesheets are reviewed by someone, ideally a supervisor, who has direct and specific knowledge of the work performed by the individual.
  7. Labor Reallocations without Appropriate Review & Approval – This problem occurs when an employee inadvertently charges and submits their time to the incorrect project. Federal grantees may be flagged when a payroll reallocation (or cost transfer) is made on the back end to correct incorrect charges, without the employee re-submitting a corrected timesheet. The best practice would be to have all changes in labor allocation originate from the employee themselves. Any adjustments to personnel costs charged to a grant should have appropriate documentation to validate the costs allocated. The charges should be based on actual work performed and any adjustments should be confirmed by the employee whose effort is being changed.

 

Other Considerations Related to Labor Costs

 

Labor Distribution Methods in a Timesheet Process:

There is more than one way to develop and implement a compliant timesheet process to ensure that labor distributions are appropriately supported by a system of internal control, incorporated into the official records of your organization, reasonably reflect the work performed, and comply with federal regulations. Namely, there are two common labor distribution methodologies employed when an organization utilizes timesheets. This includes the:

  • Diluted Hourly Rate Method: This method consists of determining an hourly rate by dividing the employee’s total monthly salary by the hours worked to determine a diluted hourly rate. This rate is then multiplied by the total hours charged to each project or activity to determine the total cost to be charged.
  • Percentage Method: This method consists of identifying the proportion of total hours worked by project and multiplying the total monthly salary by the identified percentage to determine the total costs to be charged to each activity.
Administrative Personnel:

It is important to note that the salaries of administrative and clerical support staff are normally treated as indirect costs and that the requirements discussed above apply to directly charged employee time. Typical administrative and clerical roles that would be included in your organization’s indirect cost rate include finance, human resources, and sponsored research administration (e.g., grant administrators who work on multiple grants). In instances when an employee is working on so many activities that it becomes untenable for them to accurately track their time and directly charge grants, you may want to consider incorporating that person or role into the indirect cost rate.

While organizations can face many challenges in charging personnel costs to federal grants, consistent recordkeeping can help you mitigate compliance risks. Contact us for more information on how you can develop and implement compliant time and effort policies and processes for charging personnel costs to federal awards.

 

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