Audit 404839

Criteria: If the applicable de minimis rate for indirect cost is elected, the Department must apply such rate to modified total direct costs (MTDC), which exclude capital expenditures, construction, and other unallowable base costs per requirements prescribed by 2 C.F.R. §200.414(f). Condition/Context: During testing of federal grant expenditures and related reporting, it was noted that the Department calculated indirect costs using an incorrect total direct cost base rather than the modified total direct costs required by the grant agreement and 2 C.F.R. §200.414(f). Indirect cost was calculated based on total cost, including construction and material. Testing covered 100% of the population therefore the sampling basis is not applicable. Cause: The condition was caused by management’s misunderstanding of the federal indirect cost requirements applicable to the grant. Specifically, the requirement to apply the de minimis indirect cost rate to modified total direct costs rather than total project expenditures was unclear. Contributing factors included the entity’s limited prior experience administering major federal grants, reliance on the grant application budget that referenced approximately $10 million of expenditures, including up to $900,000 in indirect cost, and delayed clarification from the cognizant agency regarding the appropriate indirect cost base. Effect: The condition resulted in inaccurate SF-425 and SF-271 filings. However, the granting agency limited reimbursements to allowable amounts and no questioned costs were ultimately incurred. The deficiency increased the risk of noncompliance with federal grant requirements, inaccurate financial reporting, and potential delays or disputes related to reimbursement requests. Questioned Costs: None. Recommendation: We recommend the Department implement additional controls surrounding the performance and reporting around federal grant activity. We also recommend that the Department implements a formal written policy that administers all activities related to federal grants. Views of Responsible Officials: The incorrect calculation of indirect costs resulted from a misunderstanding of the federal requirements applicable to this grant. HG&E had initially confirmed its methodology verbally with the cognizant agency during bi-weekly check-in meetings, during which we were advised that our approach was correct - likely influenced by the fact that this was a new grant program. Additional contributing factors included our reliance on the grant application budget approved by the cognizant agency, which referenced approximately $10 million in total expenditures, including up to $900,000 in indirect costs. Furthermore, delayed written clarification from the granting agency led to the improper reporting of indirect costs on SF-425 reports. Going forward, HG&E will implement a formal grant administration policy. In addition, HG&E will ensure that all questions related to indirect costs and other compliance requirements are confirmed in writing. We believe this approach will significantly reduce the risk of future errors in reporting.