Justify Your Spending — Grant Expenditures

CHRISTIAN FJELGRAVE: Welcome and thanks for listening to Cherry Bekaert's Government and Public Sector Podcast Series. In each episode, we hear from the best in the business on the latest challenges, trends, and opportunities affecting the government and public sector. I'm Christian Fjelgrave, leader of Cherry Bekaert's Government and Public Sector Industry Team.


KIMBERLY KONCZACK: Hello, and welcome back to our podcast mini-series about grants management. I am Kimberly Konczack, and here joining me today are Shuo Zhang and Kat Kizior. We also have a special guest today, Anthony Walsh.

KIMBERLY KONCZACK: I have been working in the grants management space for the last four years. Here at Cherry Bekaert, we have a grants management team who can help educate you on grants management in general, and we offer the grants management life cycle of services. With that, I will turn it over to Shuo to introduce himself.


SHUO ZHANG: Hi, everyone. I'm Shuo. I'm the grants management service leader here at Cherry Bekaert.


KAT KIZIOR: I am Kat Kizior. I am a senior associate in the advisory section with Cherry Bekaert. As Kimberly mentioned, we have a guest today, Anthony Walsh, who is an auditor and expert in the single audit here at Cherry Bekaert.


ANTHONY WALSH: Thanks, Kimberly. Yes, I'm Anthony Walsh. I'm a senior manager. I work exclusively in our government and public services sector. I've been doing governmental assurance services for about 10 years, focusing on municipalities, their financial statement audits, and their single audits.


KIMBERLY KONCZACK: That's great. I know that in the grant space, the single audit is a big component of what we look at when it comes to grants. So really excited to have you with us today, Anthony. With that, I'm going to ask you a question, Kat. In the world of grants, what is a direct cost?


KAT KIZIOR: There are two types of costs related to a grant. The first is a direct cost. This is any cost that can be specifically identified with a particular project, program, or activity, and it can be directly assigned to these activities relatively easily and with a high degree of accuracy.

KAT KIZIOR: Direct costs may include salaries, travel expenses, equipment, and supplies. When determining if a cost can be considered a direct cost to a grant, ask whether that cost directly benefits the grant-supported project or activity. A direct cost must be directly associated with that grant or activity; otherwise, you do not charge that cost to the grant.

KAT KIZIOR: You also need to review the terms and conditions of your grants, including special conditions, to ensure your direct costs comply with the grant's requirements. To fully understand direct costs, you also need to understand indirect costs, which are the counterpart to direct costs.

KAT KIZIOR: Indirect costs are a little more complicated. You can't easily identify them. They are related to a project but not specifically to that project, and they are necessary to the operation of your organization and the performance of particular projects. Examples include facility maintenance, depreciation, and administrative salaries.

KAT KIZIOR: For example, consider an electric utility bill for a building where grant projects and activities occur. If the building supports only your grant activities, the electric bill may be a direct cost. But if multiple projects operate under that roof, a portion of the electric bill may be charged to the grant, and you may need to allocate that cost. Indirect cost rates come into play for those allocations, but we will focus on direct costs in this episode.


KIMBERLY KONCZACK: Thank you, Kat. To make sure we get it right, what steps can a grant recipient take to ensure they have properly determined their direct costs and have assurance that their direct costs are allowable and avoid audit findings?


SHUO ZHANG: From our perspective, there are four questions you should ask. First, does the cost result in a direct benefit to the program? The answer should be yes. Second, can it be easily and accurately traced to the program?

SHUO ZHANG: If you have mixed expenditures that generally benefit one or multiple programs and you cannot easily and accurately trace an expenditure to a program, you should consider not charging it as a direct cost, because you may not be able to defend it if selected by an auditor.

SHUO ZHANG: Third, does it benefit only one program, or does the portion you want to charge to that program benefit only that one program? Fourth, is it normally charged as an indirect cost? Many organizational costs benefit all projects and are historically included in your indirect cost structure, such as NICRA calculations. If a cost is typically treated as indirect, you should probably continue to charge it as indirect rather than direct.

SHUO ZHANG: There are also straightforward assumptions about allowability. Some costs are generally not allowable under Uniform Guidance under any circumstances, such as alcohol. First-class plane tickets are generally unallowable unless absolutely necessary and pre-approved by the donor. Entertainment, raffle tickets, amusement park tickets, and similar items are typically unallowable.

SHUO ZHANG: If your budget does not allow an expenditure, such as buying furniture that could benefit your grant, consider that expenditure a contribution or not allowable. Even if an expenditure is allowed by Uniform Guidance, it may be disallowed by your specific grant conditions. Also, treat similar costs consistently. Don't sometimes put a cost into the direct cost pool and other times into the indirect cost pool. Consistent treatment is important.


KIMBERLY KONCZACK: Is there a place we can go to find what's allowable and unallowable?


KAT KIZIOR: Yes. The primary source is the Uniform Guidance, specifically 2 CFR 200.413 for direct costs. Also check your state and local statutes for any stipulations about direct or indirect costs. Your grantor or donor will have terms and conditions and information on their websites. Review other parts of 2 CFR 200 that may be relevant to your donor or grantor and use those resources to determine allowability.


KIMBERLY KONCZACK: Anthony, speaking of allowability, how does a grant recipient determine if their direct costs are allowable, and what do you, as an auditor, look for? Could you give examples of typical audit findings related to expenditure justification?


ANTHONY WALSH: The first place to start is the grant agreement with the grantor. That often spells out what items are allowable or unallowable. In Florida, many grant agreements will point to either state or federal guidance for that particular funding, and they may have addenda that specifically allow or disallow certain costs in addition to what's in the compliance supplement or the Uniform Guidance.

ANTHONY WALSH: The compliance supplement is the next place to look. That's where auditors start. We'll receive the Schedule of Expenditures of Federal Awards at the end of the year and perform calculations to determine which programs we need to audit. We then consult the compliance supplement to see the compliance requirements we must test. Direct costs and allowable costs are among those areas we focus on depending on the grant.

ANTHONY WALSH: For example, Highway Planning and Construction (2 205) is broader than many people think. We had a governmental entity use that funding for a bicycle safety campaign, including advertisements, after consulting with the federal government. That was deemed allowable. So it's important to consult the grant agreement and the compliance supplement to determine what's allowed and disallowed.

ANTHONY WALSH: We've seen issues where gray areas during COVID affected allowability. Certain supplies and salaries were allowed under some pandemic-era grants but not afterward. We've also seen traditional errors where an expense is billed to the wrong project, gets rolled up, and passes controls, resulting in expenditures that were not related to a grant being expensed, reported, and reimbursed. Those situations can become findings and questioned costs.

ANTHONY WALSH: These issues underscore the need for a quality control process over grant expenses, similar to controls over financial statements, to ensure that what is submitted for reimbursement is truly an allowable cost and not something that will result in a finding or questioned cost during an audit.


KIMBERLY KONCZACK: If an organization does have a finding and questioned cost, what happens then?


ANTHONY WALSH: The finding and questioned cost will be reported on the Schedule of Findings and Questioned Costs, which is included with your data collection form and reported to the federal government. Beyond that, it's up to the federal agency how they handle the matter. Different agencies and program officers handle issues differently. There may be penalties or clawbacks, but how they are applied varies by agency and circumstance.


KIMBERLY KONCZACK: That's helpful and reiterates the importance of compliance and accurate reporting so you have a successful grant program. Thank you, Kat, Shuo, and Anthony, for joining.

KIMBERLY KONCZACK: If you would like to reach out to any of us, I can be reached at kimberly.konczack at cbh.com. Shuo can be reached at shuo.zhang at cbh.com. Kat can be reached at kat.kizior at cbh.com. Anthony can be reached at anthony.walsh at cbh.com.


CHRISTIAN FJELGRAVE: This was Christian again. I hope you enjoyed this episode and look forward to our next one. Don't forget to subscribe.