Dividing the Check: OIG and Cost Allocation

By | Published On: April 6, 2018

In March, the HHS Office of Inspector General (OIG) posted a new Work Plan item. The announcement of a forthcoming audit report by the Office of Audit Services caught my eye:

We will review select grantees receiving HHS grant funding from multiple sources to determine whether they are allocating and claiming costs in accordance with Federal requirements. We will also review procedures in place for HHS oversight and coordination between the participating grant programs.

We often discuss cost allocation plans, indirect cost rates and rate agreements, and the many other ways that costs must be allocated in the federal world with our clients. My favorite analogy to share involves three couples going out to dinner and splitting the bill.

Picture this: you and your significant other order pasta dishes and Couple B orders chicken and fish, all mid-priced meals. Couple C orders the most expensive thing on the menu: two 2-pound Maine lobsters at market price. The check comes, and before you can say a word, the couple with expensive taste says, “let’s split the check three ways, it’s easier.”  You and Couple B turn bright red, stunned. Reluctantly, you agree to go along with the plan. Why?! Splitting the bill equally isn’t fair at this dinner: fresh lobster costs much more than pasta, chicken, and other fish (maybe even combined). Couple C’s equal share of the full bill doesn’t cover the value of their meal. And worse, you, your significant other, and Couple B are paying for lobster that none of you enjoyed!

The underlying concept is no different in the world of federal grants. Grants largely reimburse costs. When it comes to joint or shared costs, the core concept is fairness. If a grantee incurs a cost and that cost pays for something that is used by more than one grant, function, or activity, (a “cost objective”), then that joint cost must be fairly charged or allocated to the “benefiting activities” in proportion to the benefits received. The flip side is an unfair allocation: one grant or activity is charged too much for the benefits it received. The result? It is subsidizing another grant or a non-federal activity that is underpaying for the benefits it received.

The OIG is interested in making sure that the federal government pays its fair share, not a penny more or a penny less and audit findings in these areas can be quite large. To avoid that outcome, it is crucial for federal grantees to have a good, written cost allocation plan.

To learn more about cost allocation requirements, written cost allocation plans and what to do with all these requirements, join us at our upcoming Federal Funding Academy training: June 13-15 in Portland, Oregon; September 12-14 in Louisville, Kentucky; or November 14-16 in Washington, DC.

Hope to see you there – I’ll happily accept invitations to a lobster dinner and we can all split the bill!

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