Finance Circular 2008-03

Understanding Finance Circular 2008-03

Finance Circular 2008-03, issued by the U.S. Office of Management and Budget (OMB), addresses the cost principles for state, local, and Indian tribal governments. Its primary purpose is to establish uniform administrative requirements and cost principles for determining the costs applicable to grants, contracts, and other agreements with the federal government. It aims to ensure federal funds are used efficiently and effectively, promoting accountability and transparency in government spending.

A key aspect of the circular is its focus on allowable and unallowable costs. Allowable costs are those necessary and reasonable for the performance of the award, allocable to the award, and treated consistently across all of the governmental unit’s activities. Examples include direct costs directly attributable to a project, such as salaries of project personnel, materials, and equipment used specifically for the project. Indirect costs, like administrative overhead, are also potentially allowable, but require a negotiated indirect cost rate agreement with the federal government.

Unallowable costs, on the other hand, are expenses that cannot be charged to federal awards. These are explicitly detailed in the circular and include costs like entertainment (except for specific programmatic purposes with prior approval), alcoholic beverages, lobbying, and contributions or donations. The circular provides specific criteria and examples to guide governments in determining whether a cost is allowable or unallowable.

The circular emphasizes the importance of proper documentation and record-keeping. Governments receiving federal funds are required to maintain detailed records of all expenditures, demonstrating that costs charged to the award are allowable, allocable, and reasonable. These records are subject to audit by federal agencies or their representatives.

Moreover, Finance Circular 2008-03 addresses the issue of cost allocation. Costs must be allocated equitably to all activities of the governmental unit, including federal awards. This involves using consistent and reliable methods for distributing costs, such as direct charging, cost allocation plans, or indirect cost rate agreements. The chosen method must accurately reflect the benefits received by each activity.

The circular also outlines requirements for audits. Governmental units receiving significant amounts of federal funds are subject to audit requirements under the Single Audit Act. These audits are designed to assess the government’s compliance with federal laws, regulations, and the terms of the award agreement. The auditor must express an opinion on the fairness of the financial statements and the compliance with applicable federal requirements.

In essence, Finance Circular 2008-03 provides a framework for managing federal funds responsibly and transparently. By adhering to the principles outlined in the circular, state, local, and tribal governments can ensure they are using federal funds effectively and complying with federal regulations. This, in turn, helps to maintain the integrity of the federal grant system and promote public trust.