Finding Text
Finding 2025-001: Allowable Costs - Significant Deficiency Federal Program: 93.103 - Research and Development Cluster - Education and Training Program for Outsourcing Facility Industry Award Number: 5UE5FD008142-02 Award Year: January 1, 2025 to December 31, 2025 Federal Agency: U.S. Food and Drug Administration (FDA) Pass-Through Entity: Not applicable Criteria: According to the requirements of Title 2 U.S. Code of Federal Regulations Part 200.403(e), Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), allowable costs must be determined in accordance with generally accepted accounting principles (GAAP). Condition/Context: For 2 of the 40 items selected for testing, even though the expenditures were for costs that were necessary and reasonable for the performance of the program, the expense amount benefitted periods beyond the period under audit and did not meet the allowability criteria under the Uniform Guidance. The sample was not statistically valid. Cause: Management determined allowability for certain costs based on the full period of performance covered by the grant and did not account for the period over which the costs provided benefits to the program. Effect: Certain costs allowed by the grant were recognized prior to the period in which the costs provided benefit to the program. Questioned Costs: $35,262 Recommendation: To ensure compliance with Uniform Guidance, the Organization should review its policies and procedures to ensure that the costs are reported in the proper fiscal year for financial reporting purposes, and any costs that benefit future periods are appropriately amortized and reported in the period in which the program derives benefits from the costs. Management Response: Management acknowledges the improper treatment of the expenditure for the specific period. The expenditure in question was for a one-year marketing services agreement supporting activities under the FDA 503B award. The vendor required payment in advance as a condition of service delivery, and the cost was incurred for legitimate grant-related purposes within the approved scope of work and period of performance. The expenditure was fully documented, allocable to the award, reasonable in nature, and directly connected to approved programmatic objectives. Management acknowledges that the transaction involved payment for services extending across a future service period. Specifically, 2 CFR 200 does not prohibit recipients from entering into prepaid contractual arrangements for allowable services necessary to support award implementation, particularly where such arrangements reflect standard vendor business practices and operational necessity. Further, the organization’s actions must be evaluated in the context of significant federal payment administration changes that began in February 2025. Historically, the organization received advance funding under the award consistent with the cash management principles contemplated under 2 CFR 200.305. Beginning in 2025, however, the organization was required to operate under a reimbursement-based process requiring submission of supporting documentation prior to payment release. This materially altered the organization’s working capital position and limited its ability to independently finance operational expenditures for extended periods pending reimbursement. As a result, management was required to make operational decisions necessary to ensure continuity of approved grant activities while balancing vendor requirements, cash flow limitations, and evolving federal reimbursement practices. The organization did not receive excess federal cash, improperly retain federal funds, incur unallowable costs, or use award funds outside the approved project scope. The questioned transaction reflects a timing and payment structure issue rather than a violation of fundamental federal compliance requirements. Management also notes that 2 CFR 200.305 expressly contemplates advance payment methodologies and recognizes that reimbursement-only environments may create operational hardships for recipients lacking sufficient working capital. The organization’s actions were undertaken in good faith to maintain uninterrupted program operations under materially changed federal payment conditions. Importantly, the expenditure was allowable, the services supported approved award objectives, the costs were incurred during the award period, supporting documentation exists, no misuse or diversion of federal funds occurred, and no financial harm to the federal government resulted. Note also that going forward, PDA will record future services and subscriptions to prepaid and amortize based on the periods stipulated on the vendor invoices.