Grant Compliance and Accounting – It’s not Rocket Science!

Some say that grant accounting and its related cost and tracking activities isn’t “rocket science”.  Certainly it isn’t rocket science’ it can, however, be intimidating, confusing, convoluted, and complex.  With complexity increasing with every proposal, award, and completed project, the time it takes to stay clear, and in compliance can quickly become a concern if proper systems and processes aren’t put in place.  Ensuring that the proper data collection tools, reports, and processes are implemented and available to the organization can greatly reduce the enterprise investment overall and reduce the risk of being asked to repay a grant due to non-compliance.

The first exposure applicants have to the financial aspects of government grant accounting (and sometimes “normal” business) is often their first grant proposal.  The need to determine provisional rates for cost elements, develop “budgets,” and identify expense and investment items not allowable in the proposal has lead to hyperventilation, increased blood pressure, and other undesirable physical and emotional changes.

While grant accounting isn’t rocket science, it does require an understanding of some basic accounting and financial terms and processes.  Let’s start with a few key terms:

Costs are the expenditures for items, services, and the like.  For government grants and contracts, those expenditures exclude equipment and certain other categories of operating, marketing, and general expense

There are two cost categories:  direct and indirect.  As the names imply, direct costs are the items that can be DIRECTLY traced or tied to a specific project or activity.  Costs in this category include items such as labor, supplies, and/or materials which are used to accomplish the research or other outcome of the project.

Indirect costs are those which must be incurred to provide supporting activities – accounting, sales, administration, human resources, and other activities which are the infrastructure of the business. These activities and costs exist regardless of an individual project or group of projects and while used INDIRECTLY by every project are not specifically related to a project’s tasks or outcomes.

Both direct and indirect costs as defined by commercial business operations have cost items that are not allowable costs under government grant (or contract) activities.  Costs which are chargeable to a government-funded project are called “allowable costs.”

Allowable costs are determined by satisfying clearly established criteria.   These criteria establish parameters which include complying with Generally Accepted Accounting Principles (GAAP), adhering to what can be termed “single usage” – the cost cannot have been or currently be used in any way with another grant award (cost share or cost match, specifically), ensuring consistent treatment across programs (grant and commercially funded), and complying with any limitations or exclusion specified within the program or applicable regulations and principles.

There is yet another dimension to the above cost categories and sub-categories. That is the “reasonability” of those costs.  A cost may be direct or indirect and it may be allowable; however, it also must be at a level which doesn’t exceed normal expectations.  Reasonable costs are costs which don’t exceed what the average person would expect to pay to acquire the good or service.  (Remember the days of $1500 hammers and $5000 toilet seats being charged to government contracts?)

The discussion of costs has many more dimensions and levels beyond the scope of this article.  Each additional element adds a level of complexity to managing, tracking, controlling, and reporting costs and activities.  The number of layers and the degree of complexity of a business’ operations impacts the significance of each additional project, funding agency, and commercialization effort.  A proactive, planned approach to establishing a well-designed, robust internal accounting and compliance process enables a company to take full advantage of government funding with a reasonable “return.”  The benefits of seeking government funding – grants or contracts – are worth pursuing.  The costs of implementing compliance and accounting system are, in reality, investments.  They provide businesses with an opportunity to pursue innovation as well as new technologies and applications with funds which do not require repayment, interest, or dilute equity stakes.  Just remember, compliance with the rules, regulations, and accounting guidelines isn’t optional.

Copyright © 2004 F.O.C.U.S. Resource, Inc.

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