Compliance requirements are a series of directives established by federal government agencies that summarize hundreds of federal laws and regulations applicable to federal awards. These requirements are listed in the annual Compliance Supplement (2 CFR Part 200, Appendix XI) which can be found here. There are twelve types of compliance requirements for federal awards, but not every compliance requirement is considered applicable to each award. Not every compliance requirement may be applicable to your award, but a sound understanding of the requirements and your award documentation will help you determine which compliance requirements pertain to your award. If you have questions in determining which compliance requirements are applicable, please consult your auditor or contact at the awarding agency.
All organizations receiving federal awards are required to have written policies and procedures that give guidance to the organization’s employees on how to comply with applicable compliance requirements. While there are specific policies required by the uniform guidance, the compliance requirements applicable to individual programs can require more specific policies than those defined in the code.
In this article we will examine the most important requirements of the first six types of compliance requirements. They are:
Activities Allowed or Unallowed
The activities carried out with the award are allowed under the terms and conditions of the award agreement, program legislation, and federal awarding agency regulations. Your grant agreement is the primary source of guidance on what activities are allowed.
Allowable Costs/Cost Principles
Allowable costs are expenses that are deemed reasonable, necessary, and allocable to the federal award project, and that comply with applicable regulations and the terms of the grant or contract. Guiding principles are:
Reasonableness – Costs must be reasonable in nature and amount, reflecting what a prudent person would incur in similar circumstances.
Necessity – The costs must be necessary for the project’s performance and must be directly related to the goals of the grant or contract.
Allocability – Costs must be assignable to a specific project or cost objective and should benefit the project in a way that can be reasonably determined.
Consistency – Costs must be treated consistently within the organization and with generally accepted accounting principles and practices.
Compliance – Costs must comply with all applicable regulations, including those outlined in the grant agreement or contract, and in federal cost principles.
No Double Dipping – The same expenditure cannot be reimbursed by any other award or program.
Documentation – Costs must be adequately documented to demonstrate their allowability.
Cash Management
This section covers the handling of funds pertaining to a federal program, specifically how federal assistance is distributed to recipients and how recipients manage the funds until disbursement. The federal government will either reimburse organizations for expenditures made for allowable purposes or advance funds prior to the expenditures being paid.
Organizations that receive funds in advance of the related expenditures must minimize the time between when the funds are received and when they are spent. In addition, interest earned on these funds before they are spent must be spent before additional funds are requested.
Organizations that are reimbursed for expenses must maintain records supporting that the expenses were paid before the funds were received.
Eligibility
The main objective of this compliance requirement is to ensure only eligible individuals or organizations participate in federal assistance programs. The criterion for determining eligibility varies from program to program. To comply with this objective, recipients must first assure that proper eligibility determinations are made, which means that the recipient must determine the parameters and limitations to define eligibility for a specific program in accordance with the program’s purpose.
Equipment and Real Property Management
Equipment – Equipment is defined as tangible, non-expendable property acquired with federal assistance funds, that has a useful life of more than one year, and an acquisition cost greater than the amount specified in your award (consistent with a recipient’s own equipment policy, however, lower cost limits may be established). The following requirements apply to equipment:
- The property must be utilized in the program that purchased the equipment or in other federal programs appropriately.
- Equipment records must be maintained and a physical equipment inventory performed at least once every two years.
- When equipment with a current fair market value of $5,000 or more is no longer needed, it may be retained or sold. If sold, a proportionate share of the proceeds is provided to the federal government, based on the percent of federal funds to own recipient’s funds used to buy the item.
Real Property – Title to real property acquired by recipients with federal awards vests with the recipient. It must be used for the originally authorized purpose as long as needed for that purpose. Real property may be used in other federally sponsored projects or programs that have purposes similar to the one purchased with the federal award, as long as the federal government authorizes it. However, it may not dispose of or have an encumbrance of the title without prior federal government consent. When it is no longer needed for the federally supported programs or projects, the recipient must request disposition instructions from the federal government. As with equipment, if the property is sold, a proportionate share is provided to the federal government, in the amount of the current fair market value, based on the percent of federal funds to the recipient’s fund used to acquire the item.
Matching, Level of Effort, and Earmarking
This requirement includes three separate requirements with the goal of ensuring the organization is financially committed to the goals of the federal award.
Matching – This requires grantees to spend a specific dollar amount which is calculated as a percentage of total federal award. The match can either be required with every expenditure or by the end of the grant period.
Level of Effort – There are two components of this requirement:
- Supplement not supplant – The federal awards cannot be used to replace local resources.
- Maintenance of effort – Usually requires that the average prior local expenditure on a program must be wholly or partially met during the award period. It can also require that a specific level of service be performed.
Earmarking – These are instructions on how the federal dollars may be spent. For example, there may be a requirement for a specific amount to be spent on certain items/services, or it may include limits on overhead spending.
In a future newsletter, we will address the remaining six requirement compliance. If you have any questions, please contact your DZA representative.
