By Claudia Valarezo, CPA, Manager at Blue & Co.

Maximize Cost Recovery Under Federal Rules (Uniform Guidance)

Nonprofits and local governments often ask, “How can we avoid problems during our annual audit?” when talking about federal grants.

Managing federal grants can be tough, and everyone wants to avoid having their costs questioned by auditors. But sometimes, organizations are so focused on avoiding mistakes that they miss out on claiming costs they are entitled to.

Running a federal program comes with real costs, such as staff time, technology, administrative support, and overhead costs. If your organization does not claim every allowable cost, you are not just being careful; you are missing out on funding and paying federal program expenses with your own money. That is not a win for compliance; it is a missed opportunity.

The federal government has updated its grant management rules through the 2024 Uniform Guidance. Some changes could help your organization. Here is what your leadership team needs to know.

The Indirect Cost Rate: More Money Staying Where It Belongs

Let’s start with the biggest change, because this one can have a direct impact on your bottom line.

If your organization does not have a formally negotiated overhead rate with the federal government, you have probably been using the “de minimis” rate to recover overhead costs such as accounting, executive leadership, HR, and rent. These are necessary expenses to keep your programs running, but they cannot be tied to a specific grant.

Prior to the update, the rate was limited to 10 percent; the new rules have increased the de minimis rate to up to 15 percent. This change may seem small, but it could make a difference in your organization. For example, if your organization has $1,000,000 in eligible expenses, you would have recovered $100,000 at 10 percent. Now, at 15 percent, you can recover $150,000.

That means $50,000 stays with your organization, supporting the people and infrastructure that make your programs possible.

The best part is that you do not need extra paperwork or a formal rate negotiation to use this new rate.

The new rate applies only to federal awards issued on or after October 1, 2024. If you have a formal negotiated rate, you must keep using it until it expires. Once expired, you may choose the de minimis rate instead of negotiating a new one.

Partnering With Other Organizations? There’s Good News Here Too.

Many organizations do not run their federal programs alone. They partner with other agencies, community organizations, or service providers through subawards. If this applies to you, there is an important update.

Previously, you could only apply your overhead rate to the first $25,000 of each subaward. The new rules have doubled this threshold to $50,000.

If you make subawards to partner organizations, this change means more of your subcontracting costs count toward your overhead base. This allows for greater overhead recovery for your organization.

Are You Missing Direct Costs You’re Actually Entitled To?

Many organizations pay for costs from their general budget that could be billed directly to a grant. This usually happens not because the costs are unallowable, but because no one checked. If a cost is essential to your program, reasonable, and consistently treated/documented according to the award terms, it is likely billable.

Here are some categories and examples that are often missed:

Administrative and Clerical Salaries

If a staff member spends significant time on a specific grant, such as scheduling appointments, compiling reports, or managing compliance paperwork, and those activities are specifically identifiable to the grant, that part of their salary may often be charged directly to the project. Keep detailed timesheets, activity logs, or similar records to demonstrate time spent on grant tasks and ensure proper cost allocation. Good documentation is essential.

Specialized Technology and Cybersecurity Grant

Software, client-tracking databases, and cybersecurity tools may be charged directly when needed for the award; for example, to protect federal data, they can be billed as direct costs. If you purchased a tool specifically for the grant, it may be appropriate to charge it to the grant.

Program Evaluation and Reporting

Federal agencies emphasize outcomes and data. Costs for external evaluators, survey tools, and formal reporting on program results are fully allowable, provided included in the approved budget.

Your Annual Audit Fees

Many people are surprised by this: the cost of your required Single Audit is an allowable expense. You may allocate a proportional share of your annual audit invoice related to your federal awards. Since you are already paying for it, you should recover part of the cost.

Auditor’s Reality Check: “Allowable” Is Not “Automatic”

It is important to be clear: while recovering more costs is a good goal, doing so without proper controls can end up costing more than it saves.

During an audit, we check both what you charged and how you supported those charges. To avoid problems, you need to have the right documents ready. Important records for each grant expense include invoices, payroll records, timesheets, signed contracts, vendor statements, receipts, and proof of payment. Keeping these organized and easy to find will help your team answer auditor questions and lower compliance risk.

A cost that is allowable in theory can become a problem if you do not have the documentation. Before you submit your next billing, make sure these safeguards are in place:

• Do not double-dip. You cannot charge a cost directly to a grant and also include it in your overhead pool. Choose one method and be consistent.
• Keep your receipts. Save payroll records, vendor invoices, contracts, and timesheets as soon as you bill. Auditors will ask for them, and not being able to find them is never a good answer.
• Check your accounting system. Your general ledger should leave out items that do not qualify for overhead, like large equipment purchases or parts of subcontracts over the applicable threshold. If your system is not set up right, your calculations will be wrong from the start.
• Work with your finance team to review your chart of accounts and ensure the expense categories are correctly categorized as allowable or excluded for overhead.

You do not need to change everything at once. However, here are three practical steps to take before your next grant billing cycle:

1. Review your active grants. Find out which awards fall under the updated 2024 rules and whether you can modify your budget to take advantage of the changes.
2. Review your overhead strategy. Decide if the revised increased standard rate is best for your organization, or if a negotiated custom rate would recover more. It is worth calculating the difference.
3. Update your internal policies. Make sure your billing procedures, time-tracking, and staff guidance are consistent with your notice of award and federal rules. Even the best policy will not work if your team does not know about it. Good communication and training will help your team stay compliant and make the changes easier.

Federal grant funding is hard to obtain and takes time to manage. Since you have worked hard to earn it, make sure you recover the full value of running your programs.

Federal grant requirements and cost recovery decisions depend on your organization’s awards, accounting practices, and supporting documentation. Contact your Blue & Co. advisor to discuss your indirect cost strategy, grant billing procedures, and readiness for audit.