Federal Cost Principles Are Often Not Applied in Grants and Contracts With State and Local Governments

GGD-78-111: Published: Mar 12, 1979. Publicly Released: Mar 12, 1979.

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The Office of Management and Budget (OMB) promulgated uniform cost principles applicable to grants and contracts with State and local governments in a management circular issued in 1968. A review was made to determine the intent, adequacy, and extent of implementation of this circular. Federal assistance accounts for an estimated 25 percent of State and local resources. Agencies recognize and pay direct program costs; however, often they do not recognize and pay the allocated or indirect costs of providing support services.

The circular has not met its original objective, to identify the total allowable costs incurred by State and local governments in administering Federal programs. Grantees are not systematically identifying, accumulating, or allocating costs because some funding agencies employ practices which discourage or prohibit total cost determinations by grantees and allow grantees to use arbitrary indirect cost rates and to charge indirect costs to grants without a plan of allocation. Also, Federal guidance in the preparation of plans of allocation has not been provided, and the circular's objectives have not received top-level management support.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Director of OMB should consider revising the cost principles circular and related policies and procedures to: emphasize the recognition of total allowable costs and state clearly that reimbursement is a separate question which is subject to negotiations between the parties; define joint costs and indicate that such costs will not be recognized or reimbursed without evidence of plans of allocation; and improve the administration and monitoring of the circular. The heads of the Federal agencies whose programs GAO reviewed should take action to assure that: their regulations and procedures are consistent with the circular; their practices are consistent with their own regulations and policies and OMB requirements; and that they have the capacity and are providing the necessary training, instructions, and technical assistance to grantees, agency personnel, and funding personnel in using cost allocation plans.

    Agency Affected:


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