Doing Business with the Government: Administrative Challenges Faced by Nonprofits

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Nonprofit organizations face a variety of challenges that begin with fundraising and can in­clude a range of issues, including meeting growing demands for services to complying with requirements set forth by their backers. For nonprofit recipients of federal funds through grants or contracts, government agencies require highly specific reporting and accountability structures to avoid fraud, waste, and abuse. Adhering to these government requirements can generate significant challenges and increased administrative burdens. What do some of these challenges look like, and what can you do to help mitigate them?

Cost Accounting Standards (CAS)

One of the most significant obstacles nonprofits will face is harmonizing their cost accounting practices when awarded both contracts and grants. Nonprofits covered by OMB Circular A-122, “Cost Principles for Non-Profit Organizations,” can also be subject to CAS, depending on their contract awards. The Cost Accounting Standards provide a more stringent set of requirements related to cost charging practices than OMB A-122 guidance. CAS-covered nonprofit organizations should follow CAS with respect to the measurement, assignment, and allocation of costs. To avoid noncompliance issues, organizations will need to provide assurance that there is consistency in estimating, accumulating, and reporting expenditures incurred, and that costs incurred for the same purpose in like circumstances have been treated consistently as either direct or indirect costs. Many organizations opt for multiple segments to alleviate this burden.

Cost Charging

Cost charging issues faced by nonprofits can include challenges around allowability, lack of documentation, and shifting of costs. These issues can lead to costs being disallowed under federal grants and contracts, and organizations will have to bear the impact. To be allowable under federal grants and contracts, all direct and indirect costs must be adequately supported by source documentation that clearly shows the purpose and circumstance for the cost incurred. It is important to note that verbal approval from a Contracting or Grant Officer is insufficient support for costs under a contract or grant. In addition, nonprofits should have controls in place to avoid costs being shifted to a federal award to “overcome funding deficiencies,” as stated in OMB A-122 guidance.

Subrecipient Monitoring

Generally, government contract and grant recipients have faced difficulties managing and monitoring subrecipient costs, both nationwide and abroad. Recently, the federal government has increased encouragement for entities to adequately assess and monitor subrecipients. A subrecipient is different from a vendor; therefore, it is important for nonprofits to review agreements established in order to identify their current population of subrecipients. When managing subrecipients, entities are required to ensure federal funds are used for authorized purposes in accordance with laws, regulations, and award provisions. In addition, documentation of monitoring actions must be retained.


Due to the nature of the work and a lack of training, detailed and accurate timekeeping can be an ongoing challenge for nonprofits. To be allowable, labor—whether charged directly or indirectly to federal grants or contracts—must be based on accurate timesheets reflecting the actual activities of all employees. It is important for nonprofits to convey to employees the difference between actual and budgeted hours for timesheet purposes.

Budget Limitations

Nonprofit organizations must adhere to any budget limitations or restrictions incorporated into their grants or contracts. These limitations can be in the form of types of expenses (e.g., travel not allowed), spending caps on certain expenses (e.g., travel limited to $10,000), ceilings on indirect rates, or overall funding limits. It is important for nonprofits to establish a budgeting process to ensure all parties involved understand the grant or contract budget limitations. In addition, many grants and contract agreements may include a clause to prevent increases in budget line items without the prior review and approval of the Grant or Contracting Officer. The organization should ensure this approval is retained for documentation purposes.

With the recent release of the Uniform Requirements, Cost Principles, and Audit Requirements for Federal Awards in December 2013, more commonly referred to as the Supercircular, nonprofits should make it a priority to review their current practices for compliance. The Supercircular aims to impart clarity to a complex process, and many nonprofits will need to alter the way they do business to get up to speed. However, the promise of the Supercircular is that once organizations implement the new guidance, they will no longer be subject to a confusing array of regulations and will be more prepared to appropriately administer their grants and contracts.

Eric Sobota is managing director with Government Contracting Advisory Services at BDO USA, LLP. He can be reached at or 703-770-6395.