Are you ready for the Omni Circular?

The Office of Management and Budget’s (OMB’s) so-called Omni Circular supersedes and streamlines requirements from eight existing circulars that apply to federal awards. Although the new audit threshold has received much of the attention, nonprofits that receive federal awards should be aware of other significant changes that take effect for new contracts starting after Dec. 26, 2014.

Cost principles

The Omni Circular, or the “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” includes significant reforms to the cost principles formerly found in Circulars A-21, A-87 and A-122. For example, a nonprofit that’s never had a negotiated indirect cost rate may now use a de minimis rate of 10% of modified total direct costs. Nonprofits that have an approved federally negotiated indirect cost rate can apply for a one-time extension up to four years without further negotiation.

The Omni Circular also clarifies when administrative salaries can be considered direct costs, adds reporting requirements for compensation, and includes some computer costs with materials and supplies. Changes may be necessary to comply with the specific requirements for time and effort tracking. Overall, the guidance should allow nonprofits to recover more costs from the federal government, according to the OMB.

Subrecipient monitoring

The final guidance clarifies expectations for awardees about the oversight and management of any “subawards” nonprofits provide to other entities (known as “subrecipients”) to carry out part of the awardee’s grant. One example is when a nonprofit passes some of its award funds to another nonprofit to conduct research or run a program. The guidance requires the original awardee to evaluate each subrecipient’s risk of noncompliance with federal statutes and regulations and the terms and conditions of the subaward to determine monitoring procedures.

Monitoring must include review of any performance or financial reports the awardee requires from its subrecipients to meet its oversight requirements under the terms of the federal award. Monitoring also must include follow-up to ensure that these organizations take timely and appropriate action on all deficiencies detected through audits and on-site review. The original awardee, referred to in the Omni Circular as a “pass-through recipient,” must verify that a subrecipient receives the required audit. But, for smaller subrecipients where an A-133 audit isn’t required, additional monitoring may be needed.

Grant management

Awardees must set and maintain effective internal control over the award. This means providing reasonable assurance that the award is being managed in compliance with the award’s terms and conditions and federal laws.

Internal controls should comply with the U.S. Comptroller General’s “Standards for Internal Control in the Federal Government” and the Committee of Sponsoring Organizations of the Treadway Commission’s “Internal Control — Integrated Framework.” The Circular also requires awardees to take reasonable measures to protect information that’s personally identifiable or designated as sensitive.

Performance management

The Omni Circular stresses that the awardee’s performance should be measured in a way that will help an awarding agency and other nonfederal entities (for example, other nonprofits) improve program outcomes, share lessons learned, and spread the adoption of promising practices.

Awarding agencies (for instance, the Department of Health and Human Services) must require awardees (such as community clinics) to relate financial data to performance accomplishments of the award. These recipients also may need to provide cost information to demonstrate cost-effective practices. All awarding agencies are required to state clear performance goals, indicators and expected outcomes.

Audit requirements

The Omni Circular also changes the threshold for requiring a single audit. Since 2004, a single audit was required when an organization spent $500,000 or more in federal funds. The Circular raises the threshold to $750,000 for fiscal years beginning on or after Jan. 1, 2015. The Council on Financial Assistance Reform noted that this increased threshold would still encompass 99.7% of the dollars currently covered under a single audit.

Act now

Federal funding is critical for the survival of many nonprofits, making compliance with the rules critical, too. Your CPA can help you set up the necessary systems and controls to comfortably comply with these changes.

© 2014