Overview of Requirements

The Head Start Act in Section 644 (b) and Head Start regulation 45 CFR 1301.32 limit the amount of funds that may be charged as development and administrative costs to 15 percent of the total costs of the program unless the Director of the Office of Head Start or the ACF Regional Administrator approves in writing a waiver granting a higher percentage for a specific period of time not to exceed 12 months. These authorized officials, for example, could approve a waiver to limit development and administrative costs to 25 percent for 10 months. Development and administrative costs are herein referred to as "administrative costs."

There can be instances where a grantee agency may be at or below the 15 percent maximum limit and still have excessive administrative costs as judged by the Associate Commissioner of the Head Start Bureau or the Regional Administrator. If this occurs, the grantee agency must eliminate excessive administrative costs.

Unallowable costs must be excluded from any calculation used to determine if the grantee agency met the 15 percent administrative costs requirement.

The purpose of this requirement is to ensure Head Start funds expended by the grantee agency are used primarily for the delivery of services and not for excessive administrative costs. The regulation addresses three types of costs: program costs, administrative costs and dual benefit costs. All costs in a Head Start program must be categorized as one of these costs.

All dual benefit costs must be further as either administrative costs or program costs. The grantee agency must have a system in place, including adequate procedures, to ensure that the 15 percent administrative cost limitation requirement is met. This system should be part of the grantee agency's accounting system.

Clarifying Definitions

Head Start regulations 45 CFR 1301.2 set forth definitions related to the administrative costs limitation requirement.

Administrative costs relate to the overall management of the program and do not relate to the provision of program component services (e.g., health services, parent involvement services), but do include costs such as the staff accountant's salary and audit services. Conversely, program costs relate to the provision of program component services such as health services and parent involvement services, but do not include costs for staff accountant salaries and audit services.

Dual benefit costs relate to both administrative functions and program component services. Therefore, they must be allocated on a rational basis between administrative and program costs.

Total approved costs in a Head Start program consist of the Federal share, the approved non-Federal share, plus any additional approved non-Federal share above the statutory minimum. Total approved costs exclude costs paid by other Federal agencies (e.g., USDA reimbursements are not included in the total costs of the program).

Administrative costs, program costs and dual benefit costs are costs incurred in accordance with an approved Head Start budget, including services to children with disabilities, as set forth and described in the Head Start Program Performance Standards.

Narrative

Development and Administrative Costs

Administrative costs cover the organization-wide management functions of accounting, budgeting, coordination, direction, and planning, as well as the management of payroll, personnel, property and purchasing. Such costs can be for either personnel or non-personnel functions.

Personnel costs include salaries and fringe benefits for positions such as executive director, fiscal officer/staff accountant, personnel officer, payroll/insurance/property clerk, secretary/administrative assistant/receptionist in the administrative office, and staff accountant. In addition, administrative personnel costs include the janitor/custodian for administrative office space and costs associated with volunteers carrying out administrative functions. Expenses for these staff such as travel, per diem, training, and transportation also would be considered as administrative costs.

Personnel costs for the Head Start director, center directors, and secretary are primarily administrative costs. However, there are instances where they may be classified as a dual benefit cost. See section on Dual Benefit Costs below.

Non-personnel costs include expenses related to audits, bonding, accounting and payroll services. Also, to the extent they support administrative functions and activities, expenses for insurance, supplies, office furniture and equipment, copy machines, postage utilities and occupying, operating and maintaining space also are administrative costs.

The total expenditures for administrative costs are to be reported in the remarks section (block 12) on the final Financial Status Report (SF-269) for the budget period.

Program Costs

Program costs cover expenses directly related to (1) the direction, coordination or implementation of component services as well as (2) the delivery of such component services. Program components include education, disabilities, health, nutrition, parent involvement, social services and transportation. The provision of program component services, training and transportation for staff, parents and volunteers are program costs. Such costs can be either personnel or non-personnel costs.

Personnel costs that are classified as program costs include salaries and fringe benefits for the program component coordinators and component staff in the delivery of services. Thus personnel costs for the positions of teachers, cooks, parent involvement aides and bus drivers are program costs. In addition, program personnel costs include the janitor/custodian and transportation staff involved in program component efforts and the costs associated with parent involvement and component volunteer services.

Non-personnel costs include allowable costs of travel, per diem and transportation, training, food center/classroom supplies and equipment, parent activities funds, liability insurance, and the occupation of program component space, including utilities. [The] purchase of a school bus is a programmatic cost.

Labeling a personnel officer as a "program officer," or a staff accountant as a "program manager," does not make it a programmatic position or a programmatic cost. They are still administrative staff and must be classified as such.

Dual Benefit Costs

All costs are initially classified as administrative, programmatic or dual benefit. Costs initially classified as dual benefit costs must be further classified as administrative or programmatic according to the percent of the cost that is dedicated to each function.

Dual benefit costs benefit both the administrative functions and the program components. In such cases, grantee agencies must identify and properly allocate such costs between administration and program service delivery. Dual benefit costs can be for either personnel or non-personnel costs.

Not all administrative costs or program costs can be classified as dual benefit costs. For example, the grantee executive director is 100 percent administrative and a teacher is 100 percent program. They cannot be classified as a dual benefit cost.

Occupancy cost is probably the most common example of a dual benefit cost. Assume the grantee agency rents space for $24,000 per year. Assume further that the administrative offices represent 25 percent of the total space rented. Then $6,000 (25 percent of $24,000) of the total occupancy costs would be allocated to administration, while the remaining $18,000 (75 percent of $24,000) would be allocated to program.

In another example, assume the grantee agency employs a planner whose primary responsibility is to write grants and oversee other administrative functions. However, that individual may spend a portion of their time developing Head Start's Community Assessment and serving as editor of the newsletter. Assume that the planner spent one day a week on the community assessment/newsletter function, then the costs of their salary and fringe benefits would be charged 20 percent to program while the remaining 80 percent would be charged to administration. Dual benefit costs may, for example, include the position of Head Start director/education coordinator, which is both administrative and programmatic. A Head Start director, center director, or secretary, may be both administrative and programmatic. However, the grantee agency must be able to adequately document the allocation of costs between administration and program.

Grant Application Budget Instrument (GABI)

The Grant Application Budget Instrument (GABI) is a software package used in the budget development process by Head Start grantee agencies. It was developed for ACF and is required by most Regional Offices. Budgetary line items have preset default allocations for administrative and programmatic functions. Grantee agencies should review the allocations to ensure they are appropriate to their agency operations. For example, the Head Start director's position defaults automatically to 100 percent administration. This may not be true in smaller grantee agencies if the director also assumes other roles such as education specialist. The GABI programs will produce a report that indicates the projected administrative cost percentage, as well as all other required grant application documents.

Facilities Costs

The determination for classifying facilities as program or administrative costs is based on the purpose for which the facility is used. If the facility is a classroom then it is considered 100 percent program cost. If the facility contains both classrooms and administrative offices then it is a dual benefit cost and must be allocated between administrative and program costs. This principle also applies to alterations and renovations, modulars, and construction.

Total Approved Costs

Total approved costs in a Head Start program consist of the Federal share, the approved non-Federal share, plus any additional approved non-Federal share above the statutory minimum. Total approved costs exclude costs paid by other Federal agencies. Therefore, USDA reimbursements are not included in the total costs of the program. The test to see if the grantee agency met the 15 percent administrative cost limitation requirement is based on year-end figures for expenditures and in-kind contributions and not on budgetary data developed at the beginning of the budget period.

The examples below compare the difference in the amount of administrative costs allowed when no additional non-Federal share is added (example A) and when additional non-Federal share is added (example B).

Costs incurred in a Head Start program above that which is indicated on the Financial Assistance Award are not considered part of the total approved costs of the program. In example A above, the total approved cost of the program is $1,000,000 whereas in example B, the total approved cost of the program is $1,100,000. Although no more than 20 percent non-Federal share may be required, increasing the non-Federal contributions to more than 20 percent in example B increases the total approved costs and thus, broadens the base against which the 15 percent limitation is applied. In example A, there is no additional non-Federal share. The limitation on administrative costs is $150,000. However, in example B the grantee agency included an additional $100,000 of non-Federal share in the program. Assuming it was included on the Financial Assistance Award, then $165,000 is the limit on administrative costs.

Relationship Between Development and Administrative Costs, and Indirect Costs

Indirect cost rates used by a Head Start agency must be approved by the cognizant agency or the agency with authority to set the grantee agency's indirect cost rate. If the grantee agency does not have an approved indirect cost rate, then indirect costs cannot be charged to the Head Start program. If indirect costs cannot be charged to the program, then all administrative costs must be directly charged.

Grantee agencies must charge all costs (1) directly to the project or (2) as part of an indirect cost pool. The costs charged to Head Start must then be categorized as either administrative or program.

For example, assume a custodian earns $16,000 per year and provides 75 percent of his time to Head Start and 25 percent to another program. In this instance $12,000 would be charged to Head Start and $4,000 to the other program. The $12,000 must then be categorized as either an administrative cost or a program cost. Assume further that the custodian is responsible for both the administrative office and three classrooms all of equal size. The custodian is providing a dual benefit to both program (75 percent), and administration (25 percent). Therefore his salary is charged $9,000 to program and $3,000 to administration. The fringe benefits for the custodian would be allocated in the same manner as salaries.

If the custodian's salary and fringe benefits were part of an indirect cost pool, then the entire amount of his salary ($16,000) plus fringe benefits would be considered indirect costs.

Limitation on Administrative Costs Calculations

The following calculations are presented to assist in determining whether or not the grantee agency is meeting the 15 percent administrative cost requirement. Examples A and B below are used to determine (1) if an application for funding or refunding meets the 15 percent administrative requirement and (2) whether a disallowance of Federal funds is to be taken against the grantee agency at the end of the program year. The examples below assume costs were charged directly to the project. However, the grantee could have charged the administrative costs of $147,000 in example A and $160,000 in example B as part of an indirect cost pool.

The example assumes that the $1,000,000 in total costs consists of $800,000 Federal share plus $200,000 non-Federal share.

Based on these examples the grantee agency cannot exceed $150,000 in administrative costs as follows:

The following examples show how the 15 percent administrative cost limitation applies to the application process for funding or refunding.

In example A, the estimates (budgeted figures) contained in the application for funding or refunding program shows administrative costs to be $147,000 or 14.7 percent of the total cost of the program. The grantee agency's application shows administrative costs are under the 15 percent limitation - the application is in compliance. The Financial Assistance Award will be issued.

In example B, the estimates (budgeted figures) contained in the application for funding or refunding shows administrative costs of $160,000 or 16 percent of the total costs of the program. The grantee agency's application shows administrative costs are over the 15 percent limitation - the application is not in compliance. The Financial Assistance Award will not be issued. In this instance, the grantee agency must submit a waiver or revise the budget information to comply with the administrative cost limitation. (See the section below on Waivers.)

The following examples show how the 15 percent administrative cost limitation applies to the audited figures for the completed budget period.

The test for determining whether or not the grantee agency has met the 15 percent requirement is based on the sum of its year-end expenditures, both Federal and non-Federal, plus in-kind contributions.

Assume the grantee agency has just been audited. The auditor found that $800,000 in Federal funds was expended and the $200,000 match requirement was met. Assume the grantee agency's Federal and non-Federal share of administrative costs totaled the amounts listed in examples A and B, above. Would a disallowance of Federal funds be taken in either case, and if so, how much?

In example A, the grantee agency expended $147,000 for administrative costs. These costs were reported in the Remarks section on the final Financial Status Report (SF-269). The total cost of the program was $1,000,000, thus the grantee agency is limited to no more than $150,000 in expenditures for administration. Since the $147,000 is below the $150,000 threshold level, the grantee agency has met the requirement. Therefore no disallowance is taken.

In example B, the grantee agency expended $160,000 for administrative costs. These costs were reported in the Remarks section on the final Financial Status Report (SF-269). The total cost of the program was $1,000,000, thus the grantee agency is limited to no more than $150,000 in expenditures for administration. Since the $160,000 is above the $150,000 threshold level, the grantee agency has not met the requirement. Therefore a disallowance of $10,000 is taken by ACF against the grantee agency.

Waiver

The Director of the Office of Head Start or the ACF Regional Administrator may grant a waiver of the 15 percent administrative costs limitation for a specific period of time not to exceed 12 months. The grantee agency should ensure that such approval is obtained in writing before proceeding.

There are certain conditions under which a waiver can be granted:

• When a new Head Start grantee agency or delegate agency is being established.
• When services are being expanded by a new grantee agency or delegate agency.
• When delivery of component services to children and families is delayed until all program development and planning is well underway or completed.
• When component services are disrupted or suspended in an existing Head Start program due to circumstances beyond the grantee agency's control such as a fire, flood, or tornado.

When the grantee agency determines, anytime during the program year, that administrative costs will exceed 15 percent of the total approved cost of the program, it must immediately submit a waiver request to the Director of the Office of Head Start or the ACF Regional Administrator.

The waiver must contain:

• The reasons for exceeding the 15 percent limitation.
• The time period for which the waiver is requested.
• The steps planned to be taken to ensure compliance is met.
• An assurance that these costs will not exceed 15 percent of the total cost of the program after the completion of the waiver period.

Once the director for the Office of Head Start or ACF Regional Administrator grants approves the waiver, the grantee agency will receive a revised Financial Assistance Award specifying in the Remarks section the conditions under which the waiver was granted.

If the grantee agency submits a waiver request with an application for funding or refunding and the Director of the Office of Head Start or Regional Administrator does not approve it, then no Financial Assistance Award will be made to the grantee agency until it resubmits a revised budget that complies with the 15 percent limitation.

Audit Requirements

An auditor will:

1. Verify that the grantee agency has a system in place, including adequate procedures to monitor and to ensure the 15 percent administrative cost limitation requirement is met.
2. Select a sample of administrative personnel and non-personnel costs and verify that they were properly categorized and charged as administrative costs.
3. Select a sample of programmatic personnel and non-personnel costs and verify that they were properly categorized and charged as program costs.
4. Select a sample of dual benefit costs and verify they were properly identified and allocated between administrative costs and program costs.
5. Verify that costs for organization-wide management functions were not over charged to the Head Start program.
6. Verify that the administrative costs and the total approved costs of the program are based on year-end budget period actual costs.
7. Verify that administrative and program costs exclude unallowable costs.
8. Verify that the grantee agency's administrative costs do not exceed 15 percent of the total approved costs in the program.