Payroll charged to federal grants

In recent years, federal agencies have been increasing the intensity of their monitoring efforts over federal grant awards. This is likely the result of a higher level of federal grant expenditures due to the American Recovery and Reinvestment Act (ARRA) as well as the directive from the Office of Management and Budget (OMB) for federal agencies to increase the transparency and accountability over grant funding.

One area that has been frequently reviewed is compliance with payroll charged to federal awards. We recommend you take some time to evaluate your government’s compliance in this area.

OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments, establishes principles and standards for costs charged to federal grants. Within this circular, specific requirements are applicable to salaries and wages. Federal agencies have frequently been finding instances of noncompliance with the specific time distribution requirements. The following summarizes the key requirements of time distribution:

  • When employees are expected to work solely on activities related to a single federal award, charges for their wages should be supported by periodic certifications that the employees worked solely on that program for the period covered by the certification. The certifications should be prepared at least semi-annually and should be signed by the employee and supervisor.
  • When employees with payroll costs allocated to grants work on multiple activities, a distribution of their salaries or wages must be supported by personnel activity reports, detailed timesheets, or equivalent documentation that meets all of the following standards:
    • They must reflect an after-the-fact distribution of the actual time of each employee
    • They must account for the total activity for which each employee is compensated
    • They must be prepared at least monthly and must coincide with one or more pay periods
    • They must be signed by the employee 

Budgeted estimates or other distribution percentages may be use for interim accounting purposes provided that, at least quarterly, comparisons of actual costs to budgeted distributions are done and necessary adjustments are made. OMB Circular A-87 provides specific guidance if this methodology is followed:

  • Substitute systems for allocating salaries and wages to federal awards may be used in place of activity reports in some circumstances. These may include random-moment sampling or case counts. However, these systems need to be approved by the cognizant agency.
  • Salaries and wages of employees used in meeting cost-sharing or matching requirements of federal awards must be supported in the same manner as those claimed as allowable costs under federal awards.

We encourage you to review your compliance with these requirements.