Reimbursement strategy recoups missed dollars 

Do you understand OMB rules A-21 and A-122?

Research organizations should have a strong handle on overhead costs under the federal Office of Management and Budget (OMB) rules, including circulars A-21 and A-122, an expert advises.

"The federal government awards billions of dollars every year for research and development, and a lot goes to colleges and universities," says Mark Davis, managing director in health services and education at BearingPoint Inc. in McLean, VA, a consulting firm that works with academic medical centers, colleges, and universities.

"That’s where a lot of the research in the United States is carried out, so these institutions are required to manage these funds as we’d expect them to do from a taxpayer standpoint," Davis says.

Two of the costs that require particular attention are those related to administrative costs and facilities-related costs, Davis says.

"There are several rules in the OMB A-21 that institutions are required to follow in terms of claiming reimbursements of indirect costs," he says.

"What’s happened over the years is we went through a period in the 1990s where the government’s focus was on indirect cost recovery," Davis notes. As a result, the government implemented changes to the cost principles for better managing indirect cost reimbursement, he adds.

"What we’re seeing today and over the last few years are an increase in federal funding, especially for the National Science Foundation and National Institutes of Health, and the government has shifted focus to looking at direct costs, which make up 90 percent of the federal research and development money," Davis says. "Eighty percent of that is in the form of salary and wages, so the focus now is on how institutions are managing direct costs."

So in today’s environment, effort reporting is the No. 1 compliance issue, and effort-reporting rules are all documented in A-21, Davis explains.

While rule A-21 applies to colleges and universities, a similar OMB circular, A-122, is for not-for-profit organizations, and research hospitals follow OASC-3. All three are similar, Davis says.

Here’s what you need to know about each rule:

  • A-21: Going back more than 10 years, the federal government found problems with some universities over indirect costs, Davis says. Under A-21, the government implemented cost accounting standards that colleges and universities are required to follow. They need to prepare a formal statement of their business policies and procedures and business practices and submit these to the government, he explains.

Institutions need to go on the record with details of what their practices are and how they are accounting for issues such as allowable and unallowable costs, Davis says.

The government is now auditing 120 institutions. "They’re traveling to the university and spending some time on site and reviewing records and policies to ensure the disclosure statement reflects what the university is doing."

In other words, the government’s chief objective is to make certain the institution has reported accurately what their policies are and how these are in compliance with regulations, Davis says.

For example, within the disclosure statement there is a section that requires the institution to define what its policy is on effort reporting and what methodology and procedures are being used, Davis says.

Also, auditors are looking to see how indirect costs are identified and allocated to research activity, he says.

Auditors are looking at these questions:

  • How is the institution defining each cost pool?
  • How are costs identified?
  • What methodology is used to track costs to research activities?

"Auditors will look at how the indirect cost proposal is prepared to ensure it’s consistent with federal regulations," Davis says. "They review the disclosure statement to ensure the methodologies and procedures used to prepare the indirect cost proposal are consistent with the A-21 cost principle."

The federal government prescribes a few different best practice methodologies, Davis notes.

No matter what methodology is selected, under effort reporting it boils down to a certification that the scientist or faculty has to certify at least annually their distribution of effort toward a research project, he says.

"In the academic community, that has been an issue, and there have been studies and project groups that have tried to look at effort reporting processes with an eye toward whether there is anything that can be done to reduce the burden and make it more efficient," Davis says. "But what it comes down to is that we see more and more institutions requiring individual faculty members to certify their efforts."

The reason institutions focus on the certification is because when a federal audit finds problems with undocumented costs, these typically are related to salary costs, Davis explains.

"You charged $75,000 for this project but have no record the investigator did the work, and there’s not an effort report to substantiate that the individual worked on the project, yet accounting has the charge," Davis says.

The majority of institutions and investigators are diligent about submitting quarterly reports to the sponsoring agency, listing work accomplishments in that period, Davis says.

"Scientists say, We performed the work and delivered the work product to the government, so why are we being asked to comply with the detailed accounting requirements?’" he says. "However, effort reporting is the only means to document that the work was performed, since in universities and colleges there are no time clocks for scientists."

By contrast, commercial businesses that are defense contractors will provide daily time reporting of everyone from the chief executive officer on down, Davis notes.

"So the academic community is required with an effort report to do certification at least once annually," Davis says.

  • A-122 and OASC-3: The basic difference between A-122, OASC-3, and A-21 is that A-21 has an administrative cap that limits universities to recovering 26% of administrative/indirect costs, Davis says. For not-for-profits and research hospitals, there are no caps for administrative costs, he explains.

"The difference in the rules goes back in time to when the government put administrative caps in university cost principles limitation," Davis says.

"Also, effort reporting for not-for-profits and research hospitals are more stringent than the A-21 rules." Under A-122 and OASC-3, institutions are required to document effort on a monthly basis, Davis says.

"What the government is concerned about is that when they look at the effort report, it should reconcile with the cost documented in the accounting system and their payroll system," Davis says. "Honestly, the institution should be reviewing that on a monthly or regular basis and ensuring the project accounting reports are accurate, and if something needs to be changed, it should be done in a timely way."

The OASC-3 currently is under revision by the federal government. "The government is going through the process of looking at hospital cost principles with the view of streamlining those principles to make them more consistent with A-21 and A-122," Davis says.