Administrative charging: You’ve got questions, Jung has answers
The practice of billing expenses to federal sponsors is the top risk area for audits, expert says

Steve Jung, director of internal audit and institutional compliance, has compiled the following list of answers to frequently asked questions about administrative charging, one of the top areas of risk for mischarging costs to federal sponsors.

Q: I understand that auditors continue to question expenses for administrative salaries, supplies and services charged to sponsored project accounts. How can I avoid negative audit findings when I charge such costs to government-sponsored projects?

A: As articulated in Office of Management and Budget Circular A-21 (Section F.6.b) and Stanford policy (Research Policy Handbook 3.6), the underlying compliance principle is that typically administrative expenses (e.g., clerical salaries, phone line and local calling charges, postage, administrative supplies, memberships) normally should be charged as "indirect" costs, i.e., to an operating budget or other nonsponsored account. However, according to both government and Stanford policy, you can and should direct charge federal awards when it is permissible to do so.

A-21 and Stanford policy state that to be direct charged, the typically administrative salaries and supplies must be "significantly greater than the routine level of such services provided by academic departments." They also provide a list of specific examples of what constitutes a case where it is appropriate to direct charge. These examples all contain a common theme: The purpose of the typically administrative expense is to carry out the research or other work funded by the sponsor, i.e., a specific element of the scope of work as described in the proposal to the sponsor.

Q: What is the key to justifying direct charging for administrative costs to auditors?

A: What's key is being able to articulate to the auditors how those costs relate to accomplishing the intended outcomes of the funded project and, ideally, to be able to document that relationship when they come knocking. The most important element of documentation is a clear written description in the proposal work statement, budget and budget justification of the administrative-type work that is going to be carried as part of the project and the costs that we plan to direct charge. For administrative salaries, it also is important to document the work as it is actually performed, preferably via direct evidence (e.g., timekeeping system records, calendar notes).

Q: This appears to be a change from the way we've done things in the past.

A: The language in A-21 F.6.b, added in 1993, constituted a significant departure from the direct charging rules that we observed for many years. It meant that we could no longer depend on one of A-21's most important and easily understood cost principles: the definition of a direct cost, which says you can charge a government project for any allowable expense that clearly and directly benefits that project. In this special case, federal policymakers said that even though administrative supplies and services do benefit a project, we cannot direct charge for them unless the supplies and services are demonstrably necessary to accomplish the science or otherwise carry out the work scope as proposed to the sponsor.

Q: Why was this change made?

A: In the early 1990s, government auditors observed that there was very little consistency among universities, or even within the same university, regarding how administrative support costs for sponsored research were charged. Some direct charged for the expenses, others covered them with institutional or unrestricted funds.

The auditors argued that this situation was inequitable to the government, because in effect it was sometimes paying double for administrative costs, initially as a direct charge and then again as a component of the indirect costs that were tacked onto all direct charges through the institutions' Facilities and Administrative (F&A) cost rate. Along with a general sentiment in Congress to limit universities' ability to recover indirect costs, these factors led to the 1993 change in A-21.

However, as suggested above, the government did allow universities an opportunity to cover the costs of typically administrative supplies and services when their purpose is primarily to carry out the funded scope of work. So, for example, although an administrative assistant's routine work such as copying, phone line charges, and postage are no longer direct chargeable, if we are doing a research project involving a mailed survey, then the time an administrative assistant spends keying addresses of survey respondents, costs of duplicating the survey questionnaire, postage involved in mailing it and phones used to do follow-up work are all direct chargeable.

Q: What does "major project" mean?

A: The Office of Management and Budget (OMB) initially came up with the notion of "major project" in attempting to describe the circumstances under which it had decided to allow administrative supplies and services to be direct charged. In retrospect, this term may have been unnecessarily confusing, because many people reasonably assumed it meant that the administrative activities of large and complex projects could be direct charged. But Internal Audit's review of OMB's 1998 "clarification" of this issue (which is quoted verbatim in Stanford's most recent policy statement, see below), indicates that it is the existence of a significant project component which requires administrative supplies and/or services (including offsite performance of segments of the work) that makes a project "major" per the A-21 definition, not the size or complexity of the project. Thus, Stanford's latest policy guides our faculty to explicitly describe the tasks of an administrative nature to be supported by sponsor funds in their technical proposal (work statement), the budget and the budget justification, and to indicate specifically that they believe these tasks render the project "major."

Other important things to remember:

c Technical services and supplies (e.g., lab chemicals, photocopying to accomplish research objectives) that benefit a project can be direct charged as always.

c Because they typically establish "administration" as a discrete component of the work statement, "center grants," "program project grants" or other such multisite projects normally allow administrative costs to be direct charged provided that they have been properly proposed and budgeted.

c Most (but not all) nonfederal sponsors still adhere to the old direct charging principle: If it benefits the project and is not unallowable, you can charge it. So don't hesitate to charge benefiting administrative expenses to a nonfederal sponsor, after verifying that it has not adopted A-21's more restrictive administrative charging provisions.

c A violation of A-21's administrative charging provisions also very likely constitutes a violation of Cost Accounting Standard 502, which requires consistent treatment of direct and indirect costs in like circumstances.

And finally, remember Internal Audit's "total cost of the transaction" rule. While it may be easier at the outset to go ahead and charge a questionable expense, if that transaction cannot be justified at closeout or is selected for audit and is questioned at some later date, it can prove quite burdensome to justify the expense or to cover it from an unrestricted source if it is removed or disallowed. So if you have questions, better to ask before incurring the expense. Questions may be addressed to the appropriate research administration contact in your school, the Office of Sponsored Research, or Internal Audit at 725-0074.

Stanford's most recent policy on administrative charging, Research Policy Handbook 3.6, dated Dec. 1, 1999, states university policy and procedures and quotes extensively from Circular A-21. It also includes more questions and answers and several flowcharts to help identify when administrative expenses can be direct charged. It is available online at www.stanford.edu/dept/DoR/rph/3-6.html.