1.0    Introduction

As a recipient of federal grants and contracts the University of Kentucky must comply with Office of Management and Budget (OMB) Circular A-21 “Cost Principles for Educational Institutions.” A-21 also includes the following four Cost Accounting Standards (CAS) applicable to educational institutions:

• CAS 501 - Consistency in Estimating, Accumulating, and Reporting Costs
  
  
• CAS 502 - Consistency in Allocating Costs Incurred for the Same Purpose
  
  
• CAS 505 - Accounting for Unallowable Costs
  
  
• CAS 506 - Cost Accounting Period

CAS 501 requires the university to use consistent accounting practices to estimate the cost of a project in the proposal and to accumulate and report the actual costs of the project. For any significant amount of estimated cost in the proposal, accounting records must provide a meaningful comparison with actual costs. One effect of this standard is the requirement to account for all funds, including university resources, committed to and incurred on individual sponsored projects.

1.1    General Statement

Some sponsored projects require that the University participate to some extent in the total cost of the project. Cost sharing or matching (the terms may be used interchangeably) represent the use of institutional funds to supplement project costs not borne by the sponsoring agency.

The policy of the University is to make a cost sharing commitment only when required by the sponsor or by the competitive nature of the award and then to cost share only to the extent necessary to meet the specific requirements of the sponsored project. The cost sharing commitment must be included on the Internal Approval Form (IAF) and in the proposed budget. The responsible University officials must approve the cost sharing commitment on the Internal Approval Form [forms available from the Office of Sponsored Projects Administration (OSPA)].

2.0    Cost Sharing Obligation

There are several points in the proposal and award process at which the University may incur a cost sharing obligation.

2.1    Proposal Submission

Cost sharing may be committed in the proposal to the sponsor for one of two reasons: (1) the sponsor (or a particular program of the sponsor) requires cost sharing as a condition of applying for an award; (2) the University makes a commitment of cost sharing for competitive purposes. In both of these situations cost sharing is quantified in the proposal budget and becomes the basis for the sponsor’s award.

2.2    Negotiation and Receipt of Award

Cost sharing not quantified in the original proposal budget may subsequently be contributed by the University because sponsor funds are not sufficient to perform the agreed upon scope of work. Examples of this type of cost sharing obligation include: 1) the sponsor does not fund the project at the level requested in the proposal and the full amount is needed to accomplish the scope of work. University resources are committed to the project. 2) An overrun occurs on a ledger 4 sponsored project account. The overrun will be covered by University sources and must be identified as cost sharing.

See Exhibit A for further guidance.

ALL types of cost sharing described above must be documented and identifiable in the University accounting system. (See Section 5.)

2.3     Determining a Cost Sharing Obligation

Upon receipt of an award document OSPA will compare the awarded budget to the proposed budget. If the award is less than the proposal OSPA will contact the PI and/or unit business person to determine whether or not the university has incurred a cost sharing obligation. The amount of any obligation included in the original proposal and/or subsequently through negotiation must be documented along with the source of funds by account number. Revised budgets may be required. Significant changes in the scope of work or budget from those originally submitted will require another IAF per Administrative Regulation (AR) II-1.0-3 (VIII.A.).

3.0    Sources of Cost Share

Cost sharing may be met from the following sources:

1. University funds provided for the benefit of the specific project (i.e. department, dean or vice chancellor accounts; gift accounts.)
   
   
2. Unfunded or Waived Indirect costs. Waived indirect costs are indirect costs that are otherwise available to be recovered but the University has agree to accept less than the full amount. The difference between the indirect costs accepted and the amount that would have been provided at the full rate may be used as cost sharing if approved by the sponsor.

   In some circumstances the sponsor does not reimburse indirect at the full rate due to sponsor policy, government legislation or terms of the agreement. If the difference is to be used as cost share it must be approved by the sponsor.

   In addition, when direct cost is shared the University will cost share the associated indirect costs. This will be calculated by Sponsored Projects Accounting.
   
   

3. Another sponsored project account. This is rare and allowable only if approved by both sponsors. Note that federal funds may not be used as cost sharing on other federal funds.
   
   
4. Third-party contributions. This is support from a non-University source. For contributions other than cash, see Exhibit B for valuation method.

4.0    Criteria for Cost Share

To be acceptable to be used as cost sharing an expenditure must satisfy all of the following criteria:

1. be verifiable from official University records;
   
   
2. not be used as cost sharing for any other sponsored program;
   
   
3. be necessary and reasonable for proper and efficient accomplishment of project objectives;
   
   
4. be allowable under the applicable cost principles, OMB Circular A-21 (Refer to “Costing Guidelines for Sponsored Projects” Exhibit 1 or the object code listing in the Business Procedures Manual or FRS Handbook);
   
   
5. be itemized in the approved budget if this is a requirement of the sponsor; and
   
   
6. be incurred during the effective dates of the grant or contract.

4.1    Acceptable Expenditures

In general, costs normally treated as direct costs on sponsored projects may be used to meet a cost sharing obligation; costs normally treated as indirect on sponsored projects may not. For a complete list see the “Costing Guidelines for Sponsored Projects” Exhibit I or the listing of expenditure codes in the Business Procedures Manual or FRS Handbook.

1. Examples of expenditures which may be used as cost sharing include:
   
   
   1. Faculty, staff, or student salaries and applicable fringe benefits
      
      
   2. Laboratory supplies
      
      
   3. Travel
   
   
   
2. Examples of expenditures which may not be used as cost sharing are:
   
   
   1. Expenditures normally treated as indirect, such as administrative salaries and office supplies;
      
      
   2. Unallowable costs, such as alcoholic beverages, entertainment and memberships in community organizations (for a more complete list see “Costing Guidelines for Sponsored Projects”).

5.0    Accounting for and Documenting Cost Sharing

All cost sharing must be documented and readily identifiable in the University accounting system. Documentation is the responsibility of the department/unit designated as the “responsible” unit on the ledger 4 sponsored project account. The method of documentation is determined by the requirement of the sponsored agreement.

5.1    Individual Project Reporting

As noted in section 1.2 some sponsors or individual programs have a stated cost sharing requirement. Usually, this type of cost sharing must be reported to the agency on a project-by-project basis. When the sponsoring agency requires the University to report cost sharing for a specific project, a separate cost sharing account, corresponding to the ledger 4 account, will be established by Sponsored Projects Accounting (SPA).

As indicated in section 2.3, OSPA will determine the cost sharing obligation upon receipt of the award and will provide information to SPA concerning the expenditure items and amount of cost sharing. SPA will establish a separate ledger 3 cost sharing account at the same time the ledger 4 account is established. The ledger 3 account numbers will be in a unique series to identify them as cost sharing accounts. The cost sharing budget will be established in Pool 1000 with ABR Rule 9. Whenever possible, the budget will reflect the entire cost sharing commitment for multi-year sponsored projects.

All allowable direct costs from university sources committed as cost sharing must be charged to the ledger 3 cost sharing account, with one exception: effort of full-time faculty, including effort contributed to a sponsored project, is documented in the Faculty Effort System and should not be charged to the ledger 3 cost sharing account.

The Principal Investigator and department administering the ledger 4 account are responsible for transferring funds from departmental sources into the ledger 3 account. This will be done through the IDIV recharge process. The IDIV will debit the departmental source of cost sharing funds using object code 3585 and credit the ledger 3 account using object code 4283. IDIVs may be processed for part or all of the cost sharing commitment, but in no event may actual expenditures exceed the recharge amount at the end of a fiscal year.

Multiple university sources may be used to fund a single ledger 3 account.

If cost sharing has been committed by a source other than the department (i.e. Vice Chancellor for Research), that unit will also process an IDIV to transfer funds into the ledger 3.

If the ledger 4 account continues beyond June 30, budgeted balances and any positive cash balance in the ledger 3 will automatically be carried forward.

SPA will report expenditures incurred on the cost sharing account to the agency in the frequency required.

5.2    All Other Cost Share Reporting

Cost sharing which is not required by the agency to be reported on a per project basis will be documented on a Cost Sharing Certification Report form (see Exhibit C.) The responsible department will complete the form at the end of each fiscal year (or more often if necessary) recording cost sharing expenditures incurred within that fiscal year period, and submit the form Sponsored Projects Accounting.

Effort of full-time faculty will be documented in the Monitored Workload System.

5.3    Equipment Used as Cost Share

Proposing the purchase of equipment as University Cost Share should be carefully weighed as there are cost/benefit issues to be considered.

For example, federal cost principles (OMB A-21) allow universities to calculate a depreciation allowance on equipment purchased with non-federal funds. This amount becomes a part of the facilities component which contributes to the University’s indirect cost rate. However, when an item of equipment is purchased in whole or in part with non-federal funds and is cost shared on a federally-funded project, the University is not allowed to include the depreciation allowance normally associated with the item of equipment in the indirect cost rate calculation. Consequently, this type of transaction will have a negative impact on the indirect cost rate. Therefore, one must weigh these factors very carefully before making the decision to commit non-federal funds toward the purchase of equipment to be used as cost sharing on a federally-funded project.

A cost sharing obligation can develop at two stages prior to an award being accepted by the University.

The first stage is when the proposal is submitted and a cost sharing commitment is made:

• Because the sponsor requires it; or
  
  
• Because cost sharing is quantified in the proposal to make it more competitive

The second stage is during negotiation with the sponsor. In the following three EXAMPLES only one results in a cost sharing obligation which must be documented:

1. The sponsor and Principal Investigator (PI) agree to reduce the scope of work which reduces the budgetary requirements. A reduction in budget with a commensurate reduction of the scope of work does not result in cost sharing.
   
   
2. The sponsor awards less than the proposed budget but does not agree to reduce the scope of work. The University decides it can still complete the original scope of work within the awarded amount. There is no cost sharing obligation.
   
   
3. The sponsor awards less than the proposed budget, does not agree to reduce the scope of work and the University decides it will need to supplement the award to complete the original scope of work. A cost sharing obligation is incurred.