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Four Things Every Nonprofit Contracting with Government Should Do

by Molly O'Connell

Watch a one hour webinar at your convenience to learn more about getting reimbursement for your nonprofit’s costs. Free for members!

The White House Office of Management and Budget (OMB) rules known as the Uniform Guidance went into effect at the end of 2014, representing “historic reform [that] will transform the landscape … for generations to come.”

The changes streamline the rules governing administrative requirements, cost principles, and audit requirements on federal awards, removing inconsistencies in the old circulars. And, probably most noteworthy, the rules require that governments pay their nonprofit contractors reasonable indirect costs.

Does the Uniform Guidance Affect You?

These rules are applicable to all new written agreements (contracts and grants) between government agencies/departments and nonprofits that were signed after December 26, 2014.

While the Guidance does not require a government agency to use the new overhead reimbursement standards for existing contracts or a basic renewal of an existing contract, any substantial changes made to the contract could require that the higher overhead rules apply.

What Has Changed?

In what many are citing as a great win in countering the Overhead Myth, government agencies and departments that hire a nonprofit using federal funds must reimburse the organization for its reasonable indirect costs (aka overhead or administrative costs).

Making this change even more significant, the Guidance also applies to pass-through entities (typically states and local governments, as well as some larger nonprofits) using federal funds to hire a nonprofit to perform services. Historically many of these pass-through entities have not paid indirect costs, even if the nonprofit had a negotiated indirect cost rate established.

Nonprofits can seek reimbursement of their indirect costs by:

  • electing to use their already federally approved indirect cost rate (if one exists),
  • negotiating a new rate, or
  • utilizing the default minimum rate of 10% of the modified total direct costs.

In addition to changes related to the reimbursement of indirect costs, the Guidance provides direction on other topics such as internal controls and procurement. This article provides an overview of changes.

What Do Nonprofits Need to Do?

For nonprofits that already receive or plan to receive federal funding, it is important to understand these guidelines and accurately identify and track overhead costs in order to benefit from these changes.

The National Council of Nonprofits advises:

In connection with government grants and contracts, the [OMB] Uniform Guidance provides only the promise of improved treatment; it is incumbent upon each organization to (1) take action to own its own costs, (2) learn its responsibilities and rights under the new rules, and (3) protect those rights through advocacy, both on its own behalf with each grant and contract, as well as by engaging in efforts with the broader nonprofit community.

1. Own Your Own Costs

It is essential for your nonprofit to have financial management systems in place that track your indirect costs so you can negotiate your federal indirect cost rate and receive more than the 10 percent minimum if appropriate.

2. Learn Your Rights and Responsibilities

Take the time to read the Guidance, specifically Appendix IV – Indirect (F&A) Costs Identification and Assignment; Rate Determination for Nonprofit Organizations.  Refer to the National Council of Nonprofits publication Know Your Rights … and How to Protect Them. There is also this summary of the top 10 changes and what your nonprofit should do in response.

Please also share your experiences and questions with us here at MANP. We’ll be working to provide resources and training on this topic as needed by members. (With that in mind, save the date for the Nonprofit Finance Conference on November 5th in Freeport!)

3. Protect Your Rights

It may be necessary to contact the government or pass-through entity associated with a contract in order to elect or negotiate an indirect cost rate and reimbursement. Nonprofits should also be prepared in the case that those state or local agencies that issues their award are not up to speed about the new requirements.

If a state or local government tries to deny your nonprofit the reimbursement rates guaranteed by the Uniform Guidance, stand up for your nonprofit’s rights. Among the many safeguards put in place by OMB, pass-through entities may not ask your nonprofit to sign a waiver of its right to this reimbursement. Use the National Council of Nonprofits publication Know Your Rights … and How to Protect Them to learn about potential compliance challenges and how the Uniform Guidance should be properly interpreted.

4. Report Back

As you enter into new grants and contracts, share your experience–positive and negative–using the confidential Uniform Guidance Implementation Report Form on the National Council of Nonprofits website. The information that nonprofits share will help the network of engaged state associations of nonprofits monitor compliance, compile data and patterns that can be addressed at a government-wide level, and identify good processes and solutions that can be replicated to help nonprofits across the country meet their missions.

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