Updates to Federal Financial Assistance Guidelines in 2024: Cost Principle and Grant Administration Changes

On April 4, 2024, the Office of Management and Budget (OMB) released updates to the OMB Guidance for Grants and Agreements (the Uniform Guidance). The revised Uniform Guidance — now called the “OMB Guidance for Federal Financial Assistance” — clarifies and streamlines the requirements for agencies in making grants and providing other forms of federal financial assistance, such as cooperative agreements and loans, to nonprofit organizations and state, local, and Tribal governments. The updated Uniform Guidance will become effective on October 1, 2024, but federal agencies may elect to apply the new rules on June 21, 2024.

Widely anticipated in the federal grant community since the publication of the proposed changes to the Uniform Guidance in October 2023, the revised Uniform Guidance makes significant changes to various aspects of federal grant administration as summarized below:

• Increasing the guaranteed de minimis rate for indirect costs from 10% to 15% of modified total direct costs (§ 200.414)
• Clarifying recipient entitlement to unexpended fixed amount award funds at the end of the program (§ 200.201) and increasing limits on fixed amount subawards (§ 200.333)
• Increasing the single audit requirement threshold from $750,000 to $1 million (§ 200.501)
• Elevating the mandatory disclosure standard from requiring disclosure for “violations” of federal criminal law to requiring disclosure for “credible evidence of the commission of a violation” (§ 200.113)
• Adding cybersecurity and other information security measures for internal controls (§ 200.303)

Increase in the Guaranteed De Minimis Indirect Cost Rate

For organizations that do not have in place a negotiated indirect cost rate agreement to recover indirect costs, perhaps the most impactful change relates to the default de minimis indirect cost rate that those organizations may use. OMB has raised the de minimis indirect cost rate from 10% to 15% of the modified total direct costs, which includes all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $50,000 (formerly, the first $25,000) of each subaward (regardless of the period of performance of the subaward).

The revised Uniform Guidance clarifies that the federal government and pass-through entities may not compel recipients and subrecipients to use an indirect cost rate lower than the 15% de minimis rate or elected de minimis rate, unless required by a federal statute or regulation. The updated rule does allow the use of a lower rate if the recipient or subrecipient chooses to do so. Lastly, in another important change, the Uniform Guidance no longer requires recipients’ indirect cost rates to be made public on a government-wide website. However, this requirement could be revived when the federal government updates the applicable web system, as OMB commented in the October 2023 proposed changes to the Uniform Guidance.

Fixed Amount Awards and Subawards

In the revised Uniform Guidance, OMB clarified that recipients of fixed amount awards (in contrast to cost reimbursement awards) are entitled to unexpended funds at the end of a project so long as the required activities under the award agreement were completed and certified to the federal agency or pass-through entity. The current version requires the return of fixed amount awards if the required activities were not carried out, but no entitlement to leftover funds is defined. In addition, the amount of fixed amount subawards that a recipient may issue with prior written approval from the federal agency was raised from $250,000 to $500,000.

Increase in the Single Audit Requirement Threshold

Recipients and subrecipients of federal grant awards that spend over a certain threshold amount of the grant money must annually undergo a single audit for their programs under the Single Audit Act. 31 U.S.C. § 7502. The Director of OMB is authorized to adjust the threshold amount triggering the single audit requirement every two years. Accordingly, through this update in the Uniform Guidance, OMB is raising the threshold amount from $750,000 to $1 million. OMB stated that it consulted the Consumer Price Index from 2014 to determine the rate of increase, and also commented that this increase is the smallest percentage increase to date.

Change in the Mandatory Disclosure Standard

The updated Uniform Guidance requires recipients, subrecipients, and applicants under a federal award to promptly disclose “credible evidence of a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code or a violation of the civil False Claims Act (31 U.S.C. 3729-3733)” in connection with the federal award. The current version requires disclosure of actual violation of federal criminal law, while the updated version more closely mirrors the existing Federal Acquisition Regulation (FAR) requirement for government contractors. OMB suggested that the “credible evidence” standard will be simpler to apply because it does not require a firm legal determination as to whether a criminal law was violated. However, OMB declined to provide a definition of “credible evidence,” instead citing to the Black’s Law Dictionary definition: “evidence that is worthy of belief; trustworthy evidence.” OMB also cited to FAR Council guidance to explain that “credible evidence” is a higher standard than reasonable grounds and the recipient, subrecipient, or applicant should “take some time for preliminary examination of the evidence to determine [the] credibility before deciding to disclose to the Government.” In short, those receiving federal financial assistance should be aware that potential violation of certain federal laws, including the civil False Claims Act, must be disclosed promptly if a preliminary investigation provides credible evidence of the violation.

New Cybersecurity and Information Security Requirement

The Uniform Guidance now addresses the emerging cybersecurity and information security threats by requiring recipients and subrecipients to take “reasonable cybersecurity and other measures to safeguard information.” Recipients and subrecipients must implement such security measures as a part of their internal controls; protected information includes personally identifiable information, as well as other information that the federal agency or pass-through entity designates as sensitive. The new cybersecurity requirement is in line with other updates to the Uniform Guidance, such as the mandate that the federal agencies assess recipients for cybersecurity risks when making award decisions.

Conclusion

The updated Uniform Guidance brings welcome benefits to the recipients and subrecipients of federal financial assistance in the form of increased indirect cost rates and a higher audit threshold. However, grantees and awardees should be aware that new compliance requirements, such as cybersecurity measures and a heightened mandatory disclosure standard, are present in the new Uniform Guidance.

With these changes in the Uniform Guidance, it is possible that states may also consider amending their grant laws and regulations modeled on the Uniform Guidance, such as the Illinois Grant Accountability and Transparency Act, to remain consistent with the updated Uniform Guidance.

Arnold & Porter will continue to monitor and report on developments in this space, and to analyze best practices for our clients. If you are seeking advice in light of the updated Uniform Guidance, please reach out to any authors of this Advisory or your regular Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.