Reform of Federal Policies Relating to Grants and Cooperative Agreements; Cost Principles and Administrative Requirements (Including Single Audit Act), 11778-11785 [2012-4521]

Agencies

• Management and Budget Office

[Federal Register Volume 77, Number 39 (Tuesday, February 28, 2012)]
[Proposed Rules]
[Pages 11778-11785]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-4521]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 77, No. 39 / Tuesday, February 28, 2012 / 
Proposed Rules

[[Page 11778]]



OFFICE OF MANAGEMENT AND BUDGET

2 CFR Chapters I and II


Reform of Federal Policies Relating to Grants and Cooperative 
Agreements; Cost Principles and Administrative Requirements (Including 
Single Audit Act)

AGENCY: Executive Office of the President, Office of Management and 
Budget (OMB).

ACTION: Advance Notice of Proposed Guidance.

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SUMMARY: In his November 23, 2009, Executive Order 13520 on Reducing 
Improper Payments and his February 28, 2011, Presidential Memorandum on 
Administrative Flexibility, Lower Costs, and Better Results for State, 
Local, and Tribal Governments, the President directed the Office of 
Management and Budget (OMB) to work with Executive Branch agencies; 
state, local, and tribal governments; and other key stakeholders to 
evaluate potential reforms to Federal grants policies. Consistent with 
the Administration's commitment to increasing the effectiveness and 
efficiency of Federal programs, the reform effort seeks to strengthen 
the oversight of Federal grant dollars by aligning existing 
administrative requirements to better address ongoing and emerging 
risks to program outcomes and integrity. The reform effort further 
seeks to increase efficiency and effectiveness of grant programs by 
eliminating unnecessary and duplicative requirements. Through close and 
sustained collaboration with Federal and non-Federal partners, OMB has 
developed a series of reform ideas that would standardize information 
collections across agencies, adopt a risk-based model for Single 
Audits, and provide new administrative approaches for determining and 
monitoring the allocation of Federal funds.

DATES: To be assured of consideration, comments must be received by OMB 
at one of the addresses provided below, no later than 5 p.m. Eastern 
Standard Time (E.S.T) on March 29, 2012.

ADDRESSES: In submitting comments, please refer to file ``Grant 
Reform''. You may submit comments using one of the following three 
alternatives (please choose only one of these three alternatives):
    1. Electronically. You may submit electronic comments on this 
regulation to https://www.regulations.gov. Follow the instructions under 
the ``more Search Options'' tab.
    2. By express or overnight mail. You may send written comments to 
the following address only: Office of Management and Budget, 725 17th 
St. NW., Washington, DC 20025, Attention: Office of Federal Financial 
Management ``Grant Reform''.
    3. By regular mail. You may mail written comments to the following 
address only: Office of Management and Budget, 725 17th St. NW., 
Washington DC, 20500, Attention: Office of Federal Financial Management 
``Grant Reform''. Due to potential delays in OMB's receipt and 
processing of mail sent through the U.S. Postal Service, we strongly 
encourage respondents to submit comments electronically to ensure 
timely receipt. We cannot guarantee that comments sent via surface mail 
will be received before the comment closing date.
    Comments will be most useful if they are presented in the same 
sequence (and with the same heading) as the section of this notice to 
which they apply. Also, if you are submitting comments on behalf of an 
organization, please identify the organization. Finally, the public 
comments received by OMB will be posted on OMB's Web site and at https://www.regulations.gov (follow the search instructions on that Web site 
to view public comments). Accordingly, please do not include in your 
comments any confidential business information or information of a 
personal-privacy nature.
    Copies of the OMB Circulars that are discussed in this notice are 
available on OMB's Web site at https://www.whitehouse.gov/omb/circulars_default/. The Cost Principles for Hospitals are in the 
regulations of the Department of Health and Human Services at 45 CFR 
part 75, Appendix E (Principles for Determining Costs Applicable to 
Research and Development Under Grants and Contracts with Hospitals), at 
https://www.gpo.gov/fdsys/pkg/CFR-2011-title45-vol1/pdf/CFR-2011-title45-vol1.pdf.

FOR FURTHER INFORMATION CONTACT: Victoria Collin at (202) 395-7791 for 
general information.

SUPPLEMENTARY INFORMATION: This advance notice outlines the reform 
ideas for which OMB seeks public comment. These comments will assist 
OMB in its development in the coming months of a further Federal 
Register notice, to be published for comment later this year, which 
would propose specific revisions to existing requirements. These reform 
ideas relate to, and could result in proposed revisions to the 
following government-wide issuances: OMB Circulars A-21, A-87, A-110, 
and A-122 (which have been placed in 2 CFR parts 220, 225, 215, and 
230); Circulars A-89, A-102, and A-133; the guidance in Circular A-50 
on Single Audit Act follow-up; and the Cost Principles for Hospitals at 
45 CFR Part 74, Appendix E. As part of this ongoing review, OMB will 
consider the consolidation of currently-separate guidelines addressing 
related topics as well as the continued integration of guidelines into 
title 2 of the Code of Federal Regulations.
    The reform ideas would be applicable to grants and cooperative 
agreements that involve state, local, and tribal governments as well as 
universities and nonprofit organizations. To the extent that current 
OMB circulars on cost principles cover all awards including contracts 
for these entities, reforms to cost principles will equally apply to 
all Federal awards including contracts, except for those contracts that 
that are subject to ``full coverage'' under the Cost Accounting 
Standards (CAS) as defined at 48 CFR 9903.201. CAS-covered contracts 
will continue to be subject to the relevant requirements under the 
Federal Acquisition Regulation (FAR). Single Audit Act requirements 
will continue to apply to all Federal awards including contracts, 
though cost reimbursement contracts may continue to be subject to 
additional audit requirements.

I. Objectives and Background

A. Objectives

    As the President made clear in Executive Order 13563 of January 18, 
2011, on Improving Regulation and

[[Page 11779]]

Regulatory Review (76 FR 3821; January 21, 2011; https://www.gpo.gov/fdsys/pkg/FR-2011-01-21/pdf/2011-1385.pdf), each Federal agency must 
``tailor its regulations to impose the least burden on society, 
consistent with obtaining regulatory objectives, taking into account, 
among other things, and to the extent practicable, the costs of 
cumulative regulations'' and, to that end, it is important that Federal 
agencies identify those ``rules that may be outmoded, ineffective, 
insufficient, or excessively burdensome,'' and ``modify, streamline, 
expand, or repeal them in accordance with what has been learned.'' The 
President reinforced his commitment in Executive Order 13579 of July 
11, 2011 on Regulation and Independent Regulatory Agencies (76 FR 
41587; July 14, 2011; https://www.gpo.gov/fdsys/pkg/FR-2011-07-14/pdf/2011-17953.pdf).
    As in other areas involving Federal requirements, the President is 
committed to eliminating requirements in the financial assistance arena 
that are unnecessary and reforming those requirements that are overly 
burdensome. As part of this commitment, the President believes that the 
Federal government has an obligation to eliminate roadblocks to 
effective performance in carrying out and completing grants and 
cooperative agreements. Essential to this reform effort is reducing 
``red tape'' that is attached to the more than $600 billion the Federal 
government spends annually in the form of grants and cooperative 
agreements. These awards provide important benefits and services to the 
public, and the awards go to state, local and tribal governments as 
well as to institutions of higher education and non-profit 
organizations. In order to ensure that the public receives the most 
value for the tax dollars spent, it is essential that these programs 
function as effectively and efficiently as possible, and that there be 
a high level of accountability to prevent waste, fraud, and abuse.
    To this end, the President on February 28, 2011, issued his 
Memorandum on Administrative Flexibility, Lower Costs, and Better 
Results for State, Local, and Tribal Governments, (Daily Comp. Pres. 
Docs.; https://www.gpo.gov/fdsys/pkg/DCPD-201100123/pdf/DCPD-201100123.pdf). In the Memorandum, the President explained that 
``Federal program requirements over the past several decades have 
sometimes been onerous, and they have not always contributed to better 
outcomes. With input from our State, local, and tribal partners, we 
can, consistent with law, reduce unnecessary regulatory and 
administrative burdens and redirect resources to services that are 
essential to achieving better outcomes at lower cost.'' In addition to 
other actions, the President instructed the OMB Director to ``[r]eview 
and where appropriate revise guidance concerning cost principles, 
burden minimizations, and audits for State, local, and tribal 
governments in order to eliminate, to the extent permitted by law, 
unnecessary, unduly burdensome, duplicative, or low-priority 
recordkeeping requirements and effectively tie such requirements to 
achievement of outcomes.''
    At the same time that the Federal Government must remove 
unnecessary and overly burdensome requirements that interfere with 
efficient and effective program performance, another Presidential 
priority is ``intensifying efforts to eliminate payment error, waste, 
fraud, and abuse'' in Federal programs, as the President emphasized in 
Executive Order 13520 of November 20, 2009, on Reducing Improper 
Payments (74 FR 62201; November 25, 2009; https://www.gpo.gov/fdsys/pkg/FR-2009-11-25/pdf/E9-28493.pdf). Accordingly, as the President 
explained, it is important for Federal agencies ``to more effectively 
tailor their methodologies for identifying and measuring improper 
payments to those programs, or components of programs, where improper 
payments are most likely to occur.'' Moreover, the elimination of 
unnecessary and overly burdensome requirements can advance the goal of 
strengthened program integrity, by enabling resources to be focused on 
those activities that are most effective at reducing payment errors and 
eliminating waste, fraud and abuse. Accordingly, in his February 2011 
Memorandum on Administrative Flexibility, Lower Costs, and Better 
Results for State, Local, and Tribal Governments, the President 
directed Federal agencies to ``[w]ork with State, local, and tribal 
governments to identify the best opportunities to realize efficiency, 
promote program integrity, and improve program outcomes, including 
opportunities, consistent with law, that reduce or streamline 
duplicative paperwork, reporting, and regulatory burdens and those that 
more effectively use Federal resources across multiple programs or 
States.''
    The reform ideas described below are being considered as approaches 
for pursuing these objectives.
    The purpose of this notice is to solicit public input on a range of 
ideas for reforming the requirements that govern the management of 
Federal financial assistance awards. OMB is interested in receiving 
broad public feedback on these ideas. Based on the feedback that is 
received, as well as on the ongoing discussions among Federal agencies 
(including their Inspectors General) as well as with other 
stakeholders, OMB in the coming months will develop a set of proposed 
amendments that, later this year, will be published for public comment 
in the Federal Register. The public comments on that proposed set of 
revisions will in turn be considered as OMB develops a final notice 
that will adopt a set of reforms. Following the implementation of these 
reforms, OMB will continue to monitor their impacts to evaluate whether 
(and the extent to which) the reforms are achieving their desired 
results, and OMB will consider making further modifications as 
appropriate.
    In addition, OMB is considering implementing these reforms through 
the development and issuance of an integrated set of guidelines that 
would be contained in one consolidated circular, in which current 
administrative requirements that currently vary by type-of-recipient 
would be streamlined into one set of common requirements, while at the 
same time some provisions that vary among different types of recipients 
would be retained. The goal of such a streamlining would be to increase 
the consistency, and decrease the complexity, in how the Federal 
Government's financial assistance programs are administered. Among 
other benefits, this will make it easier for applicants and recipients 
of Federal awards to understand and implement these requirements.

B. Background

    The reform ideas outlined in this notice reflect input from a year 
of work by the Federal and non-Federal financial assistance community. 
In response to the President's direction that OMB and Federal agencies 
identify ways to make the oversight of Federal funds more effective and 
more efficient, OMB worked with the Office of Science and Technology 
Policy (OSTP) to convene meetings with both Federal and non-Federal 
stakeholders to discuss possible ideas for reform efforts. These 
meetings resulted in OMB receiving a series reform ideas at the end of 
August 2011 that have since been further developed as described below. 
In addition, over 150 comments were received from the university and 
research community. These comments are publicly available at https://rbm.nih.gov/a21_task_force.htm.
    On October 27, 2011, the OMB Director issued Memorandum M-12-01,

[[Page 11780]]

Creation of the Council on Financial Assistance Reform (https://www.whitehouse.gov/sites/default/files/omb/memoranda/2012/m-12-01.pdf). 
To ``create a more streamlined and accountable structure to coordinate 
financial assistance,'' the Memorandum established the interagency 
Council on Financial Assistance Reform (COFAR) as a replacement for two 
Federal boards (the Grants Policy Council and the Grants Executive 
Board). The 10-member COFAR is composed of OMB's Office of Federal 
Financial Management (Co-Chair); the eight largest grant-making 
agencies, which are the Departments of Health and Human Services (a Co-
Chair), Agriculture, Education, Energy, Homeland Security, Housing and 
Urban Development, Labor, and Transportation; and one additional 
rotating member to represent the perspectives of other agencies, which 
for the first two-year term is the National Science Foundation.
    Since the COFAR's first meeting on November 4, 2011, it has worked 
to formulate and further develop reform ideas for consideration to 
streamline and improve financial management policy for Federal 
assistance awards. These reform ideas are presented below, in Part II 
of this notice. In Part III, specific questions are posed regarding 
these reform ideas, for which comments are especially invited, along 
with other comments.

II. Reform Ideas for Comment

    OMB invites comments from the public on all issues addressed in 
this advance notice. We invite those interested in responding to answer 
all of the questions posed or to choose to respond only to those 
questions of greatest interest to them. This feedback will assist us in 
fully considering issues and developing policies. In addition, the 
public is invited to suggest additional reform ideas for our 
consideration. Finally, we should note that, as this is an advance 
notice, the fact that OMB is requesting public comment on a reform idea 
does not mean that OMB has concluded that the reform idea necessarily 
should be pursued. That is why public comment is being requested, so 
that OMB and Federal agencies (and other stakeholders) can have the 
benefit of the public's input, views and perspectives at this stage of 
the process, as we continue to evaluate these ideas for reform.
    The reform ideas under discussion are outlined below in three main 
categories:
     Section A: reforms to audit requirements (Circulars A-133 
and A-50)
     Section B: reforms to cost principles (Circulars A-21, A-
87, and A-122, and the Cost Principles for Hospitals)
     Section C: reforms to administrative requirements (the 
government-wide Common Rule implementing Circular A-102; Circular A-
110; and Circular A-89)

A. Reforms to Audit Requirements (Circulars A-133 and A-50)

    This section discusses ideas for changes that would be made to the 
audit guidance that is contained in Circular A-133 on Audits of States, 
Local Governments, and Non-Profit Organizations and in Circular A-50 on 
Audit Follow-up. The following are ideas for reform that have been 
raised and discussed.
    1. Concentrating audit resolution and oversight resources on higher 
dollar, higher risk awards.
    Changing the Single Audit framework could enable agencies to focus 
their oversight and follow-up resources in the most efficient and 
effective way for targeting improper payments, waste, fraud, and abuse. 
The following oversight guidelines are an illustrative example of the 
form that a revised framework for the Single Audit requirement might 
take:
    A. Entities that expend less than $1 million in Federal awards 
would not be required to conduct a Single Audit. This would be an 
increase in the current threshold of $500,000, below which entities are 
currently not required to conduct Single Audits.
    B. Entities that expend between $1 million and $3 million in 
Federal awards would be required to undergo a more focused version of 
the Single Audit, which would differ from current Single Audit 
requirements in that once a major program determination has been made, 
auditors would review only two compliance requirements for those 
programs. Allowable and unallowable costs would always be one of the 
required compliance requirements, and agencies would have the 
discretion to select the second compliance requirement for each of 
their programs as they deem most appropriate. OMB would provide 
guidance to agencies that this second compliance requirement should be 
the one that, for the particular program, would best target the risk of 
improper payments or waste, fraud, and abuse.
    C. Entities that expend more than $3 million in Federal awards 
would undergo a full Single Audit. These Audits would be strengthened 
per the ideas in reforms 2-5 (below) to give agencies better tools to 
reduce improper payments and to eliminate waste, fraud, and abuse.
    Raising the threshold for a Single Audit (from $500,000 to $1 
million) would reduce the administrative burden for audited entities 
and for auditing agencies, allowing the agencies to concentrate their 
audit oversight and follow-up resources more closely on other entities 
that are higher-dollar and higher-risk. Focusing the Single Audit 
requirement (for entities expending between $1 million and $3 million) 
to two compliance requirements would enable agencies to tighten their 
scrutiny on the highest risk areas of program oversight while at the 
same time reducing the burden--for both agencies and recipients--
associated with collecting and resolving audit findings in lower risk 
areas. This would narrow the scope of compliance-related information 
that agencies receive for entities expending below $3 million. Finally, 
maintaining the full Single Audit for entities expending more than $3 
million would ensure that agencies still receive full Single Audit 
compliance information for higher dollar recipients, and that they will 
be able to shift more resources to provide the necessary level of 
oversight to those recipients.
    2. Streamlining the universal compliance requirements in the 
Circular A-133 Compliance Supplement.
    For all entities that undergo a full Single Audit, the universal 
compliance requirements listed in the Circular A-133 Compliance 
Supplement could be streamlined to focus on proper stewardship of 
Federal funds.
    This could be done, for example, by emphasizing--in the universal 
compliance requirements--those elements that address improper payments, 
waste, fraud, abuse, and program performance, while streamlining other 
elements. Under this approach, a subset of compliance requirements 
would be targeted for increased testing, larger sample sizes, or lower 
levels of materiality. Examples of these could include: Allowable or 
unallowable activities and costs, eligibility, reporting, selection of 
subrecipients and subrecipient monitoring, special tests and 
provisions, period of availability of Federal funds, and compliance of 
procurement with suspension and debarment policies. At the same time, 
other compliance requirements could either be made optional for testing 
(depending on the material effect of that requirement on the program) 
or could have smaller sample sizes and higher levels of materiality. In 
addition, Federal agencies would have the ability, on a

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program-specific basis to place higher emphasis through the Compliance 
Supplement process on those elements (no longer universal) which the 
agency believes are relevant to prevent waste, fraud, or abuse.
    Refocusing the Single Audit Compliance Supplement to reduce the 
number of types of compliance requirements tested would both reduce the 
audit burden on recipients and provide agencies with more risk-based 
audits. This refocusing of the Single Audit is intended to allow 
agencies to concentrate their audit resolution and oversight resources 
on the requirements most essential to managing waste, fraud, and abuse 
and reducing improper payments. This could result in a more focused 
audit that produces the findings needed to ensure accountability, while 
relieving the burden of audit work on issues that are secondary to the 
integrity of funds. Agencies could add back specific requirements under 
program specific tests and provisions where necessary. This would limit 
the types of compliance information that Federal agencies routinely 
receive from the Single Audit process.
    3. Strengthening the guidance on audit follow-up for Federal 
awarding agencies.
    This reform approach could include changes along the following 
lines:
     Requiring agencies to designate a senior accountable 
agency official to oversee the audit resolution process;
     Requiring agencies to implement audit-risk metrics 
including timeliness of report submission, number of audits that did 
not have an unqualified auditor opinion on major programs, and number 
of repeat audit findings;
     Encouraging agencies to engage in cooperative audit 
resolution with recipients; and
     Encouraging agencies to take a pro-active approach to 
resolving weaknesses and deficiencies, whether they are identified with 
single specific programs or cut across the systems of an audited 
recipient.
    To improve audit follow-up, the Federal Government would digitize 
Single Audit reports into a searchable database to support analysis of 
audit results by Federal agencies and pass-through entities.
    Strengthening audit resolution policies should result in agencies 
taking a more pro-active and collaborative approach towards following- 
up on audit findings, which should result in a decrease in audit 
findings and program risk over time. This collaborative approach would 
be envisioned more as a mediation process between agencies and 
recipients, with informal assistance as needed, rather than a more 
formal provision of training or technical assistance. As underlying 
programmatic weaknesses are resolved and repeat findings reduced, both 
recipients' and agencies' audit burdens will be lessened. This may 
require more resources from Federal agencies as they work to strike the 
right balance on pro-active oversight. A web-based searchable database 
of Single Audit findings will provide a key tool to improve the utility 
of audits.
    4. Reducing burden on pass-through entities and subrecipients by 
ensuring across-agency coordination.
    In order to reduce redundancy and burden, this reform idea would 
involve making more explicit the existing requirement that Federal 
awarding agencies are responsible for coordinating additional audits of 
a recipient entity with the Federal cognizant or oversight agency for 
audit for that entity. This would in no way impact the ability of 
Inspectors General to conduct audit work as deemed necessary in 
accordance with the Inspector General Act of 1978, as amended.
    Ensuring that audits are coordinated across Federal agencies, and 
that agencies conduct audit follow-up for internal-control issues at 
those subrecipients which receive the majority of their Federal funds 
through direct Federal assistance, would reduce the number of 
subrecipients for which pass-through entities engage in follow-up 
efforts that could duplicate the Federal efforts.
    5. Reducing burdens on pass-through entities and subrecipients from 
audit follow-up.
    For those situations in which an entity receives a majority of its 
Federal funds through direct grants from the Federal government, and 
some Federal funds through subawards, the reform idea would be to 
require Federal agencies to conduct audit follow-up of the subawards 
for those audit findings regarding financial or internal control 
systems that are not specific to the program delivery of the subawards.
    Such a change to Circular A-133 would be aimed at eliminating 
duplicative audit follow-up work performed by a pass-through entity 
without providing significant additional work to Federal agencies that 
already will be following-up on these same audit findings, as well as 
at simplifying the follow-up for the subrecipient. Pass-through 
entities that give subawards would no longer be required to resolve 
financial and internal control issues but could instead focus on the 
programmatic requirements of the subawards they make. Subrecipients 
would not be required to negotiate with both the Federal government and 
the pass-through entity over the same financial and control issues that 
affect both types of awards. However, once the Federal government has 
resolved the financial and control issues with the subrecipient, a 
pass-through entity that awarded a subaward would be responsible for 
audit follow-up monitoring of these general findings to ensure that the 
subrecipient complies with the audit resolution as it applies to the 
subgrants made by the primary grantee. The subrecipient's Federal 
awarding agency would perform a normal audit follow-up for the 
financial and control issues, issuing management decisions on these 
audit findings, and provide a process to make these management 
decisions and a Federal contact person readily available to the 
affected pass-through entities.

B. Reforms to Cost Principles (Circulars A-21, A-87, and A-122, and the 
Cost Principles for Hospitals)

    This section discusses ideas for changes that would be made to the 
OMB cost-principle circulars that have been placed at 2 CFR Parts 220, 
225, and 215 (Circulars A-21, Cost Principles for Educational 
Institutions; Circular A-87, Cost Principles for State, Local and 
Indian Tribal Governments; and Circular A-122, Cost Principles for Non-
Profit Organizations), and to the Cost Principles for Hospitals that 
are in the regulations of the Department of Health and Human Services 
at 45 CFR Part 75, Appendix E (Principles for Determining Costs 
Applicable to Research and Development Under Grants and Contracts with 
Hospitals). The following are ideas for reform that have been raised 
and discussed.
    1. Consolidating the cost principles into a single document, with 
limited variations by type of entity.
    2. For indirect (``facilities and administrative'') costs, using 
flat rates instead of negotiated rates.
     One option would be to establish a mandatory flat rate 
that is discounted from the recipient's already negotiated rate. This 
approach could significantly reduce the burden associated with indirect 
cost rate calculation and negotiation, as well as reduce overall 
indirect costs.
     Another option would give recipients the option of 
accepting a flat rate or negotiating a rate. Recipients with a 
previously negotiated rate may have the additional option of accepting 
a discounted rate from their already negotiated rate. Recipients with a 
previously negotiated rate may have the

[[Page 11782]]

additional option of accepting a discounted rate from their already 
negotiated rate. Discounted rates could be maintained for up to a four-
year period with minimal documentation, or raised through negotiation 
with full documentation.
    Under both options, OMB would work with cognizant federal agencies 
and the HHS Division of Cost Allocation to develop a list of flat rates 
and discount factors by entity type. The aim of such approaches would 
be to reduce negotiation costs for agencies while reducing--for 
agencies, recipients, and subrecipients--the administrative burden 
associated with rate preparation and negotiations. Entities with CAS-
covered contracts would still be required to use a negotiated rate for 
those contracts.
    Establishing either a mandatory or optional flat indirect cost rate 
could reduce administrative burdens on recipients associated with 
documenting, justifying, negotiating, and maintaining support for a 
negotiated rate. This burden can be substantial depending on the extent 
to which an entity analyzes, documents, and negotiates a rate or group 
of rates. By setting the flat rate at a lower level than the negotiated 
rate would have been, this approach could also reduce indirect-costs 
expenses incurred by Federal agencies. OMB would continue to work with 
stakeholders to address potential challenges to implementation, 
including finding the right algorithms for setting the rates and 
reducing overall indirect costs.
    One consideration here is the issue of whether Federal agencies 
would actually end up incurring additional indirect costs if each 
grantee had the option of choosing to use a flat rate or a negotiated 
rate. The concern here is that, through their choices, grantees would 
apply those rates that would result in the highest indirect cost 
reimbursement, with these increases in indirect costs thereby resulting 
in less funding being available for direct programmatic activities. OMB 
is seeking input on how to structure a reform approach in a way that 
would ensure a reduction in overall indirect costs.
    3. Exploring alternatives to time-and-effort reporting requirements 
for salaries and wages.
    This reform idea would involve working with the Federal grant and 
Inspector General (IG) communities to identify risks associated with 
justifications for salaries and wages and to identify possible 
alternative mechanisms for addressing those risks beyond current time-
and-effort reporting requirements.
    This would include consideration of the ideas described in existing 
pilots or development of new pilots to accountably document the 
allowability and allocability of salaries and wages charged to Federal 
awards as direct costs. The first three pilots under consideration are 
those of the Federal Demonstration Partnership (https://sites.nationalacademies.org/PGA/fdp/PGA_055834); the Department of 
Labor's Workforce Innovation Fund (https://www.doleta.gov/grants/find_grants.cfm); and the Department of Education's Request for Ideas 
(https://www.ed.gov/blog/2011/10/granting-administrative-flexibility-for-better-measures-of-success/).
    Considering and developing pilot programs that provide alternatives 
to time-and-effort reporting could result in substantial reductions of 
the administrative burden currently associated with compliance, while 
enhancing compliance and stewardship. OMB will work with IGs and other 
stakeholders to ensure that any alternative provides appropriate levels 
of auditable and accountable information.
    4. Expanding application of the Utility Cost Adjustment for 
research to more higher education institutions.
    This reform idea would expand application of the 1.3% indirect 
(facilities and administration) costs adjustment for utility costs of 
research to more institutions of higher education.
    The Utility Cost Adjustment (UCA) is currently provided to 65 
institutions of higher education for research grants. Under this 
proposal, the UCA would be extended to other institutions that submit 
to their cognizant Federal agency a utility cost study justifying an 
increase in utility cost reimbursement and an approved plan to reduce 
their utility costs over time. OMB would work with Department of 
Defense's Office of Naval Research and the Department of Health and 
Human Services' Division of Cost Allocation to develop guidelines and a 
format for the cost studies to ensure standardization across entities.
    Extending the opportunity to apply for the UCA to more institutions 
of higher education for research is aimed at resolving the equitable 
treatment concern that has been raised by those academic institutions 
that have not been offered this opportunity since the UCA became 
available to some institutions in 1998. This revision would address 
that concern while still ensuring cost accountability and reduced 
utility consumption by requiring a utility cost study (to be developed 
by OMB in coordination with DOD's Office of Naval Research and HHS' 
Division of Cost Allocation) as well as a plan to reduce utility costs 
in order for the adjustment to be approved. If all remaining 
institutions apply for and receive this adjustment, this revision could 
raise Federal indirect cost reimbursements for utility costs by up to 
approximately $80 million per year once fully implemented.
    5. Charging directly allocable administrative support as a direct 
cost.
    This reform idea would involve clarifying the circumstances under 
which institutions of higher education, and other entities where 
appropriate, may charge directly allocable administrative support as a 
direct cost. Included are project-specific activities such as managing 
substances/chemicals, data and image management, complex project 
management, and security.
    This clarification would be aimed at ensuring that charges are 
appropriately classified in order to provide support for all of the 
costs directly associated with a Federal award, while reducing the 
burdens of securing special permission to purchase what have become 
routine supplies. This is not intended to result in a net cost 
increase, but rather to provide clarity in how allowable costs are 
routinely charged.
    6. Including the cost of certain computing devices as allowable 
direct cost supplies.
    This reform idea would involve explicitly including the cost of 
computing devices not otherwise subject to inventory controls (i.e. 
cost less than the organization's equipment threshold) as allowable 
direct cost supplies. Applicants for Federal awards would be required 
to document these items as a separate line-item in their budget 
requests, but would not be required to conduct the more stringent 
inventory controls in place for equipment.
    This clarification would be aimed at ensuring that charges are 
appropriately classified in order to provide support for all of the 
costs directly associated with a Federal award, while reducing the 
burdens of securing special permission to purchase what have become 
routine supplies. This is not intended to result in a net cost 
increase, but rather to provide clarity in how allowable costs are 
routinely charged.
    7. Clarifying the threshold for an allowable maximum residual 
inventory of unused supplies.
    This reform idea would involve harmonizing cost principles with 
existing language in Circulars A-110 and A-102 to clarify that $5,000 
is the threshold for an allowable maximum residual inventory of unused 
supplies that may be retained for use on another

[[Page 11783]]

Federal award at no cost, as long as the cost was properly allocable to 
the original agreement at the time of purchase.
    This clarification would be aimed at minimizing confusion about 
appropriate disposal or re-expensing of unused inventories at the 
conclusion of an award and at ensuring consistency in the application 
of the cost principles in the circulars.
    8. Eliminating requirements to conduct studies of cost 
reasonableness for large research facilities.
    This reform idea would involve eliminating requirements for 
institutions of higher education, and other entities where appropriate, 
to conduct studies of cost reasonableness for large research 
facilities. This would be aimed at reducing paperwork that is costly to 
generate and may yield information that is of minimal use to the 
awarding agency.
    9. Eliminating restrictions on use of indirect costs recovered for 
depreciation or use allowances.
    This reform idea would involve eliminating the restrictions on the 
use of the portion of indirect cost recoveries associated with 
depreciation or use allowances. This would be aimed at reducing 
paperwork that is costly to generate and may yield information that is 
of minimal use to the awarding agency.
    10. Eliminating requirements to conduct a lease-purchase analysis 
for interest costs and to provide notice before relocating federally 
sponsored activities from a debt-financed facility.
    This reform idea would involve eliminating requirements for 
institutions of higher education, and other entities where appropriate, 
to conduct a lease-purchase analysis to justify interest costs, and to 
notify the cognizant Federal agency prior to relocating federally 
sponsored activities from a facility financed by debt. This would be 
aimed at reducing paperwork that is costly to generate and may yield 
information that is of minimal use to the awarding agency.
    11. Eliminate requirements that printed ``help-wanted'' advertising 
comply with particular specifications.
    This reform idea would update the cost principles to reflect the 
media now used for those notices.
    12. Allowing for the budgeting for contingency funds for certain 
awards.
    This reform idea would involve clarifying that budgeting for 
contingency funds associated with a Federal award for the construction 
or upgrade of a large facility or instrument, or for IT systems, is an 
acceptable and necessary practice; that the method by which contingency 
funds are managed and monitored is at the discretion of the Federal 
funding agency. Contingency related amounts should not be included in 
recipient proposed budgets for specific awards or in the actual award 
documents; risk-adjusted total cost estimates should be based on 
verifiable supporting data consistent in compliance with Generally 
Accepted Accounting Principles (GAAP) and with standard project-
management practices. Rebudgeting out of these funds would not be 
allowable.
    Allowing recipients to budget for contingency funds is aimed at 
clarifying and harmonizing the rules on what is deemed standard project 
management practice and to encourage development of shared IT services. 
There could be some cost implications to projects if and when the 
contingency funds become necessary spending.
    13. Requesting that the Cost Accounting Standards Board (CASB) 
consider increasing the minimum threshold for disclosure statements.
    This reform idea would involve OMB requesting that the Cost 
Accounting Standards Board consider the following--
     Increasing the minimum threshold for institutions of 
higher education to file a disclosure statement of cost-accounting 
standards from $25 million to $50 million in Federal awards per year 
based on the average of the entity's most recent three years;
     Establish that the requirement no longer applies if an 
entity drops below that threshold and is not required to file under 
current Cost Accounting Standards Board (CASB) requirements described 
at 48 CFR 9903.202-1; and
     Remove exhibit A of Circular A-21 from future guidance.
    OMB would also request that the CASB reassess its rule to increase 
the $25 million procurement contract threshold for institutions of 
higher education to conform to the $50 million threshold for other 
types of entities. OMB would also link the requirement to future 
adjustments to the CASB rule.
    14. Allowing for excess or idle capacity for certain facilities, in 
anticipation of usage increases.
    This reform idea would allow for excess or idle capacity in 
consolidated data centers, telecommunications, and public safety 
facilities. In order to consolidate data centers and operate in a 
cloud-based environment, data centers require excess capacity at their 
creation in order to accommodate increases in usage later on. Other 
telecommunications facilities and public safety projects have similar 
characteristics. Federal sharing of these costs would be contingent on 
the grantee providing a multi-year plan for reaching full capacity of 
the data center. The OMB cost principles currently do not address the 
excess or idle capacity in consolidated data centers.
    15. Allowing costs for efforts to collect improper payment 
recoveries.
    This reform idea would involve revising OMB guidelines to allow 
costs for expenses associated with the effort to collect improper 
payment recoveries or related activities, if such costs are 
specifically approved or directed by the awarding agency.
    This change would be aimed at meeting the President's directive to 
improve the Federal government's ability to recover improper payments. 
While this could result in increased upfront costs to the agencies, the 
intention here is that awarding agencies would approve these costs only 
when the anticipated amount of recovered funding more than justifies 
the expense of collection.
    16. Specifying that gains and/or losses due to speculative 
financing arrangements are unallowable.
    This reform idea would involve specifying that gains and/or losses, 
related to debt arrangements on capital assets, due to speculative 
financing arrangements (such as hedges, derivatives, etc.) are 
unallowable. Due to the volatile nature of such instruments, all 
derivative and hedging instruments would be unallowable, including 
derivative and hedging instruments embedded in other contracts, whether 
used for risk management purposes, forecasting, calculations used for 
the preparation of proposals for federal funding (e.g., forecasting 
contingencies) or otherwise, and regardless of whether related to 
assets, liabilities, or expenses.
    This change would be aimed at updating the cost principles to 
address all types of debt arrangements.
    17. Providing non-profit organizations an example of the 
Certificate of Indirect Costs.
    This reform idea would involve providing non-profit organizations 
an example of the required certification (Certificate of Indirect 
Costs) similar to the information that is already provided for state, 
local, and tribal governments. This would be aimed at providing 
uniformity in documentation requirements across different types of 
entities.
    18. Providing non-profit organizations with an example of indirect 
cost proposal documentation requirements.
    This reform idea would involve providing, for non-profit 
organizations, an example of indirect cost proposal

[[Page 11784]]

documentation requirements that are similar to the information provided 
for state, local, and tribal governments. This would be aimed at 
providing uniformity in documentation requirements across different 
types of entities.

C. Reforms to Administrative Requirements (the Common Rule implementing 
Circular A-102; Circular A-110; and Circular A-89)

    This section discusses ideas for changes that would replace the 
government-wide common rule implementing Circular A-102 on Grants and 
Cooperative Agreements with State and Local Governments and that would 
revise Circular A-110 on Uniform Administrative Requirements for Grants 
and Other Agreements with Institutions of Higher Education, Hospitals 
and Other Non-Profit Organizations (2 CFR part 215) and Circular A-89 
on Catalog of Federal Domestic Assistance. The following are ideas for 
reform that have been raised and discussed
    1. Creating a consolidated, uniform set of administrative 
requirements.
    This reform idea would involve consolidating the administrative 
requirements in OMB Circulars A-102 and A-110 into a uniform set of 
administrative requirements for all grant recipients. This uniform 
guidance would continue to include limited exceptions by type of 
recipient.
    2. Requiring pre-award consideration of each proposal's merit and 
each applicant's financial risk.
    This reform idea would involve requiring agency consideration of 
the merit of each proposal and the financial risk associated with each 
applicant prior to making an award. (Many agencies currently award 
grants based on merit review under current law and policy. The proposed 
change would be a reform in the sense that such merit-based review 
would be required for the first time in an OMB circular.) Indicators of 
risk would include past financial, internal control, and programmatic 
performance. The outcome of the review should affect award decisions, 
and risk assessment may also affect terms and conditions. This would 
formalize a ``best practice'' that is already conducted by many 
agencies, and agencies will continue to have the discretion to 
determine the format of the review. This reform would not apply to 
formula grants.
    This change would be aimed at ensuring greater transparency in the 
award making process as well as higher quality of awarded projects, and 
at delivering improved results with less risk of waste, fraud, or abuse 
during implementation.
    In evaluating risks, agencies would be required to consider factors 
that could include: Financial stability; quality of management and 
internal control systems and the ability to meet the management 
standards prescribed in the amended guidance; history of performance; 
Federal award Single Audit reports and findings for previous awards; 
and any other factors that may affect the applicant's ability to 
effectively implement statutory, regulatory, or other requirements 
imposed on recipients. Merit reviews may be implemented according to 
the individual practices of each agency. This reform would include 
explicit authority for agencies to modify award decisions as well as 
the terms and conditions of any award based on the findings of a risk 
review.
    Articulating the requirement for this review in an OMB circular 
could ensure greater transparency in the award making process and 
higher quality of awarded projects. There may be some additional burden 
for agencies that do not currently conduct such reviews to incorporate 
them into their processes, and could also result in additional 
information collections from recipients.
    3. Requiring agencies to provide 90-day notice of funding 
opportunities.
    This reform idea would involve requiring Federal agencies to 
provide 90-day advance forecast of funding opportunities in an updated 
Catalog of Federal Financial Assistance (CFFA) that will replace the 
existing Catalog of Federal Domestic Assistance (CFDA). This would not 
affect the requirement to post actual notices of funding opportunities 
on Grants.gov.
    This change would be aimed at providing applicants with additional 
time and information with which to prepare financial assistance 
applications, thereby improving the relevance and quality of proposals 
submitted to Federal agency programs. Exceptions to the 90-day notice 
requirement would include statutory obligations or exigent 
circumstances that dictate a shorter timeframe. The new enhanced CFFA 
will include both domestic and international funding priorities for 
grants, loans, insurance, and other types of financial assistance, 
including information about projected amounts of available funds and a 
summary of general eligibility requirements. These notices of intended 
priorities may change based on modifications to funding cycles and/or 
statutory authorities.
    4. Providing a standard format for announcements of funding 
opportunities.
    This reform idea would incorporate into circulars the existing 
requirement for certain categories of information to be published in 
announcements of public funding opportunities. See OMB Memorandum M-04-
01 of October 15, 2003 (https://www.whitehouse.gov/omb/memoranda_fy04_m04-01), which announced the Federal Register notice that OMB published 
at 68 FR 58146 (October 8, 2003).
    Among other information, the opportunity announcement must include 
specific eligibility or qualification information and a clear 
description of all criteria used in agency review of applications for 
the grant opportunity. Further, agencies must disclose all terms and 
conditions that may be attached to the funded awards and general 
information regarding post-award reporting requirements, except for 
award specific terms and conditions determined during the pre-award 
process. Providing this level of transparency at the solicitation stage 
assists applicants in determining not only whether they are eligible 
and/or qualified for an award, but also the scope of recipient 
responsibilities associated with an award.
    5. Reiterating that information collections are subject to 
Paperwork Reduction Act approval.
    This reform idea would involve reiterating that information 
collection requests are limited to standardized data elements approved 
by OMB, as required under the Paperwork Reduction Act of 1995 (PRA), 
plus OMB-approved exceptions for all applications and reports.
    Continued efforts at data standardization are intended to improve 
governmentwide program management; enhance transparency in Federal 
awards; and streamline and reduce the reporting burden, including the 
time necessary to comply with application and reporting requirements. 
For both applications and post-award reporting, there are current 
requirements that agencies use standard OMB-approved governmentwide 
information collections, with deviations approved by OMB on a limited 
basis. Continued data standardization will also support OMB and Federal 
agency efforts to develop a comprehensive, end-to-end grants reporting 
system that allows applicants and recipients to apply for and report on 
all Federal grants at one location. Approved collections would be 
designed to include necessary information for program measurement and 
monitoring. This reform would in some cases limit Federal agencies' 
ability to require unique information

[[Page 11785]]

collections for particular program, except where required by statute.

III. Questions for Comment

    The list below includes the questions about these reform ideas that 
address issues which are of greatest interest to OMB at this stage of 
the process. Comments addressing any other concerns, and other types of 
feedback, are also welcome.
    In addition, as was explained at the beginning of this notice, the 
public comments received by OMB will be posted on OMB's Web site and at 
https://www.regulations.gov. Accordingly, please do not include in your 
comments any confidential business information or information of a 
personal-privacy nature.

A. Overarching Questions

    1. Which of these reform ideas would result in reduced or increased 
administrative burden to you or your organization?
    2. Which of these reform ideas would be the most or least valuable 
to you or your organization?
    3. Are there any of these reform ideas that you would prefer that 
OMB not implement?
    4. Are there any reform ideas, beyond those included in this 
notice, that OMB should consider as a way to relieve administrative 
burden?

B. Single Audits

    1. In general terms, how important are Single Audits to your entity 
or to entities you audit for subrecipient monitoring?
    2. In general terms, what impacts would the following changes to 
the Single Audit framework have on your organization in administrative 
burden and in ability to provide oversight to subrecipients?
    a. Increasing the Single Audit threshold to $1 million?
    b. Requiring a more focused Single Audit (with only two compliance 
requirements) for any entity expending between $1 million and $3 
million?
    c. Requiring full Single Audits for any entity expending more than 
$3 million?
    3. Should the Single Audit threshold(s) be increased, and if so, to 
what extent?
    4. Which types of currently universal Single Audit compliance 
requirements do you think are most essential to identifying and 
mitigating waste, fraud, and abuse?
    5. What processes or tools should the Federal Government implement 
in order to ensure better coordination in the Single Audit oversight by 
Federal agencies and pass-through agencies, including in the resolution 
of audit findings that cut across multiple agencies' programs?

C. Cost Principles

    1. On indirect cost rates:
    a. Would administrative burden be reduced by having an indirect 
cost rate in place for 4 years?
    b. Are there any existing Federal or state level statutory/
regulatory/agency requirements that would prohibit recipients from 
using a ``flat'' indirect cost rate if it were proposed?
    2. What are your views on the following types of indirect cost 
rates?
    a. A flat rate
    b. Longer term for negotiated rates to be in effect
    c. A flat rate that would be a fixed percentage of the 
organization's already existing negotiated rate
    3. In general terms, what would be the cost implications of 
implementing each of the following reforms, and/or of all of them 
together?
    a. The proposed clarifications to allowable charges of directly 
allocable administrative support as a direct cost. As currently 
envisioned, reforms would clarify that project-specific activities such 
as managing substances/chemicals, data and image management, and 
security are allowable.
    b. Allowing costs associated with recovery of improper payments.
    c. Allowing excess capacity for telecommunications and public 
safety projects?
    4. Would you be potentially interested in participating in a 
piloted alternative for time-and-effort reporting? Is there a permanent 
change to time-and-effort requirements that you recommend OMB consider?
    5. If your organization is an educational institution that does not 
currently receive the Utility Cost Adjustment (UCA), what are the 
general factors that your organization would likely consider in 
deciding whether to conduct a cost study, and complete a plan to reduce 
utility costs, in order to justify receiving the UCA?
    6. For organizations with CAS-covered contracts, are there 
differences between what is envisioned here and the standards for CAS-
covered contracts in the FAR that you believe could be challenging to 
address?

D. Administrative Requirements

    1. What areas of past performance should be considered as part of a 
Federal agency assessment of recipient risk (e.g., fulfillment of 
statutory matching requirements, record of sound financial management 
practices with no significant or material findings or weaknesses, 
ability to meet established deadlines)?
    2. What specific standards should be considered in Federal 
agencies' evaluation of merit prior to making Federal awards?
    a. How should these be applied?
    b. What elements and what source materials should be looked at?
    3. With respect to the existing government-wide standard 
information collection requests (ICRs) for grant applications and grant 
reporting--
    a. Do these ICRs provide necessary information to enable Federal 
agencies to review grant applications or to monitor the progress of 
grant awardees?
    b. Are these ICRs unnecessarily burdensome and, if so, in what 
way(s)?
    4. Should there be sets of standard data elements based on the type 
of assistance being provided (e.g. research, construction, social 
services, scholarships or aid program awards, etc.)?
    5. Are there any system issues and associated costs that may arise 
as a result of implementing the new pre-award and post award 
requirements? In general, what is the rough order of relative magnitude 
of these costs?

Daniel I. Werfel,
Controller.
[FR Doc. 2012-4521 Filed 2-27-12; 8:45 am]
BILLING CODE P