Federal Cost Principles Are Often Not Applied in Grants and Contracts With State and Local Governments

Gao ID: GGD-78-111 March 12, 1979

The Office of Management and Budget (OMB) promulgated uniform cost principles applicable to grants and contracts with State and local governments in a management circular issued in 1968. A review was made to determine the intent, adequacy, and extent of implementation of this circular. Federal assistance accounts for an estimated 25 percent of State and local resources. Agencies recognize and pay direct program costs; however, often they do not recognize and pay the allocated or indirect costs of providing support services.

The circular has not met its original objective, to identify the total allowable costs incurred by State and local governments in administering Federal programs. Grantees are not systematically identifying, accumulating, or allocating costs because some funding agencies employ practices which discourage or prohibit total cost determinations by grantees and allow grantees to use arbitrary indirect cost rates and to charge indirect costs to grants without a plan of allocation. Also, Federal guidance in the preparation of plans of allocation has not been provided, and the circular's objectives have not received top-level management support.


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