REVIEW
GUIDE FOR
STATE AND LOCAL GOVERNMENTS
STATE/LOCAL-WIDE CENTRAL SERVICE COST ALLOCATION PLANS
AND INDIRECT COST RATES
U.S. Department of Health and Human Services
Division of Cost Allocation
(DATED 1/31/00)
STATE AND LOCAL GOVERNMENTS
STATE/LOCAL-WIDE CENTRAL SERVICE
COST ALLOCATION PLANS
AND INDIRECT COST RATES
TABLE OF CONTENTS
-
Introduction
-
Preliminary
Review
-
General
-
Reconciliation
of Proposal To Financial Statements
-
Trend
Analysis
-
File
Documentation
-
Reference
Material
- State-Wide Cost Allocation
Plans
- Section I Costs
- Section II Costs
- Internal
Service Funds
- Self-Insurance
Funds
- Fringe Benefits
- Indirect
Cost Rates
- Attachment A - Reconciliation of Retained Earnings
Sample Formats
I. INTRODUCTION
This review guide was developed to assist
Division of Cost Allocation (DCA) staff in reviewing and negotiating
state-wide cost allocation plans and indirect cost rates for state,
local and Indian tribal governments. The guide includes suggestions,
facts and concerns that should be considered in planning and conducting
reviews of proposed state-wide cost allocation plans and indirect
cost rates. Alternative approaches and allocation methods are considered
and discussed in detail. The development of billing rates for internal
service funds and other interagency services is also discussed at
length. Although the guide is intended to be reasonably detailed
and comprehensive, it is not a substitute for professional experience
and judgment. DCA staff should consider the complexity of the proposal,
the level of Federal reimbursement, and prior experience with the
governmental unit when planning his/her review.
The Office of Management and Budget (OMB) has issued
cost principles for all Federal agencies that award grants and contracts
to state and local (including tribal) governments. OMB Circular
A-87 (A-87) establishes cost principles for determining costs applicable
to those grants and contracts. A-87 contains general principles
for determining allowable costs, both direct and indirect. It also
contains information and guidance concerning the development and
submission of state-wide cost allocation plans, indirect cost rates
and public assistance cost allocation plans. This document addresses
the review and negotiation of state-wide cost allocation plans and
indirect cost rates. Guidance with regard to public assistance cost
allocation plans will be provided in a separate issuance.
A-87 was originally issued in 1969, with a number
of revisions since that time. In 1995, A-87 was completely updated
and reissued including expanded guidelines in a number of areas
which had produced conflicts and confusion during the preceding
25 years. Among the changes to A-87 were increased documentation
requirements for salaries and wages, expanded allowability of certain
interest expenses and clarification of policies with regard to pension
and post-retirement health benefits. Of particular significance
was the new requirement for extensive documentation in support of
internal service funds, self insurance funds, and fringe benefits.
It also included, for the first time, a special attachment dealing
specifically with public assistance cost allocation plans. The changes
to A-87 are, in part, the reason this guide has been prepared.
The objective of A-87 is to provide specific and
consistent principles and standards for determining costs of Federal
awards carried out through grants, cost reimbursement contracts,
and other agreements with governmental units. These principles are
for the purpose of cost determination and are not intended to dictate
the extent of federal reimbursement for a program or project. There
is a basic assumption that governmental units are responsible for
the efficient and effective administration of Federal awards, and
A-87 does not attempt to impose specific organization or management
techniques to assure proper and efficient administration of Federal
awards. The reviewer should keep these basic concepts in mind when
drawing conclusions about the allowability of costs assigned to
Federally financed activities.
A-87 contains five (5) attachments: Attachments
“A” and “B” address allowable costs and
include specific guidance on various selected costs; Attachment
“C” provides information related to state/local-wide
central service cost allocation plans; Attachment “D”
relates to public assistance cost allocation plans; and Attachment
“E” deals with indirect cost rate proposals. As previously
noted, this guide will provide DCA staff with recommended review
procedures for state/local-wide cost allocation plans and indirect
cost rate proposals. Public assistance cost allocation plans are
dealt with in separate documents.
In addition to A-87, the Department of Health and
Human Services (HHS), in coordination with OMB, has developed an
implementation guide for A-87 entitled, “A Guide for State,
Local and Indian Tribal Governments” (ASMB C-10). The ASMB
C-10 is intended to assist governmental units in applying the principles
and standards contained in A-87. It was issued in April, 1997 by
the HHS Office of Audit Resolution and Cost Policy in accordance
with the mandate contained in A-87. ASMB C-10 provides clarification
and procedural guidance to implement the provisions of A-87, and
will also provide the reviewer with answers to many of the issues
concerning cost policy not specifically addressed in A-87 itself.
II. PRELIMINARY
REVIEW
A. GENERAL REVIEW
STEPS
|
COMMENTS
|
- Determine whether the proposal package
is The proposal package should include: complete; in sufficient
detail to permit an adequate review; and is in a format
that can be readily C followed by the reviewer.
|
- The proposal itself, including detailed
schedules on the composition and allocation of all allocated,
billed or indirect cost centers.
- A copy of the state’s Comprehensive
Annual Financial Report (CAFR) and any other financial records
supporting the amounts included in the proposal.
- A detailed and understandable reconciliation
of the costs included in the proposal to the state’s
official accounting records and/or the CAFR.
- An explanation of any significant increases
in individual cost centers or rate components. (e.g. a proposed
central service or significant indirect cost rate component
that is more than 10% higher than the level negotiated for
the prior year).
- A computation of the actual/estimated Federal
Financial Participation (FFP) for each applicable agency
with Federal funds.
- Any other information specifically requested
by the DCA as a condition of prior negotiation
agreements
- A signed Certificate of Cost Allocation
Plan or Certificate of Indirect Costs as required by A-87,
Attachment A, Section H.
- Justification for deviations from the standard
allocation bases prescribed by A-87.
|
- Review the prior negotiation workpapers
and determine the following:
- When was the last on-site review conducted?
- Were there any findings/recommendations
contained in the most recent A-133 audit report that
should be considered in the current review?
- Review negotiation adjustments and
insure corrections were included in the current proposal.
- Did the negotiation agreement contain
any conditions? If so, has the grantee complied with
those conditions?
- If fixed rates/amounts were negotiated,
does the carry-forward amount in the current proposal
agree with the prior written carry-forward agreement?
|
Review the Audit Clearance Document to determine if agreed adjustments
have been included in the proposal.
If the corrections were not made, or conditions were not fulfilled,
appropriate adjustments should be made. |
- By comparing the submission with prior
negotiations, identify any aspects of the proposal which
appear out-of-line and are not fully explained or discussed
in the proposal package.
|
|
- Determine the areas of the proposal that
appear to require an in-depth review and/or an on-site review.
|
On-site reviews are
usually required for state-wide cost allocation plans and indirect
cost proposals from agencies that receive substantial Federal
funding. |
- Determine if the grantee is proposing any
cost/rate increases beyond those based on historical costs.
|
Proposals which include
projected costs usually require a more detailed review. See
separate sections of this guide for a more thorough discussion
of projected cost increases. |
- “Test-check” the mathematical
computations to ensure their accuracy.
|
These verifications
and the extent to which the verifications were made should be
noted on the proposal, workpapers, etc. |
B. RECONCILIATION OF PROPOSAL
TO THE FINANCIAL STATEMENTS
Costs included in the cost allocation plan or indirect cost rate
proposal must ultimately be reconciled to the state’s Comprehensive
Annual Financial Report (CAFR) or other official accounting records.
The reconciliation process will generally require the use of detailed
accounting records such as appropriation statements or similar budget
and expenditure documents. These documents are the official accounting
records of the state/locality and are the source of the expense
information contained in the CAFR. The information in these statements
should provide the necessary information to determine that cost
have been properly categorized as allowable or unallowable. The
reconciliation should be part of the proposal and the proposal is
incomplete without it.
STEPS
|
COMMENTS |
- Reconcile the proposal to the CAFR and/or
other official accounting records.
|
Total costs for each
agency should be reconciled first to the Statement of Appropriations
or similar document. These documents are the source of the expenditure
information included in the CAFR. In many cases the amount reported
in the CAFR will be the sum of a number of appropriation accounts
and may include reclassifications or other adjustments. A careful
examination of these accounts is necessary to insure that all
appropriate costs have been included in the proposal. It will
also enable the negotiator to identify any unallowable or unallocable
costs. |
- Once the negotiator is assured that the
costs included in the proposal agree with the CAFR/appropriation
statements, adjustments for unallowable or additional costs
should be examined for appropriateness.
|
Refer to A-87, Attachment
B, for a discussion of allowable and unallowable costs. Additional
costs not recorded on the books of account, such as “use
allowances”, must be reviewed for adequate support. Additional
information regarding the reconciliation and verification of
costs included in the proposal is contained in sections of this
guide dealing with specific types of rate/cost allocation proposals. |
C. TREND ANALYSIS
A trend analysis of the costs, rates, and allocation bases should
be performed during the preliminary review for all state/local-wide
cost allocation plans and for those indirect cost rates where significant
federal funds are involved. A trend analysis can be completed in
a short time and may provide the negotiator with insight into the
areas of the proposal needing a more detailed review.
STEPS
|
COMMENTS
|
- Complete a detailed trend analysis of the
cost pools, allocation bases, and indirect cost rates as
appropriate. The analysis should compare costs for a minimum
of three (3) years.
|
There are a variety of areas in which a trend analysis may be
useful. For cost allocation plans, both the costs being allocated
and the bases used to allocate the costs should be considered.
This will allow the negotiator to determine not only cost
centers with significant increases, but also important shifts
in the allocation of those costs among various benefitting
agencies. In indirect cost rate proposals it is critical to
analyze changes in both the indirect cost base and the indirect
cost pool. Finally, the trend analysis will identify new cost
centers included in the proposal.
More guidance on trend analysis as it relates to specific types
of proposals is contained in later sections of this guide.
|
- Evaluate the state’s justification
for any significant changes or additions.
|
If the state has not
included the required justifications the negotiator should request
them immediately. |
D. FILE DOCUMENTATION
The negotiation workpaper files should contain sufficient documentation
(e.g. file notes, schedules, interview/meeting notes, etc.) to clearly
show:
- What aspects of the proposal were reviewed.
- What portions of the proposal were not reviewed
and why.
- What adjustments were made to the proposal,
the reasons for the adjustments and supporting computations.
- How the approved rates/costs were computed and
negotiated.
- How any cost savings were computed.
- Required certifications
E. REFERENCE MATERIAL
- OMB Circular A-87, “Cost Principles for
State, Local and Indian Tribal Governments”
- OMB Circular A-102, “Grants and Cooperative
Agreements with State and Local Governments”
- OMB Circular A-133, “Audits of States,
Local Governments, and Non-Profit Organizations”
- ASMB C-10, “A Guide for State, Local and
Indian Tribal Governments”
- Grants Administration Manual/Grants Policy Directives
- 45 CFR Part 16, “Procedures of the Departmental
Grants Appeals Board”
- 45 CFR Part 74, “Uniform Administrative
Requirements for Awards and Subawards to Institutions of Higher
Education, Hospitals, Other Nonprofit Organizations, and Commercial
Organizations; And Certain Grants and Agreements with States,
Local Governments and Indian Tribal Governments” - Departmental
Implementing Regulations for OMB A-110
- 45 CFR Part 92, “Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and
Local Governments” - Departmental Implementing Regulations
for OMB A-102
Internet Sites:
- OMB
Circulars - www.whitehouse.gov/omb/grants/index.html
- GASB
Statements - www.rutgers.edu/Accounting/raw/gasb/st/summary
- FASB
Statements - www.rutgers.edu/Accounting/raw/fasb/st/summary
-
HHS Cost Policy Issuances (including ASMB C-10) - www.hhs.gov/progorg/grantsnet
- CFR
Sections - www.access.gpo.gov/nara/cfr/index.html
-
DAB Decisions - www.hhs.gov/dab/index.html
- Actuarial
Standards of Practice - www.actuary.org/standard.htm
See separate sections for specific reference
material related to individual areas.
III. STATE-WIDE AND LOCAL
COST ALLOCATION PLANS
Most governmental units provide certain services, such as motor
pools, computer centers, purchasing, accounting, etc., to operating
agencies on a centralized basis. Since Federally supported awards
are performed within the individual operating agencies, there needs
to be a process through which these central service costs can be
identified and assigned to benefitting activities on a reasonable
and consistent basis. The central service cost allocation plan (commonly
referred to as the state-wide cost allocation plan or SWCAP and
for local governments, LOCAP) provides that process.
A. SECTION I
The allocated costs of the central service cost allocation plan
are commonly referred to as “Section I” costs. These
central service costs are allocated to benefitting operating agencies
on some reasonable basis (e.g., number of warrants issued, number
of employees) - not on a fee-for-service basis.
STEPS
|
COMMENTS
|
SECTION A - PRELIMINARY STEPS |
-
Determine that the plan is accompanied
by all required supporting documentation:
-
A certification by the State Budget
Officer or other authorized state official as required
by A-87.
-
The state’s official financial
statements.
-
An organization chart that shows the
state-wide organizations rendering services, all the
state departments/ agencies receiving the services,
and all the departments/agencies not receiving the services.
-
Exhibit A in an electronic file.
|
Where a local-wide cost allocation plan is being negotiated, the
word “state” should be read as “local”
for this step and all subsequent steps.
The documentation required to support the plan may vary depending
on the circumstances involved in the negotiation. The items
listed here are considered to constitute the minimum documentation
necessary to permit an evaluation of the plan.
Only changes to the organizational structure need to be submitted
after the initial organizational chart has been submitted.
Lotus or Excel is preferred but an ASCII file
is acceptable. See Section D, Concluding Step 4. |
-
Determine whether the plan, as a minimum,
contains:
- The nature of the services provided
and their relevance to Federal grants and contracts.
- The items of expense included in the
central service costs.
- The methods used in distributing the
costs.
- Identify both state departments/agencies
rendering the services and those receiving the services.
- A summary schedule showing the allocation
of each service to the specific benefitted agencies.
|
|
- Coordinate the negotiation with interested
Federal agencies.
|
Federal agencies
interested in participating in a negotiation will notify the
negotiator. In these cases, the interested agency should be
notified upon the receipt of a proposal or audit report on the
organization and asked to advise the negotiator of any factors
that should be taken into account in the negotiation. If the
Federal agency has not received a copy of the proposal or audit
report, the negotiator should send (or arrange for the state
or audit agency to send) a copy of the document to the agency.
If a formal negotiation is deemed necessary, the agencies which expressed an
interest in participating in the negotiation should be invited
to send a representative to the pre-negotiation conference
as well as to the formal negotiation conference. If an agency
does not wish to send a representative to either of these
two conferences the negotiator will act on behalf of that
agency.
After the negotiation is concluded and an agreement issued, a copy of the agreement
will be distributed to other Federal agencies as part of the
normal responsibility for the distribution of agreements.
|
-
Review negotiation agreements, cost allocation
plans, correspondence, and workpapers applicable to prior
years to determine:
- Whether the state has complied with
the terms and conditions of the prior negotiation related
to the development of future cost allocation plans.
- Whether the “carry-forward”
amount was correctly computed and included as part of
the plan (if central service costs were approved on
a “fixed” basis in prior years).
- What adjustments were made in the prior
year’s negotiation.
|
In prior negotiations,
advance agreements may have been established for future negotiations
to preclude disputes or problems or to help insure equitable
cost determinations in the future. Examples of such agreements
include those involving the performance of special studies or
refinements in allocation bases, the treatment of certain types
of costs, changes in the state’s accounting system. |
- Review the organization chart and the amount
of Federal grant/contract costs incurred by each organization
receiving the central services to determine the services
which should be most thoroughly evaluated because of their
ultimate impact on grant/contract costs.
|
|
- Complete a trend analysis of the cost pools
and allocation bases.
|
For the analysis of the allocation
bases, select high Federal subvention agencies to determine
if the percentage of costs allocated to these agencies has changed.
The state needs to account for any significant increases. |
- Obtain a copy of the A-133 Single Audit
report. Determine if there are any audit findings that effect
the scope of the review.
|
If the applicable
A-133 Single Audit report has not been issued, review the most
recent audit report. |
- Determine the appropriate level of negotiation
effort and whether or not a HHS audit is needed.
|
Final determination
on these matters may not always be possible at this point.
However, they should be made as early in the negotiation process
as possible.
If the negotiator concludes that an audit
is necessary, he/she needs to identify the specific areas
which the negotiator feels are critical to the determination
of the reasonableness of the proposal and which cannot be
satisfactorily evaluated without an on-site audit review.
A special audit request should be sent to the Regional Audit
Director. The request should indicate the specific reason(s)
why the audit is needed and should include the negotiator’s
recommendations on the scope of the audit. If an audit is
conducted, the negotiator should discuss the scope of the
audit with the auditor to determine whether the specific areas
of the proposal are being adequately covered during the audit,
The negotiator should not duplicate the work being performed
by the auditor. |
- If an audit is not to be conducted, reconcile
the plan to the state’s financial statements or other
financial documents used to support the plan.
|
If the amounts do
not reconcile and if they cannot be readily reconciled via telephone,
the state should be requested to submit additional data. |
SECTION B - REVIEW OF COSTS
STEPS
|
COMMENTS
|
- Determine whether all central services
(allocated and billed) are accounted for by Sections I and
II of the plan.
| To assure
that duplicate charges do not occur, the plan must account for
all central service costs, including those which are billed
to the user departments/agencies and institutions (e.g., state
hospitals or universities). |
- Determine if any new allocated central
service costs were added.
|
Review the justification
for including the item as a Section I cost. |
- Determine whether the costs included in
the plan appear to be allowable, reasonable and allocable
to Federal awards.
|
For definitions of
cost allowability, reasonableness and allocability, refer to
A-87, Attachment A, Part C, 1-3. |
- Determine that applicable portion of the
costs of department/agency heads and their immediate staff
are excluded from the plan, if there are any unallowable
functions reporting to them.
|
|
- Determine whether the central services
costs in the plan exclude the following unallowable costs:
- Alcoholic beverages (4.)
- Bad debts (7.)
- Contingencies (12.)
- Contributions and donations (13.)
- Entertainment (18.)
- Equipment and other capital expenditures
(19.)
- Fines and penalties (20.)
- Fund raising (21. a.)
- General government expenses (23.)
- Investment management (21. b.)
- Legal expenses for prosecution of claims
against the Federal government (14. b.)
- Lobbying (27. & 30. e.)
- Underrecovery of costs under Federal
agreements (42.)
|
The numbers next to
each item refer to the section number in A-87 which prescribe
the handling of these costs. Unless otherwise noted, the references
refer to Attachment B of A-87. |
-
Review the following costs to determine
whether they have been treated properly in the cost allocation
plan:
- Depreciation or use allowances:
- Determine that the value of the
assets for depreciation/use allowances purposes
was properly established.
- Determine that cost of land and
the portion of assets that are Federally financed
or financed with grantee matching contributions
have been eliminated from the computation.
- Determine that a combination of
the depreciation and use allowance methods have
not been used for a single class of fixed assets.
- If depreciation is proposed, determine
that the depreciable lives that have been established
are reasonable.
- Determine that the depreciation
methods used result in an equitable allocation of
costs to the time periods in which the assets are
used.
- Determine that the charges for
use allowances or depreciation are adequately supported
by property b. Rental costs records.
- If use allowances are proposed,
determine that a factor no greater than 6 2/3 percent
has been used for equipment and 2 percent has been
used for buildings.
- Rental costs
|
The value for depreciation/use
allowances purposes is acquisition cost. This cost should
reflect the actual amount recorded in the records of the state
or, if cost records do not exist, an estimate of the acquisition
cost, which is usually based on an independent and professional
appraisal. Where such appraisals are used, care should be
exercised to insure that the amount used reflects the cost
at the time of purchase and not replacement cost at the time
of the appraisal. Where depreciation or use allowances
are material in amount the negotiator should satisfy himself
that the valuation bases are proper and, if the amounts are
based on appraisals, that such appraisals were performed by
independent and professional appraisers or by other reliable
methods (e.g., insurance valuations).
In the absence of historical usage patterns,
guidance in this area can be found in A-87, Part B, Paragraph
15, e. or IRS depreciation guidelines.
Depreciation methods other than the straight line method
should not be accepted unless the circumstances fully justify
their use (i.e., when it can be demonstrated that assets are
being consumed faster in the earlier years than in the latter
years of their useful lives).
When the depreciation method is followed, depreciation records
indicating the amount of depreciation taken each period must
also be maintained.
Refer to A-87, Attachment B, Part 38, for limitations
on the amount of rental costs that may be charged to Federal
awards under various types of leasing arrangements (e.g., sale
and leaseback arrangements, less-than-arms-length leases or
capital leases). Also refer to Chapter 6-10 of the Grants Administration
Manual. |
- Determine whether the central service costs
which are allocated in the plan properly exclude the “general
cost of government.”
|
The “general
costs of government” are not explicitly defined in A-87.
They have been construed, however, to include the general costs
required to carry out the overall responsibilities of the state
or local unit of government. The principle examples of these
costs are those incurred in operating the governor’s office
and those incurred in operating state/local legislative bodies.
This does not preclude the recovery of special, identifiable
expenses incurred pursuant to the administration of Federal
grants/contracts in one of these normally unallowable activities. |
- Determine whether the central services
included in the plan benefit Federal awards.
|
Unless specifically
unallowable, central services benefit Federal programs if they
benefit the program directly or if they are necessary for the
overall operations of departments/agencies performing the programs. |
- Determine whether appropriate consideration
was given to any “applicable credits” in the determination
of the expenses included in the plan.
|
Income generated by
activities conducted by the state agencies providing central
services and certain negative expenditure types of transactions
should be used to off-set or reduce expense items (e.g., sale
of scrap and publications, parking fees, cafeteria income, purchase
discounts and rebates, etc.). |
SECTION C - REVIEW OF COST ALLOCATION METHODS
The central service costs are normally distributed on a number of different bases
dependent upon the element of cost being distributed. This area
is critical to the propriety of the plan. The negotiator, therefore,
should thoroughly analyze the bases to determine whether their use
results in an equitable distribution of costs to the benefitting
activities.
STEPS |
COMMENTS
|
1. Determine whether
the bases chosen by the state are appropriate for allocating
each central service. |
Any method of distribution
which will produce an equitable distribution of the cost can
be used. In selecting one method over another consideration
should be given to the additional effort required to achieve
a greater degree of accuracy. Suggested bases are shown in Part
4.6.2 of the Guide for State, Local and Indian Tribal Governments
(ASMB C-10). |
2. Determine whether the proposed bases include all activities
which benefit from the central services being allocated, including
all departments/ agencies benefitting from the services, and
where appropriate:
- Activities associated with general funds
- Activities associated with restricted,
special purpose, or other funds
- Grants and contracts
- State institutions (e.g., hospitals, universities)
- Costs used for cost sharing or matching
purpose
- Non-state organizations which receive services
(e.g., an affiliated foundation, a local government agency,
etc.)
|
|
3. Determine whether
the data included in the bases (e.g., square footage, number
of employees, time studies, etc.) are current and accurate. |
|
4. Determine that
activities supported by “flow-through” funds have
been properly treated. |
In some state department/agencies,
notably Departments of Education, the state acts mainly as a
conduit of certain grant funds which “flow through”
the state to local units of government and, in some cases, to
other types of organizations (e.g., universities, non-profit
institutions, etc.). In such cases, the activities supported
by the funds generally do not receive central services from
the state and, therefore, should normally be excluded from the
base(s) used to allocate the central service costs. |
5. If the proposed
base is state operating expenditures, determine if recipient
payments are excluded. |
Inclusion of recipient
payments (e.g., financial assistance, food stamps or medical
vendor payments) in the base will distort the distribution of
costs to benefitting departments/agencies. |
SECTION D - CONCLUDING STEPS
STEPS |
COMMENTS
|
1. Determine whether
there are any significant anticipated changes in the state’s
operations (e.g., organization structure, accounting system,
etc.) that should be take into account in negotiating provisional
or fixed central service costs. |
Normally these costs
should be based on the actual costs for the state’s most
recently completed fiscal year. However, if the state anticipates
significant changes in its operations that would affect the
costs, the state would be permitted to use appropriated budget
amounts which reconcile to official documents. |
2. Determine whether
an advance agreement covering future negotiations should
be established. |
Advance agreements
should be established when they are needed to preclude future
disputes or problems or when they will help insure equitable
cost determinations in the future. Examples of areas where
these agreements may be needed include (a) the performance of
special studies or analyses in the development of future plans,
(b) changes or refinements in allocation bases, (c) the treatment
of certain types of costs, (d) changes in the state’s
accounting system, etc. If an advance agreement is established
it should be included in the letter transmitting the Negotiation
Agreement. |
3. Complete Summary
of Negotiation. |
A summary of negotiation
should be prepared which shows the amounts negotiated that are
different from the amounts submitted, and the reasons for the
negotiated differences. The summary should be sufficiently detailed
to permit an independent reviewer to quickly see and understand
how the negotiated amounts were arrived at. |
4. Transmit the electronic
file of the negotiated Exhibit A to DCA - Washington DC headquarters.
|
The SWCAP information
will be made available to Federal agencies through the government’s
intranet. |
B. SECTION II COSTS
The billed costs of the central service cost allocation plan are
commonly referred to as “Section II” costs. These central
service costs include internal service funds, self-insurance funds
and fringe benefit funds.
1. INTERNAL SERVICE
FUNDS
The internal service funds (ISFs) and other billed services (e.g.,
general fund revolving fund/accounts) might include billings for:
- Services provided, e.g., ADP, Motor Pool, etc.
- Payments made centrally and charged to departments
based on established allocation percentages, e.g., telephone costs
based on the number of instruments, utility costs based on square
footage.
- Supplies requisitioned at inventory cost plus
a mark up for administrative cost.
STEPS
|
COMMENTS
|
SECTION A - PRELIMINARY STEPS |
1. For each ISF or similar activity with an operating budget of
$5 million or more, determine whether the plan contains:
- A brief description of each service.
- A financial report balance sheet.
- A revenue/expense statement with revenues
broken out by source (e.g., regular billings, interest earned,
etc.).
- A listing of all non-operating transfers
(as defined by GAAP) into and out of the fund.
- A description of the procedures (methodology)
used to charge the costs of each service to users, including
how billing rates are determined.
- A schedule of current rates.
- A schedule comparing total revenues (including
imputed revenues) generated by the service to the allowable
costs of the service under A-87, with an explanation of
how variances will be handled.
- A schedule of billing services (by user
and consist of all revenues, including unbilled, uncollected
and imputed revenues).
|
Although
the documentation is required by A-87 for those ISFs with operating
budgets of $5 million or more, the negotiator has the option
of requesting any of the information for ISFs with operating
budgets less than $5 million. This is applicable when reviewing
smaller state governments.
ASMB C-10, Section 4.7 requires a schedule for all funds, including those under
$5 million. For example formats, see Attachment A. Other formats
may also be acceptable.
See ASMB C-10, Illustration 4-6 for an example.
|
2. Ensure that all ISFs are identified by reviewing:
- Internal Accounting Manuals
- Financial Statements (Certified, Internal,
other)
- Budget Documents
- Discussions with appropriate state/local
personnel
|
Data
on ISFs should have been submitted from the entity in accordance
with A-87. The negotiator should be aware that requirements
are also applicable to activities that function like ISFs
but are not formally setup as an ISF.
The financial statements may only indicate
in sub-schedules the existence of centralized service accounts
but reviews of accounting manuals and discussions with appropriate
state/local personnel would be required to identify all ISFs.
Discussions will also highlight areas where functions are
"Memo Billed.” |
3. Review all ISFs to identify:
- Those that are central service versus those
of an operating department.
- The specific nature of the central service
function.
- All potential users.
- Those with potential Federal recoveries.
|
A Department of Corrections may run a farm, operate a laundry,
build furniture, etc., for which ISF was established. A Department
of Health may charge out for laboratory services. Responsibility
for review of these funds should be the cognizant Federal
agency for state/local department providing the services.
This can be a direct charge to a Federal program, an overhead
account at the operating department level or a charge to a
Section I central service function which is subsequently allocated
to Federal programs. |
4. Obtain copy of the latest audit to identify departments/agencies
with Federal funds and potential problem areas. This would
include:
- A-133 Single Audit or other independent
audits
- HHS OIG Audits
- State Internal Audits
|
If there
is no audit, the negotiator should be alerted to the fact that
there may not be a complete tracking of sales and related accounts
receivable. Potential problems may be that charges are based
on revenue received rather than charges for total usage of the
services provided. |
5. For new ISFs, discuss with appropriate state/local personnel
to determine:
- When the fund was first established.
- How the fund was initially funded (capital
transfer, etc.).
- Existence of external and/or internal financial
statements.
- Manner in which services are charged out,
i.e., billing rate system or recorded cost procedures.
|
Billing
rate steps are described in Section B. 1. below and cost procedures
steps described in Section B. 2. |
SECTION B - REVIEW OF BILLING MECHANISMS
Normally under a billing rate system, a formal schedule
of user rates is published and used for charging purposes; whereas
under cost allocation procedures, the actual cost of the
period (e.g., monthly, quarterly) are charged out to the users of
the service during the respective periods on the actual allocation
statistics for the period.
STEPS
|
COMMENTS
|
1. Review billing rate system
- Review current billing rate schedule of
charges and obtain support for rates to determine if data
is current and accurate, and unallowable costs are excluded.
- Determine whether the rate provides for
all costs, e.g., fringe benefits, SWCAP, etc.
- Review the schedule of billings by user
to determine if all users (including outside the governmental
entity) are billed, as well, as billed the same rate for
the same service. Also, ensure that there are no differences
in billing state and non-state functions.
- Determine that serviced departments are
not overbilled because of another department’s underbilling.
- Identify procedures followed by service
and serviced departments where billings exceed original
appropriated amounts.
- Review rate base to determine whether it
equitably distributes the cost of the service
- Determine if past profit/loss is properly
treated.
|
Federal funds are
usually billed upon usage of specific service with funds transferred
at that point from the Federal program to the ISF. State funds
may be handled in the same manner or the entire funds appropriated
to operating departments may be transferred to the ISF at
the beginning of the state year setting up payable/receivable
amounts in their respective accounts. Under the latter approach,
the billings to state programs during the year only result
in reductions to payable/receivable accounts.
A problem consistent with the billing method
is that the
billing rate may provide for replacement of assets rather
than depreciation on existing equipment.
Cars can be purchased directly under Federal awards.
The consistency principle must be applied where the
same department is being billed from a central motor
pool.
As a general rule, separate billing rates for Federal
programs should not be required from those that a state
uses for its own purposes.
The review should address the need for multiple rates.
In addition, outside expertise may be needed (e.g., ADP reviews).
|
NOTE: Once a billing
rate system is established and approved, it should be selectively
reviewed in the future to be satisfied that the system is working
as intended. |
2. Review cost allocation procedures
- Review the method used to bill out the
cost.
- Determine the composition of cost. The
data should be current and accurate, and unallowable costs
excluded.
- Determine if all users are charged on the
same basis.
- Determine that serviced departments are
not overbilled because of another department’s underbilling.
- Identify procedures followed by service
and serviced departments where billings exceed original
appropriated amounts.
- Review charge out base (i.e., allocation
statistics) to determine whether it equitably distributes
the cost of the service provided.
|
Under this approach,
costs are charged out on a periodic basis, e.g., monthly based
on actual usage during that period.
Comments noted under Section B. 1. above apply here also. In
addition, the review must include the identification of non-recurring
items and instances where bills are paid by the state in lump
sum as opposed to the
same billing cycles as it charges its users. If these costs
are charged out based on one month's statistics it could result
in charging inappropriate programs. |
NOTE: Once a system
is approved, a review of at least one billing cycle is needed
to assure compliance with approved procedures. |
SECTION C - REVIEW OF RECONCILIATION OF RETAINED EARNINGS
STEPS
|
COMMENTS
|
1. Review annual reconciliation of retained earnings, i.e., the
schedule comparing total revenue (including imputed revenue)
to the allowable costs. Need to determine if variances were
properly treated.
- Determine whether funds which utilize multiple
billing rates/functions should be required to have separate
reconciliation schedules for each billing rate/function.
- Verify the accuracy of the reconciliations
to supporting documents (e.g., CAFR). Also, math check the
schedules.
- Review the accuracy of the beginning A-87
R.E. balances.
- Determine that the A-87 Revenue reflects
total charges for all services provided for the year whether
billed or not.
- Verify the accuracy of interest earned
or imputed interest. Review fund statements to determine
if applicable credit has been given for earnings on ISF
cash balances. If earnings are not reported, the negotiator
should impute the interest amount and determine through
discussion with state personnel if cash balances are invested.
- Review the expenditure amounts to ensure
that unallowable costs are excluded and that remaining costs
meet A-87 requirements.
- Review the allowable reserve to determine
if the amount is excessive.
-
Review the adequacy of
fund transfers made during the year.
-
Determine if there is
an excess balance to the fund.
|
Sample formats are shown as Attachment A. Other formats may also
be acceptable.
For example, an ISF may consist of both ADP and Telecommunication
services where each function separately identifies its own
revenues and expenditures. An overall fund balance may not
be appropriate, because excess charges may occur in one billed
service but undercharges may occur in other billed services.
In addition, various users do not utilize each billed service
to the same extent.
If the fund has not been reviewed or if adjustments have not been
made for overcharges in prior years, the beginning balance
is the R.E. balance on the state’s CAFR including allowable
adjustments (e.g., transfers in/transfers out, A-87 unallowable/allowable
costs, imputed interest).
If the fund has been reviewed in prior years, the beginning balance
will be the ending balance from the previous year’s
reconciliation schedule. However, if adjustments for
excess reserve balances have been made, then a zero balance
may be the appropriate starting balance.
If some users were not billed for services (or not billed at a
full rate), a schedule showing the full imputed revenues should
be provided (see ASMB C-10, Illustration 4-6). The revenue
should also include all other revenues the fund earns from
its operations and interest earned on reserves.
When known, actual earnings should be used. However, if the state
commingles its funds, earnings may be imputed by applying
the government’s rate (e.g., the state’s Treasury
Average Rate of Return) to the monthly average cash balance
for the year.
Common problem areas:
- Replacement costs.
- Expensing of capital assets rather than
depreciating.
ISFs are dependent upon a reasonable level of working capital
reserve to operate one billing cycle to the next. A working
capital reserve as part of the retained earnings of up to
60 days cash expenses is considered reasonable. See ASMB C-10,
Illustration 4-7 for detailed instructions on computing allowable
reserves.
A concern is that the funds were transferred out to the general
fund which could indicate an overbilling of services.
Variances may be handled as adjustments to future billing rates,
cash refunds, credits to individual programs, or, if less
than $500,000, as a Section I allocated cost. If a method
other than a cash refund is negotiated, an interest assessment
may need to be considered. |
2. SELF INSURANCE FUNDS
What does self-insurance include? Anything for which insurance
can be purchased commercially, unless specifically disallowed, as
indicated by A-87 - “Type of coverage and the extent of coverage
and the rates and premiums would have been allowed had insurance
(including reinsurance) been purchased to cover the risks.”
Some common self-insurance items could be for workers compensation
or unemployment insurance, property, liability, health, dental,
life insurance, and severance pay.
A-87 and ASMB C-10 list the submission requirements for self-insurance
funds. The effort required will depend on what information is submitted
for the self-insurance funds. The following are some steps to follow:
STEPS
|
COMMENTS |
1. Identify all self-insurance where funded reserves are used
through review of:
-
Internal Accounting Manuals
-
Financial Statements and
notes
-
Budget Documents
-
Discussion with appropriate
state personnel
|
This can be accomplished through:
- Establishment of Internal Service Fund.
- Accounting for funding within the General
Fund.
Data on self-insurance funds should have been requested from the
entity in the attachment to last negotiation agreement.
Estimate federal share of the annual cost or fund balance of the
insurance being reviewed. Where the federal share is limited,
we cannot expect to exert much influence on the reserve balances
maintained. Our focus should be on determining whether federal
programs are paying the same per unit costs as state funded
programs and have transfers been made from the fund. |
2. Identify and document
the kinds of risks, for example buildings, liability which the
organization’s policy is to cover losses on a “pay
as you go” basis, i.e., as losses occur or to the extent
funds are available. |
“Pay as you
go” is not a self-insurance fund. The allowability of
costs as a result of losses incurred by an entity using such
an approach are severely limited by A-87. |
3. Obtain copies of
applicable financial statements, including actuarial reports. |
If financial statements
are not available, the fund manager should have some internal
statements for use. |
4. Determine which
insurance coverages, identified in Steps 1 and 2, are charged
to federally funded programs. |
Only those coverages
ultimately charged to federally funded programs should be considered
for review. |
5. Determine the specific
coverage for items identified in Step 4, the cost of such and
the mechanism used to charge Federal programs. |
Depending on the coverage,
Federal programs could be charged through the central service
plan (Section I), billing rates to departments (Section II),
“pass-thru” vendor bills, fringe benefit rate, or
other mechanisms. Review should include determining the reasonableness
of the method(s) used to allocate the cost of insurance. |
6. If the organization
has changed from purchased insurance to self-insurance obtain
rationale for conversion and a comparison of before and after
rates. If rates have increased significantly, obtain an explanation
for the increases. |
For most of these
changes you can only reasonably expect to be kept informed as
to the current situation. Any actuarial analysis involved in
the rate setting will be difficult to contest. If you believe
there are significant overcharges or excessive reserves, consult
with your branch chief early in the review process for guidance
in how to resolve your concerns. |
7. Where funded reserves are used:
- Obtain rationale and support for year’s
insurance expense
- If actuarially determined, obtain copy
of study
- If historical experience, obtain supporting
data
- If created by law/statute, obtain copy
and note any pertinent provisions.
- Reconcile expense to the financial statements
- Review expense support to identify
- Contingencies included
- Unallowable costs under OMB A-87
- Unallocable costs
- Review fund statements to identify:
- Extent of contributed capital
- How interest and other investment earnings
on reserves are accounted for.
- Reserve balances that represent an
aggregate of several activities/billing centers must
be analyzed separately. The entity must be requested
to present this information.
- Reserve balance amounts and support
to demonstrate the reserve is not excessive.
- The purpose of intergovernmental transfers
such as “Amounts due the General Fund” and
similar accounts/ transactions.
- Verify actual funding
- Have entity identify all transfers during
the year other than charges for self-insurance.
- Verify all funds, programs, etc. are charged
consistently.
- Determine the reasonableness of the allocation
or charging basis depending on the specific insurance coverage.
|
The level of federal
participation of the balance should be considered in the extent
of the review of the actuarial report. The range of review items
listed in order based on federal participation are:
- obtain a copy
- does it identify the three reserve balance
components identified in A-87?
- does it contain rate recommendations?
- are the rate recommendations used by the
state to fund the reserve?
- do the assumptions appear reasonable?
- how has recent investment earnings (i.e.
stock market) impacted the reserve balances?
At most, you can probably expect to use the actuarial report to
ask what the state’s plans are concerning increasing
or reducing the fund balance in the future.
Attempts to obtain refunds based on perceived faulty actuarial
assumptions and computations are not generally recommended.
Your branch chief should be consulted early in your review
if you are contemplating a determination for a refund based
on issues you have with an actuarial report.
Accrual basis of accounting should be used. Cash basis will not
reflect true reserves because cash statements will only reflect
users paying for services rather than actual costs of services
provided during the accounting period to all users.
Catastrophic loses, etc.
Coverage of Federal Government Property.
Coverage for false arrest, tort claims like injury due to
falling lamp posts, etc.
Depending on source of contribution, this part of the reserve
balance would not be a potential credit to the Federal government.
All interest and other investment earnings must be credited to
the reserve to ultimately be used for the purpose of the fund.
Federal participation can vary significantly among the billing
centers.
Determination must be made on the need for a reserve and explanation
of any level in excess of claims run-off.
That include claims that are: submitted and adjudicated, but
not paid; submitted but not adjudicated; or incurred but not
submitted.
Such accounts/transactions may include unallowable transfers of
excess reserve balances or interest/investment income from
the fund.
Federal programs must be credited their share if the transfer
is not for self-insurance payments or return of contributed
capital.
All users should be charged the same rate for the same service.
Do all state agencies/departments pay their costs in the same
manner? If not, determine if the “cost per” is
the same for federally funded programs as it is for non-federally
funded programs. As a result, Federally funded programs may
be charged inflated actuarially determined rates based on
state funded programs underpaying their costs in previous
years.
Do funds flow directly from state agencies to the insurance fund?
If not, additional opportunities for transfer of funds for
other uses exist. If funds are not transferred promptly, interest
earnings may in effect be transferred for other uses.
Overall average rates of certain components may not be appropriate,
e.g., workers’ compensation expenses may vary significantly
from department to department based on employee classifications
i.e., office worker, mechanic, laboratory worker, etc. |
8. Where “Pay as You Go” method is followed:
- For liability and property insurance, assure
compliance with A-87, Attachment B, 25.
- For fringe benefit type insurance, e.g.,
unemployment, workers compensation, health, etc., determine
whether the amounts proposed represent “employee benefits
in the form of employers’ contribution or expense”,
(A-87, Attachment B, Section 11d(5)), for the year and such
amounts are properly determined and allocated.
- Determine reasonableness of the allocation
bases.
|
The entity may use trust or agency funds to account for these
items. You should determine:
- The basis of the grantee’s expense,
i.e., the amount paid to the fund or the actual payment
from the fund. (If the expense is handled as an agency fund
rather than a trust fund, the expense of the period should
be the payments from the fund. An agency fund is basically
a holding account and the payment from the fund is the true
expense of the period.)
- Whether there were any transfers from the
fund to the General Fund.
- Extent of interest earned and need to
credit Federal programs, etc.
Allocations should be based on benefits received. |
9. Where the cost
of administering these programs is charged as either part of
the billing rates or allocated as a Section I activity, you
must assure that only costs applicable to the state activity
are included for allocation. |
Many states administer
fringe benefit programs such as health, dental, pension, etc.
for both themselves and other governmental entities such as
local governments. The methodology for charging administrative
costs of the program must result in federally funded programs
not paying more than their share of these administrative costs.
The state must use some combination of (1) charging the non
state entities their relative share of the administrative costs
and (2) paying for them with only state funds. |
REFERENCE MATERIAL
The following material can be helpful to the negotiator during
the review of self insurance funds:
- HHS Department Appeals Board Decisions
No. 1635 Alabama (Transfers of self-insurance reserves and related
interest)
No. 1668 Oklahoma (Diversion/transfer of group insurance collections
for other purposes.)
3. FRINGE BENEFITS
The following guidance on the review of fringe benefits is primarily
based on the general requirements of A-87, as well as specific requirements
contained in Attachment B, Sections 11, d., e., and f. of A-87.
In addition, the negotiator should be aware of publications of both
the Governmental Accounting Standards Board (GASB) and the Financial
Accounting Standards Board (FASB) that provide information and guidance
on accounting for the cost of various fringe benefits. A listing
of applicable publications is contained in the guide at the end
of this section.
STEPS
|
COMMENTS
|
1. The following information should be submitted by the grantee
as part of its proposal:
-
Listing of fringe benefits
(FB’s) and the annual cost of each.
-
Current FB policies for
each FB listed including coverage and funding.
-
Method used for budgeting
and charging FB’s to Federal awards.
-
Future changes in FB policies
or charging/ budgeting methods.
-
FB proposal.
- Reconciliation to financial statements
(CAFR) or other official expenditure reports for each component
of the FB proposal.
-
Copies of any state, CPA,
or other audits of any FB component.
- Copies of the most recent actuarial reports.
- Any applicable state laws or regulations
concerning any of the FB’s.
|
After the initial review it is only necessary that the grantee
submit changes.
If the grantee uses a “specific identification” method
to account for FB’s annual costs may not be readily
available.
Multiple rates may be necessary if there are different classes
of employees or pension systems.
Including annual reports prepared by/for Retirement Systems, Insurance
Commissions, etc.
An actuarial valuation should be performed at least every two
(2) years. |
2. Review the financial statements and especially any notes relative
to FB costs. |
The financial statements
are an important source of background information on FB’s
and any changes with respect to their provisions. Information
on the status of reserves and transfers of funds will also be
found in the financials. |
3. Discussions should
be held with appropriate grantee representatives to obtain a
complete understanding of the methods used to both charge and
budget FB’s, including budgeting, accounting and recoInternal
Service Fundsery of all FB cost claimed for Federal reimbursement. |
Several methods can be used by the grantee in the accounting for
the various FB costs. The scope of review will vary depending
on the method followed, e.g.:
- FB’s appropriated centrally where
an average rate is developed, similar to an indirect cost
rate, and charged to federal awards. An internal billing
system is used only for federal funds and other third parties;
there is no billing for grantee funded programs.
- FB’s appropriated at the department
level resulting in internal billings for all funds. Billing
rates may be based on:
- Average rates developed for individual
FB components under the same process described for central
appropriations above.
- Specific FB’s identified with
each department and departmental rates developed and
billed accordingly.
- Individual rates needed because department
experience varies, e.g., workers’ compensation,
unemployment, etc.
- Specific FB’s identified with
individual employees and charged directly to the programs
the employees are working on.
In any case, the negotiator must assure him/herself
that Federal programs have been charged in a manner consistent
with other sources of funds, particularly state general funded
activities. |
Where
the grantee uses the average rate method (whether it is a grantee-wide
FB rate under a central appropriation process or a rate charged
under the departmental approach) all of the following steps
must be performed. Where FB’s are specifically identified
to individual employees, the negotiator must identify the method
used to assign the specific FB costs and perform only those
steps that are applicable. |
4. Review of the Salary and Wages (S&W;) base should include:
- Reconciliation to the financial statements.
- Complete description of the base, i.e.,
is it total S&W; as recorded in the accounting system or
are certain components excluded, e.g., over-time, part-time
employees, etc?
- Determine if all departments, divisions,
agencies, etc., of the grantee are considered.
- Review actuarial reports.
- Determine if a multiple rate structure
for different classes of personnel is needed.
- Determine the method followed by the grantee
to account for vacation, holiday, sick or other leave, i.e.,
accrued when earned or pay-as-you-go.
|
The review must
determine whether it is equitable to include S&W; of part-time
employees, etc., in the base. Some FB’s, such as pension,
may not apply to these employees. In such cases a separate
FB rate may be appropriate.
Where there are several classes of personnel,
e.g., uniformed (police, fire, corrections), teachers, etc.,
a multiple rate system may be needed or certain areas should
be excluded because they skew the rate and have little relevance
to Federal programs. Usually uniformed personnel as well as
judicial and legislative members should be excluded because
they have high FB costs and little or no Federal reimbursement.
The significance of this differential is usually, but not
always, highlighted in the actuarial valuation of pension
costs.
See A-87, Attachment A, Section 11.d.3 and 4
for guidance on allowable costs. Particular attention should
be paid to accrual methods of accounting to insure appropriate
credit when leave is used. |
5. Review of pension costs should include:
- Identification of all pension costs by
plan and basis of the recorded expense whether its actuarially
based or pay-as-you-go.
- Determine which classes of personnel should
be included in the pension rate for Federal purposes.
- Verify that the pension expenditures recorded
in the financial statements and the FB proposal are funded.
- Differences between expenses determined
under GAAP and actual funding should be identified and explained.
- For plans based on actuarial methods of
funding, obtain an analysis of the composition of the year’s
expenses.
- Determine if interest amounts included
in pension costs are allowable.
- The grantee, where possible, should be
requested to identify the various unfunded liabilities and
their amortization periods. Each should be reviewed for
allocability to Federal programs.
- Review the pension plan’s financial
statements to determine if the fund is maintaining a contingency
reserve which has not been included in the actuarial computations.
- If pension obligation bonds were used to
liquidate some or all of the unfunded liability, were Federal
regulations and guidelines followed?
- Where early retirement programs are initiated
determine their allocability to Federal programs and, that
required prior approval was obtained.
- Review actuarial assumptions and computations
to determine if any areas require further consideration.
- Review the pension plan, trust agreement,
etc., to determine if it is possible for the grantee to
access the pension funds for reasons other than the payment
of pensions. Ascertain if any withdrawals or diversion of
assets have taken place.
- The funding status of the plan should be
reviewed to determine if there is apparent overfunding.
The state should explain the overfunding and how it will
be liquidated.
- Where the state administers the pension
plan, determine how administrative costs are handled, i.e.,
part of the pension rate, separately recovered as a Section
I cost, other.
- The method used to compute the state contribution
to the pension plan should be compared to the method used
to compute charges to Federal programs.
|
In some cases, the state is responsible for funding the employer’s
share of pension costs for teachers and other local government
employees. In such cases, the negotiator must include those
costs in the assessment of allowable pension expenses.
Usually police, judiciary and the like should be eliminated or
separate rates should be developed.
The A-87, Attachment A, Section 11.e.(2) and (3) provides guidance
on the timing of actual contributions to a pension system.
In general, the costs must be funded within six months after
the end of the fiscal year to be included in that year’s
expenses. Further guidance concerning allowable pension costs
is also contained in ASMB C-10, A Guide for State, Local
and Indian Tribal Governments, on pages 3-8 through 3-10.
Overfunding may occur in a year because funds are available. Such
excess is not acceptable as a current period expense but is
a prepaid expense which should be applied to a future period.
(See A-87, Attachment A, Section 11.e.(3)) Underfunding will
increase future costs due to interest lost and an increase
in the unfunded liability of the pension plan.
This could include normal costs, amortization of prior service
costs, life insurance, etc. The costs included could vary
depending on the actuarial method used. The negotiator should
also determine what assumptions, regarding timing of contributions,
were made by the actuary for valuation purposes and whether
or not they were followed. The effect on Federal reimbursement
should be considered.
Further information on the requirements of accounting for and
reporting pension plan expenditures is also available in GASB
Statement No. 25.
Pension expenses may include an element of interest expense arising
from several sources, e.g.,
Allowable:
- Unfunded liability from the establishment
of the plan or changes to the plan (past/prior service costs).
- Unfunded liability created by a prior failure
to adequately fund the plan in accordance with actuarial
determinations because of a lack of funds or other considerations.
- Unfunded liability caused by the use of
outdated actuarial assumptions.
Unallowable:
- Late payments to the pension fund.
- Delay in contribution caused by a state
mandate.
Review may highlight areas where the allocability to Federal programs
is questionable.
Failure to consider all funds held by the pension system could
understate assets and result in excess contributions.
See OMB interpretation dated 1/31/94. If this was done in a prior
period, determine if the actuary or single auditor has reported
any changes.
Refer to ASMB C-10, question 3-13 for further information.
If the grantee withdraws funds from the pension system for general
fund purposes, such a transfer would require an appropriate
credit to the Federal government. This issue is most likely
to present itself during times of economic downturn and can
be an attractive alternative to raising taxes. Such transfers/withdrawals
will most often be identified in the CAFR and/or the annual
report of the pension fund.
Because the funding status of the plan must be viewed in the “long
run”, it is not easy to sustain a finding of overfunding.
However, suspected overfunding should be discussed with both
the state and its actuary to obtain a through understanding
of the status of the plan.
Assure amounts are not duplicated. In addition, costs associated
with administering portions of the pension plan not related
to state employees (local government employees, teachers)
should be identified and not included in any allocation at
the state level.
The negotiator should satisfy him/herself that the state contribution
is the same percentage of S&W; as is used to claim Federal
reimbursement. Where the state amount is based on estimated
S&W;, it may be necessary to make an adjustment to reflect
actual S&W; cost at year end to equalize the contribution,
if the state uses a specific identification method to charge
pension expense. |
6. Review of Other Fringe Benefits
- Determine if amounts and benefits are allowable
and reasonable.
- Verify that coverage is the same for all
employees
- Obtain an analysis of the portion of cost
paid for current/retired employees, e.g. health insurance.
- Determine the reasonableness of including
the cost of retiree’s benefits in the FB pool.
- Determine if there were any rebates or
other applicable credits which should be considered in arriving
at the allowable costs (e.g., rebates of unemployment compensation
insurance, life insurance dividends/rebates, etc.).
- Determine if any FB is handled through
Trust or Agency Funds. If so, obtain appropriate financial
statements/annual reports for review.
- Determine if coverage is consistent among
all employee groups and, the grantee treats the cost of
benefits consistently for both Federally and non-Federally
funded personnel.
- In some cases the grantee may elect to
be self-insured for certain FB’s, e.g., workers’
compensation and unemployment. In such cases, the negotiator
should assure him/herself that the costs are allocated in
accordance with A-87.
- For FB’s that are self-insured, see
separate section of this guide for further review steps.
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The employer share of post-retirement health insurance may be
funded on a pay-as-you-go basis or actuarially determined,
similar to pension costs. In some cases post-retirement health
insurance may be paid by the pension system and treated as
an element of the pension rate. Consistent treatment of this,
and all costs, is extremely important.
Adjustments may be necessary because:
- Some employees, like police, may have
shorter service requirements to qualify for a pension. Such
employees would therefore make up a larger proportion of
retirees. An adjustment would be necessary to compensate
for these employees where the health costs are higher and
there is little or no Federal involvement.
- Assure that amounts paid by retirees through
direct contribution or reduction of pension benefits are
properly credited against total cost of the benefit.
This could highlight transfers to the general fund, interest earned
on funds awaiting disbursement, or other areas requiring further
review. Note that interest can be earned on the employer contribution
portion as well as the employee withholdings for Social Security,
Federal taxes withheld, etc. Interest earned on both employee
and employer contributions may be a proper credit against
Federal programs.
If benefits for any group are higher than another, the need to
adjust the FB rate computation must be considered. This is
especially true for Workers’ Compensation or Unemployment
Insurance where expense could vary significantly between departments
or other employee groups.
The A-87, Attachment B, Item 25.e. requires such cost to be “allocated
as a general administrative expense to all activities of the
governmental unit.” It is not appropriate to allocate
these cost directly to the program to which the employee receiving
the benefit had been assigned. |
REFERENCE MATERIAL
The following is a list of publications and other guidance, in
addition to Circular A-87, which can be helpful to the negotiator
during the review of fringe benefits:
- Actuarial Standard of Practice No. 4 “Measuring
Pension Obligations” Actuarial Standards Board, 10/93
- Governmental Accounting Standards Board (GASB)
Statement No. 16 “Accounting for Compensated Absences”
11/92
- GASB Statement No. 25 “Financial Reporting
for Defined Benefit Pension Plans and Note Disclosure for Define
Contribution Plans” 11/94
- GASB Statement No. 26 “Financial Reporting
for Postemployment Healthcare Plans Administered by Defined Benefit
Pension Plans” 11/94
- GASB Statement No. 27
“Accounting for Pensions by State and Local Government Employees”
11/94
- FASB Statement No. 43 “ Accounting for
Compensated Absences” 11/80
- FASB Statement No. 74 “Accounting for Special
Termination Benefits paid to Employees” 8/83
- FASB Statement No. 87 “Employers’
Accounting for Pensions” 12/85
- FASB Statement No. 106 “Employers’
Accounting for Postretirement Benefits Other Than Healthcare”
12/90
- FASB Statement No. 112 “Employers’
Accounting for Postemployment Benefits” 11/92
- FASB Statement No. 132 “Employers’
Disclosures about Pensions and Other Postretirement Benefits”
2/98
HHS Secretary’s Letter to Governors Charging of different
contribution rates to Federal and state programs and diversion of
Trust Fund reserves.
HHS Department Appeals Board Decisions
No. 8 Connecticut (Consistent application of pension billing rates)
No. 29 Rhode Island (Consistent application of pension billing rates)
No. 314 Indiana (Consistent application of pension billing rates)
No. 1034 Massachusetts (Conversion from pay-as-you-go to actuarial
method)
No. 1465 West Virginia (Offsetting contributions to pension funds)
No. 1592 California (Qualifying state contributions to pension reserves)
No. 1608 Texas (Health insurance reserves related to new members)
No. 1635 Alabama (Transfers of self-insurance reserves and related
interest)
No. 1659 Maine (Offsetting contributions to pension funds)
IV. INDIRECT
COST RATE PLANS
Indirect costs are those that have been incurred for common or
joint purposes. These costs include (i) the indirect costs originating
in each department or agency of the governmental unit carrying out
the Federal awards, and (ii) the costs of central governmental services
allocated through the central services cost allocation plan. Indirect
costs are usually charged to Federal awards by the use of an indirect
cost rate.
SECTION A - PRELIMINARY STEPS
STEPS
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COMMENTS
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1. Determine whether a rate is needed.
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A rate is needed if
the state agency has any awards that provide for the reimbursement
of indirect costs or if it anticipates such awards in the near
future. However, if only training awards that limit reimbursement
to eight (8) percent of total direct costs are involved, a rate
is not required. |
2. If a rate is required,
determine whether it is the agency’s first negotiated
rate with HHS. |
The establishment
of the initial rate with an agency is critical. This negotiation
will set the tone for subsequent negotiations. As such, dollar
involvement should not be the principal factor in determining
the level of effort to be expended. Extra effort should be expended
at this time to insure that the grantee understands Federal
requirements and that the agency’s accounting system and
method of operation can accommodate these requirements. |
3. Determine whether
coordination is necessary with other Federal agencies. |
See comments for Part
III, A, Section A, 3. |
4. Determine that
all of the necessary supporting data and documentation has been
submitted.
- A copy of financial data (financial statements,
expenditure reports, etc.) upon which the rate is based.
- The approximate amount of direct base costs
incurred under Federal awards. These costs should be broken
out between salaries and wages and other direct costs.
- A certification of the proposal by a responsible
official.
- An organizational chart and functional
statement(s) noting the duties and/or responsibilities of
all units that comprise the agency.
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This documentation
may vary depending upon the particular circumstances involved
in the negotiation. The items listed here are considered to
constitute the minimum documentation necessary and will normally
have been requested in previous correspondence with the agency.
In many cases state and local government agencies
will not have certified financial statements but will have
statements that have been audited by state or local auditors
and will submit these statements in lieu of certified statements.
The agency should also indicate the amount of salaries and
wages (or total direct costs) incurred under grants and contracts
which limit indirect cost reimbursement.
See A-87, Attachment E, Part D, 3. for an example of the
required certification.
If the agency submitted these documents with a previous proposal,
only revisions to them need to be submitted with the subsequent
proposal.
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5. Determine that
the proposal is adequately cross-referenced and reconciled to
the financial data. |
Since the agency is
primarily responsible for reconciling the proposal to the financial
data, an inordinate amount of time should not be spent on this
by the negotiator. If the amounts do not reconcile and if they
cannot be readily reconciled via telephone, the agency should
be requested to submit additional data. |
6. Review prior proposals,
negotiation workpapers, Negotiation Agreements and other correspondence
maintained in the file to ascertain what adjustments have been
made in previous years. |
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7. Determine whether
any advance agreements were established in prior negotiations
and, if so, whether the institution complied with the agreements
for the proposal currently under review. |
In prior negotiations,
advance agreements or letters to grantee delineating discrepancies
that should be corrected in their future proposals may have
been established for future negotiations to preclude disputes
or problems or to help insure equitable cost determination in
the future. Examples of such agreements include those involving
(a) changes in the institution’s accounting system, (b)
performance of special studies or analysis in connection with
the development of future proposals, (c) changes or refinements
in allocation bases, (d) the treatment of certain types of costs
(e.g., rent, depreciation, computer costs, idle facilities costs),
and (e) limitations of certain costs. In some cases, a prior
rate may have been accepted with the condition that the institution
take certain actions in the development of future proposals. |
8. Determine whether
a restricted or special rate(s) is needed or whether separate
rates are needed for major organizational components of the
institution.
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Guidelines on the use of restricted and special rates are contained
in the cost principles and in Chapter 6-110 of the Grants
Administration Manual (GAM).
Separate rates for major organizational components of a department/agency
are generally not required. However, they should be considered
where the dollars involved are substantial and the characteristics
of certain organizational components of the institution are
such that there is reason to believe that they generate significantly
different levels of indirect costs than other components.
This is true for an agency which includes significantly different
types of operations (e.g., state mental health departments
and subordinate state hospitals).
The U.S. Department of Education (ED) requires “restricted”
indirect cost rates for use on some ED programs awarded to
State agencies for which HHS is cognizant. ED should inform
DCA of those state agencies, for which HHS is cognizant, needing
restricted rates. The negotiator should review the proposal
to ensure the required restricted rate has been included.
When the negotiator receives a proposal which includes a restricted
rate, a copy will be provided to ED for review. ED will examine
the proposal and provide comments within a reasonable period
of time (30 days). Based on ED input, DCA will negotiate the
rate as part of the normal process.
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9. Obtain a copy of
the OMB A-133 Single Audit report. Determine if there are any
audit findings that affect the scope of the review. |
If the applicable
A-133 Single Audit report has not been issued, review the most
recent audit report. |
10. Determine the
appropriate level of negotiation effort and whether or not a
HHS audit is needed. |
See comments for
Part III, A, Section A, 8. |
SECTION B - REVIEW OF COST ALLOWABILITY
To be allowable, costs must be (a) reasonable, (b) allocable to
the government sponsored activities, (c) treated in conformance
with any specific limitations, conditions or exclusions prescribed
in the applicable cost principles, and (d) treated consistently
(i.e., assigned to benefitting activities in a consistent manner).
The steps set forth in this section are designed to help insure
that the criteria for cost allowability are met.
STEPS
|
COMMENTS
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1. Determine whether
the proposed expenses were incurred within the period under
review. |
Normally, if the
expenses as shown in the proposal reconcile to the financial
data it can be assumed that they were incurred within that period. |
2. Determine through
the performance of a comparative analysis with prior years whether
the proposed costs are reasonable. |
The prior years’
figures maintained in the file should be used in making a comparative
analysis between years. |
3. Determine whether
the proposed costs benefit Federal awards. |
Generally an expense
that is necessary to the overall operation of the department/agency
is allocable to Federal awards. When there is a multi-tier distribution
involving more than one pool, the criteria is - does the expense
benefit all activities included in the particular distribution
base? |
4. Review the financial
data to determine if there are any applicable expense off-sets. |
Income generated by
the activities in the indirect cost pool and certain negative
expenditure types of transactions should be used to off-set
or reduce the expenses in the indirect cost pool (e.g., the
sale of scrap, parking fees, cafeteria income, purchase discounts
or rebates, etc.). |
5. Review the proposal and financial statements to determine whether
the indirect cost pool includes any of the following unallowable
costs:
- Equipment and capital expenditures (19.)
- Alcoholic beverages (4.)
- Bad debts (7.)
- Contingencies (12.)
- Contributions and donations (13.)
- Legal expenses for prosecution of claims
against the Federal government (14. b.)
- Entertainment (18.)
- Fines and penalties (20.)
- Fund raising (21.)
- General government expenses (23.)
- Lobbying (27. & 30. e.)
- Underrecovery of costs under Federal agreements
(42.)
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The numbers next to each item refer to the section number in A-87
which prescribe the handling of these costs. Unless otherwise
noted, the references refer to Attachment B of A-87.
Capital expenditures are allowable as direct costs if they are
approved by the awarding agency. They are not allowable as
indirect costs but instead are recovered through depreciation
or use allowances. |
6. Review the following costs to determine whether they are properly
treated.
- Depreciation or use allowance:
- Determine that the value of the assets
for depreciation/use allowance purposes was properly
established.
- Determine that cost of land and the
portion of assets that are Federally financed or financed
with grantee matching contributions have been eliminated
from the computation.
- Determine that a combination of the
use charge and depreciation methods has not been used
for a single class of fixed assets.
- If depreciation is proposed, determine
that the depreciable lives that have been established
are reasonable.
- Determine that the depreciation/use
allowances on idle facilities have been properly handled.
- Determine that the depreciation methods
used result in an equitable allocation of costs to the
time periods in which the assets are used.
- Determine that the charges for use
allowances or depreciation are adequately supported
by property records.
- If use allowances are proposed, determine
that a factor no greater than 6 2/3 percent has been
used for equipment and 2 percent has been used for buildings.
- Rental costs.
- Specialized facilities (e.g., computer
centers).
- Idle (excess) facilities or capacity
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The costs listed
here are particularly sensitive and should therefore be thoroughly
reviewed when dictated by materiality.
The value for depreciation/use allowances
purposes is acquisition cost except where the asset was donated
to the institution by a third party. Where the asset was donated
by a third party, the value is the market value at the time
of donation. Where acquisition cost is used it should reflect
the actual amount recorded in the records of the state or,
if cost records do not exist, an estimate of the acquisition
cost, which is usually based on an independent and professional
appraisal. Where such appraisals are used, care should be
exercised to insure that the amount used reflects the cost
at the time of purchase and not replacement cost at the time
of the appraisal. Where depreciation or use allowances are
material in amount the negotiator should satisfy himself that
the valuation bases are proper and, if the amounts are based
on appraisals, that such appraisals were performed by independent
and professional appraisers or by other reliable methods (e.g.,
insurance valuations).
In the absence of historical usage patterns, guidance in
this area can be found in A-87, Part B, Paragraph 15, e. or
IRS depreciation guidelines.
See Step 6.d. below.
Depreciation methods other than the straight line method
should not be accepted unless the circumstances fully justify
their usage (i.e., when it can be demonstrated that the assets
are being consumed faster in the earlier years than in the
latter years of their useful life).
See A-87, Part B, Paragraph 15, d. and f. for guidelines
on treatment of building components.
When the depreciation method is followed, depreciation records
indicating the amount of depreciation taken each period must
also be maintained.
Refer to A-87, Attachment B, Part 38, for limitations on
the amount of rental costs that may be charged to Federal
awards under various types of leasing arrangements (e.g.,
sale and leaseback arrangements, less-than-arms-length leases
and capital leases). Also refer to Chapter 6-10 of the GAM.
The inclusion of the costs of these types of facilities in
the indirect cost pool should not be allowed when they are
material in amount or when the facilities benefit a limited
number of activities. Normally, costs of this nature should
be charged directly to benefitting activities via a schedule
of rates designed to recover their total costs.
The costs of the facility should consist of its direct costs
as well its allocated share of indirect costs, including general
administration, operations and maintenance, depreciation/use
allowances, fringe benefits, etc. Variances between the actual
costs of the facilities and the direct charges to benefitting
activities in a given period should be adjusted in accordance
with A-87.
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7. Determine whether
state or local central service costs have been included in the
proposal and, if so, that they are properly supported. |
Idle facilities are
defined as completely unused facilities that are in excess of
the institution’s current needs. Idle capacity is the
unused capacity of partially used facilities
- i.e., the difference between 100 percent
capacity and actual usage of the facility. See A-87, Attachment
B, Paragraph 24.
To be allowable, the costs must be supported by a cost allocation
plan prepared by the state or locality. For plans prepared
by the state, they must be approved by HHS/DCA. The state’s
cost allocation file should be reviewed to determine whether
the cost allocations were approved and whether they agree
with the proposed costs.
The localities must also prepare cost allocation plans but are
generally not required to obtain approval unless specifically
requested to do so by the cognizant Federal agency. If there
is no indication that the plan required approval, the institution
should be queried as to whether the locality prepared a plan
and, if so, the proposed amounts should be accepted. |
8. Review fringe benefit
costs. |
Since the fringe benefit
policies of a state or local government usually apply uniformly
to all its agencies, the review of such policies are performed
during the review of the central service cost allocation plan.
Therefore, the negotiator should verify that the treatment of
fringe benefits in the indirect cost rate proposal is consistent
with the central service cost allocation plan. |
9. Determine if the
types of costs included in the indirect cost pool are consistently
treated as indirect costs. |
The department or
agency should be queried to determine whether any costs included
in the indirect cost pool have also been charged to any Federal
awards as direct costs. Where such costs are charged directly,
they should be removed from the indirect cost pool except to
the extent that they apply to indirect activities. The allocation
bases are the methods by which indirect costs are allocated
to benefitting activities. |
SECTION C - REVIEW OF ALLOCATION BASES
The allocation bases are the methods by which
indirect costs are allocated to benefitting activities. For multiple
allocation base proposals, the agency’s indirect costs benefit its
major functions in varying degrees and are accumulated into separate
cost groupings. Each grouping is then individually allocated to
benefitted functions by means of a base which best measures the
relative benefits. For simplified proposals, a single base is used
to allocate all indirect costs to benefitting activities, including
grants and contracts.
The base selected for each allocation should be
the one which results in an equitable allocation to benefitting
activities and is practical under the circumstances. The cost principles
and the Guide for State, Local and Indian Tribal Governments
(ASMB C-10) contains criteria for the selection of appropriate
bases as well as suggested bases that generally are considered to
be equitable. However, a base different from the suggested base
may be used if the suggested base is either inequitable or impractical.
The steps contained in this section are designed to help insure
that the bases used result in an equitable allocation of costs.
Except where otherwise noted, these steps apply equally to both
multiple allocation base and simplified proposals.
STEPS
|
COMMENTS
|
1. Determine that
the proposed bases result in an equitable distribution of indirect
costs. |
Generally, if the
proposed bases conform to the suggested or required bases they
should be accepted. However, there may be circumstances which
indicates that an inequity will result if a suggested base is
used. For example, total expenditures exclusive of capital expenditures
is a suggested base. However, the existence of major subcontracts
will usually require the use of a modified total expenditure
base excluding major subcontracts or a different base such as
salaries and wages. |
2. Determine that the proposed bases include all activities which
benefit from the indirect costs that are allocated, including
where appropriate:
- Activities associated with general funds
- Activities associated with restricted,
special purpose, or other funds
- Grants and contracts
- State institutions (e.g., hospitals, universities)
- Costs used for cost sharing or matching
purposes
- Non-state organizations which receive services
(e.g., an affiliated foundation, a local government agency,
etc.)
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3. Determine whether
the data included in the bases (e.g., square footage, number
of employees, time studies, etc.) are current and accurate. |
This step applies
only to multiple allocation base proposals. The negotiator may
be able to reconcile the data to central service cost allocation
plan statistics. |
SECTION D - CONCLUDING STEPS
STEPS
|
COMMENTS
|
1. Determine whether
there are any anticipated significant changes in the level of
the institution’s activities, its organization structure,
or its accounting system that should be taken into account in
the negotiation of a provisional, fixed or predetermined |
Normally this rate(s)
is based on the actual costs for the most recently completed
fiscal year. However, if the agency anticipates significant
changes in its operations that should affect the costs, the
changes should be reflected in the establishment of the rate(s). |
2. Determine whether
an advance agreement covering future negotiations should be
established. |
Advance agreements
should be established when they are needed to preclude future
disputes or problems or when they will help insure equitable
cost determinations in the future. Examples of areas where these
agreements may be needed include (a) changes or refinements
in allocation bases, (b) the treatment of certain types of costs,
(c) changes in the state’s accounting system, and (d)
limitations of certain costs. If an advance agreement is established
it should be included in the letter transmitting the Negotiation
Agreement. |
3. Negotiate the appropriate
type of rate(s) (e.g., provisional, fixed, predetermined, or
final) and complete negotiation agreement form. |
Contact will more
than likely be maintained with the agency throughout the review
of the proposal. The negotiator at the conclusion of the negotiation,
should contact the agency to (a) summarize the adjustments
(if any) and the term or conditions incident to the acceptance
of the rate(s) and (b) gain concurrence on a final position.
Guidance on the circumstances under which
costs should be negotiated on a provisional, final, fixed
or predetermined basis are as follows:
- Provisional rates will be used only in
those situations in which the negotiator has little confidence
in the rate proposed and cannot negotiate a rate which will
fairly reflect an agency’s operations during the period
to which the rate applies. Provisional rates should also
be used when (i) the propriety of the rates are contingent
upon the occurrence of a future event which is uncertain
at the time of negotiation or (ii) the agency plans to reorganize
or otherwise substantially change its operations in the
future. When a provisional rate is established, a final
rate must be negotiated when the actual costs for the period
become known.
- Predetermined rates may only be negotiated
in those situations where there is a high probability that
the rate negotiated will result in a dollar recovery to
the agency not in excess of the amount that would have been
recovered had the rate been established on an “after-the-fact”
basis. Predetermined rates are not authorized if there are
contracts awarded to the grantee agency.
- Fixed rates with carry-forward provisions
may be used except where the carry-forward adjustment would
be difficult or impossible to make because:
- the agency is unlikely to have active
awards in the future periods to affect the carry-forward
adjustment against,
- the mix of Federal/non-Federal work performed
by the agency from year to year is too erratic to permit
a fair carry-forward adjustment,
- the operating activities of the agency
are unstable,
- the negotiator is not satisfied that
the rate proposed will approximate the actual rate.
- The negotiator should avoid setting fixed
rates which result in major carry-forward adjustments. Consider
setting limitations on the amount of permissible adjustment
(e.g., spread over more than one fiscal year).
- If a fixed or predetermined rate is used,
a provisional rate should be normally established to cover
the period subsequent to the period covered by the fixed
or predetermined rate. This will preclude potential problems
in funding awards made after the expiration of the fixed
or predetermined rate.
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4. Complete Summary
of Negotiations. A summary of negotiations should be prepared
which shows the amounts negotiated that are different from the
amounts submitted, and the reasons for the negotiated differences.
The summary should be sufficiently detailed to permit an independent
reviewer to quickly see and understand how the negotiated rates
were arrived at. |
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