Allowable Cost Policy Manual

This document was issued in February, 1995 as Chapter B3 of the Financial Management Manual for Counties, Tribes and 51 Boards. It is also designed to be "liftable" to serve as a stand-alone Allowable Cost Policy Manual for provider agencies and other users.

Since the 1996 reorganization of State agencies, the Allowable Cost Policy Manual, originally developed in the old Department of Health and Social Services, is now being used by the Department of Health Services, and by those parts of the Departments of Workforce Development and Corrections that were formerly a part of Health and Social Services.

The online version of the Allowable Cost Policy Manual differs from the printed version in the following ways:

• Changed references to the "Department of Health and Social Services" to "Department."

• Reorganized the Table of Contents to include direct references to the federal cost principles, to ease linking to these documents.

• Added internal bookmarks for navigation within the document and external links to on-line resources such as the federal cost principles.

Effective dates of revisions to the Allowable Cost Policy Manual are shown in red text. All revisions are summarized at the end of the Manual.

Table of Contents

Introduction

Section I -- Department General Principles for Allowability

General Criteria
Direct Costs, Allocated Costs, and Indirect Costs
Procurement and Sub-Contracting
Related Party Transactions
Revenue in Excess of Allowable Costs
Third Party Revenues

Section II -- Federal Cost Principles

2 CFR Part 225 - Cost Principles for State and Local Governments
2 CFR Part 230 - Cost Principles for Nonprofit Organizations
OMB Circular A-21 - Cost Principles for Educational Institutions
48 CFR Part 31 - Contract Cost Principles and Procedures (search Title 48 for "48 CFR PART 31)

Section III -- Selected Items of Cost

1. Audit Expense
2. Bad Debts Losses - See "Collection Expense and Bad Debts Losses"
3. Care in Nursing Homes
4. Client Related Costs

a. Holding Space
b. Payment Allowances
c. Transportation
d. Clothing
e. Food
f. Guardianship Fees
g. Laundry Expense
h. Medical Supplies and Drugs
i. Space Costs

5. Collection Expense and Bad Debt Losses
6. Compensation
7. Data Processing
8. Depreciation and Use Allowance Waiver - See "Equipment and Other Capital Expenditures"
9. Entertainment
10. Equipment and Other Capital Expenditures (Effective for expenditures made before 1/1/98)
10.a. Equipment and Other Capital Expenditures (Effective for expenditures made on or after 1/1/98)
10.b. Equipment and Other Capital Expenditures Exempt from Depreciation Process (Effective for expenditures made on or after 1/1/98)
11. Fines and Penalties
12. Gifts and Donations to the Agency
13. Interest
14. Legal Expense
15. Production/Commercial Service Costs
16. Profit for For-Profit Agencies Which Provide Client Care
17. Reserved Amount for Nonprofit Agencies Using a Prospectively Set Rate
18. Start-up Costs
19. Travel Expense

Section IV -- Items Deleted

Summary of Revisions to the Allowable Cost Policy Manual

Introduction

Grant funds from the Department may only be used for allowable costs. The Allowable Cost Policy Manual sets forth the principles for determining the allowable costs of programs from the Department. The purpose of these principles is to determine costs, and they do not dictate the extent to which the Department will reimburse these costs. They are designed to provide that the Department's programs bear their fair share of costs, except where restricted or prohibited by law or contract. There is no intent for grant recipients to make a profit or other increment above allowable costs, except where specifically authorized by Wisconsin Statutes.

When determining whether a cost is allowable, an agency shall consult the following:

• The Department's general principles for allowability that all costs must meet -- see Section I, "General Principles for Allowability."
   
• The federal cost principles applicable to that type of agency -- see Section II, "Federal Cost Principles."
   
• Items of selected cost where state policy differs from or expands on federal policy -- see Section III, "Selected Items of Cost."
   
• The contract or other program specific guidance for provisions applicable to the particular grant/program. Specific statutory provision, administrative rule, departmental policy or federal regulations may require exceptions to the provisions contained in this document. Where these exceptions occur, they will be specifically indicated in the contractual agreements between the state and the provider or county as exceptions to the allowable cost policy. In no instance shall the same cost be reimbursed more than once.

The guidance in this manual shall not be construed in any way to dictate or limit the amounts which agencies may expend. However, this material does specify what costs may or may not be allowable for inclusion in contracts and/or reimbursable from the Department. Agencies shall obtain written approval from the Department prior to incurring special or unusual costs.

Section I -- Department General Principles for Allowability

All costs that are reimbursed by Department programs must meet the following Department general principles for allowability, each of which is discussed in detail in this section:

• General Criteria
• Direct Costs, Allocated Costs, and Indirect Costs
• Procurement and Purchase of Care and Services
• Related Party Transactions
• Revenue in Excess of Allowable Costs
• Third Party Revenue

General Criteria

In order to be allowable for reimbursement by programs funded by the Department, all costs must meet the following general criteria:

• Be necessary and reasonable for proper and efficient program administration and allocable thereto under these guidelines. A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. In determining the reasonability of a given cost, consideration shall be given to:
• whether the cost is ordinary and necessary to the operation of the agency or to the performance of the award;
• the restraints or requirements imposed by such factors as sound business practices, arms-length bargaining, laws and regulations, and terms and conditions of the program;
• the market prices for comparable goods and services;
• whether the individuals involved acted with prudence considering their responsibilities to the agency, the public at large, and the granting agency; and
• whether the costs were incurred in accordance with the agency's established procurement policy.

Only costs that are directly attributable to specific work under a grant or to the normal administration of the grant are allowable for reimbursement. Costs that result in personal benefit are not allowable.

A cost is allocable to a program if the goods and services involved are chargeable or assignable to the program in proportion to the relative benefits received. See "Direct Costs, Allocated Costs, and Indirect Costs" for discussion of criteria for methods of charging costs to programs.

• Be authorized by the agency administrator or funding agency and not prohibited by state or local laws.
• Be in conformance with any limitations or exclusions set forth in this Manual, federal or state laws, or other governing limitations as to types or amounts of cost items.
• Be consistent with policies, regulations, and procedures that apply uniformly to both financially assisted activities and to other activities of the agency.
• Be accorded consistent treatment. Consequently, a cost may not be assigned to a program as a direct cost if any other cost under the same circumstances has been charged to a program as an indirect cost.
• Be determined in accordance with generally accepted accounting principles or other accounting method appropriate to the circumstances.
• Not be allocable to or included as a cost of any other federal, state, or other agency financed program in either the current or prior period.
• Be net of all applicable credits. Applicable credits are receipts or reduction of expenditure-type transactions that offset or reduce expense items allocable to programs as direct or indirect costs, including discounts or rebates subsequently received for prior purchases. Agencies are expected to take advantage of available discounts on purchases of goods and services. The granting agency may disallow the excess costs if a sub-grantee's costs are inflated due to failure to take advantage of available discounts or to report those discounts that were received.
• Be supported by the agency's accounting records and be adequately documented. See Chapter B2 "Accounting Records and Source Documentation" of the Financial Management Manual for Counties, Tribes and 51 Boards and the OMB Circulars for additional information on accounting records and source documentation.

Direct Costs, Allocated Costs, and Indirect Costs

The total cost of a grant program is comprised of the allowable direct costs incident to its performance plus its allocable portion of allocated and indirect costs, less applicable credits. The term "applicable credits" is defined above. The terms "direct costs," "allocated costs," and "indirect costs" are defined in the following way:

Direct Costs - A direct cost is any cost that can be identified with a particular program or cost objective. For example, the entire salary of an individual who spends all of his or her time working on a single program can be charged as a direct cost to that program.

Allocated Costs - A direct cost can directly benefit more than one program or function and can, therefore, be allocated (or charged) to the benefiting programs or functions on some reasonable and equitable basis. For example, an individual spends his or her time working on a number of different programs that the agency operates. Salary and related fringe benefits can be charged to the respective programs based on the number of hours reported to each program on employee time sheets.

Indirect Costs - Indirect costs are those costs that are incurred by an agency that are not readily chargeable to a particular program or function, but benefit all programs and functions operated by the agency. Indirect costs are necessary to the overall operation of the agency, but a direct relationship to a specific program cannot be shown. An example of an indirect cost might be the salary and related fringe benefits paid to the agency's accounting staff and/or the executive director. Generally, these kinds of costs are identified, pooled, and charged against individual programs or funding sources using a rate designed to recover the costs.

The same type of cost may be a direct cost in one agency and an indirect cost in another agency, because each agency has to determine for itself which costs are direct, which are indirect, and how these costs can best be allocated to the benefiting programs. However, an agency must treat each item of its costs consistently as a direct, allocated, or indirect cost. Also, as noted under the general criteria, a cost may not be assigned to a program as a direct cost if any other cost under the same circumstance has been charged to a program as an allocated or indirect cost.

Direct costs shall be claimed whenever possible based on the nature of the costs and the accounting system in place. When indirect costs are charged, they shall be accumulated by logical cost groupings and distributed equitably to all programs or functions of the agency using a rate designed to recover the costs of the pool established through the indirect cost plan. Costs must not be charged to programs based on funds available or revenues received. The basis used shall be an equitable measure of the extent to which the cost incurred actually benefits the program to which it is charged. For example, square footage used by the various programs operated by the agency would be an equitable basis to allocate the total rent or utility costs incurred by the agency. Costs that are part of the agency indirect cost pool shall not duplicate any costs that are charged directly, and total costs charged may not exceed the actual costs incurred.

General departmental policies governing the allowability of allocated direct and indirect costs are as follows:

• County Agencies - Indirect costs for county agencies are allowable if the county develops and retains on file an approvable county-wide indirect cost allocation plan. Any allocated costs must be supported by a cost allocation plan. Both plans must be in accordance with the requirements of 2 CFR Part 225 Cost Principles for State and Local Governments and must be reviewed by the county's independent auditor as a part of the annual single audit.
• Tribal Governments - Indirect costs for the Tribal governments are allowable based on the receipt of an approved indirect cost rate that has been negotiated with the United States Department of Interior's Office of Inspector General and is included in the Departmental/Tribal contract. Any allocated costs must be supported by a cost allocation plan.
• Other Agencies - Indirect costs for other agencies, such as non-profit organizations, for-profit businesses, local units of government (other than Counties), and educational institutions, must be reasonable; must be documented in writing in an agency-wide Cost Allocation Plan and an agency-wide Indirect Cost Plan; and must be allocated in a manner consistent with the above plans. These plans must be in accordance with the requirements of the applicable federal cost principles and must be reviewed by the agency's independent auditor as a part of the annual audit.

Procurement and Sub-Contracting

Each agency shall have policy and procedures in place to provide reasonable assurance that the agency's procurement and sub-contracting activities are in the best interest of the agency, considering its responsibilities to the organization, its members, employees, clients, the public at large, and the granting agency. Detailed guidance on procurement and sub-contracting can be found in OMB Circular A-102/Common Rule and OMB Circular A-110. These documents should be consulted when developing or assessing an agency's policy on procurement and sub-contracting.

All care and services purchased by the department, a county social services department, a county department of public welfare, or a board established under Wis. Stat. §§ 46.23, 46.036, 51.42, or 51.437 shall be authorized by a written contract with the provider. For purchases of $10,000 or less, the requirements for a written contract may be waived upon written request to the appropriate Department contract administrator.

When procuring or sub-contracting under a grant from the Department, an agency will use its own policies and procedures, provided they adhere to the following minimum standards:

• Written Standard of Conduct - The agency shall maintain a written standard of conduct that includes a prohibition against any employee, officer, or agent of the recipient participating in the selection, award, or administration of a contract in which financial assistance funds are used, where, to his knowledge, he or his immediate family, partners, or organization in which he or his immediate family or partner has a financial interest or with whom he is negotiating or has any arrangement concerning prospective employment.

Public officials and employees should also be aware of Wis. Stat. § 946.13, which prohibits a public official or employee, acting in his private capacity, from negotiating, bidding, or entering into a contract in which he has private pecuniary interest at the same time he is authorized in his official capacity to exercise discretion in making or administering the contract.

Agencies should consult their corporation counsels, or equivalent, if they have concerns regarding conflict of interest.

• Open and Free Competition - Procurement and sub-contracting shall be conducted in a manner to provide, to the maximum extent possible, open and free competition.

1. The agency shall be alert to organizational conflicts of interest or non-competitive practices among contractors that may restrict or eliminate competition or otherwise restrain trade.
2. Those who develop or draft specifications, requirements, bid invitations, requests for proposals, etc. shall be excluded from competing.
3. Awards shall be made to the bidder/offerer whose bid/offer is responsive to the solicitation and is most advantageous to the agency.
4. Solicitations shall clearly set forth all requirements that the bidder/offerer must fulfill in order for his bid/offer to be evaluated by the agency.
5. Any and all bids/offers may be rejected when it is in the agency's interest to do so.

• Minimum Procedural Requirements - Recipients shall establish written procedures that provide for, at minimum, the following requirements:

1. Procurement and sub-contracting actions shall follow a procedure to avoid purchasing unnecessary or duplicative items.
2. Solicitations for goods and services shall clearly and accurately describe the goods and services to be procured or sub-contracted.
3. Some form of price or cost analysis shall be made in connection with every procurement and sub-contract action to ensure that costs incurred are reasonable, that costs are allowable if they are charged to financial assistance programs, and that the agency is not paying for services which are otherwise available free of charge to the agency.
4. A system of contract administration shall be in place to ensure contractor conformance with terms, conditions, and specifications of contracts or purchase orders.

Related Party Transactions

A related party transaction occurs when one party to a transaction can influence the management or financial operating policies of the other party. Examples of related party transactions include, but are not limited to, transactions between: (a) divisions of an organization; (b) organizations under common control through common officers, directors, or members; and (c) an organization and a director, trustee, officer, or key employee of the organization or his immediate family either directly or through corporations, trusts, or similar arrangements in which they hold controlling interest.

The fact that two parties in a transaction are related does not automatically mean the costs incurred are inappropriate and unallowable. However, the public interest requires that an agency receiving state and federal funds act in a manner consistent with the public interest, which includes spending funds cost-effectively. Transactions between two related parties raise concerns that the public interest may not be adequately considered.

Therefore, a cost incurred as the result of a related party transaction will be considered allowable only if:

• The cost meets allowability criteria articulated in this policy manual, applicable federal cost circulars, and/or other pertinent state and federal guidelines; and
• The cost results from the agency following procurement and sub-contracting policies and practices which meet minimum federal and Department guidelines. (See the previous section for discussion of the Department's guidelines for procurement and sub-contracting policy.)

Additional considerations need to be made when determining the allowability of rental charges between related parties and of costs incurred under cost-reimbursement contracts:

• When an agency rents or leases property from a related party, allowable costs are limited to actual costs that would have been allowed had title to the asset been vested with the agency. Examples of allowable expenses of ownership include interest, depreciation or usage allowance, maintenance costs, and utilities, if not charged separately.
• As indicated in the introduction to this manual, there is no intent for a provision for profit or other increment above allowable costs, except where specifically authorized by the Wisconsin Statutes (See "Profit for For-Profit Agencies Which Provide Client Care" and "Reserved Amount for Nonprofit Agencies Using a Prospectively Set Rate" in Section III). In keeping with this intent, no profit or other increment above allowable costs shall be incurred for cost-reimbursement contracts that involve purchases or sub-contracts between related parties. Allowable costs are limited to the actual allowable costs incurred by the related party.

Revenue in Excess of Allowable Costs

Under contracts where payments are limited to allowable costs or to a percentage of allowable costs or contracts with for-profit agencies, any revenue in excess of the contracted limit must be returned to the granting agency unless the granting agency specifically authorized the agency to keep the revenue.

Third Party Revenue

Some contracts provide a specified level of funding and require additional revenues to be collected from various types of third parties. Typically an agency's accounting records need to show all revenues received by an agency regardless of source. Also, the agency must identify all revenues collected by a subcontractor that would reduce the amount of state or federal funds paid to the subcontractor and claimed by the agency from the Department.

The Department expects that all agencies (both counties and private vendors) record gross revenues and expenditures in the appropriate accounts. Revenues should be clearly identified in the appropriate revenue ledger. The same principle applies to the recording of expenditures.

All contracts must be written to require that the revenue from sources other than the grant is to be used to offset the expenditures that would otherwise be charged to the grant. For example, there are cases where as a condition of the contract the contractor is expected to provide services up to a specific dollar amount identified in the contract with an expectation that the contractor would be billing other responsible parties, that is, private insurance companies, the client, or Medical Assistance (MA), for the service rendered. In cases where the amount collected from third parties exceeds the planned amount, the excess revenue must be used to offset expenditures previously charged to grants.

The Department's intent is for the agency's accounting system to include sufficient detail to identify the total cost of services and total revenue received by service and source.

Section II -- Federal Cost Principles

The Department has adopted the federal cost principles to provide guidance on the allowability of all Department grants and sub-grants, whether or not the grant or sub-grant includes federal financial assistance. For each kind of organization, i.e. local government or tribe, non-profit agency, educational institution, and commercial organization, there is a set of federal principles for determining allowable costs. Allowable costs are determined in accordance with the cost principles applicable to the organizations incurring the costs. The chart below lists the kinds of organizations and the applicable cost principles.

Federal Cost Principles

Section III -- Selected Items of Cost

As noted in the introduction to this manual, there are four key sources for guidance on allowability of costs: the general criteria, federal cost principles, selected items of cost where state policy differs from or expands on federal policy, and program specific guidance. Two of these sources, the general criteria and federal cost principles, were discussed in the Sections I and II of this manual, and program specific guidance can be found in the contract or other program-related documents. This section includes the discussion of selected items of cost where state policy differs from or expands on federal policy, which we believe most agencies will find beneficial and essential to understanding which costs will be considered allowable.

In reviewing these selected items of cost, please keep three points in mind. First, the following principles for allowability of items of specific cost are not all-inclusive, and failure to mention a particular item is not intended to imply that it is either allowable or not allowable. Second, prior users of the Department's Allowable Cost Policy Manual will notice that many items which were previously addressed in previous version of the manual have been deleted. Department policy on the deleted cost items has not changed. However, since the discussion of the deleted items did not differ in any material way from the federal cost policies, we are relying on the federal documents instead of repeating what they have to say. Finally, these principles apply whether a cost is treated as direct or indirect. All costs allocated to programs must be allocated in accordance with a plan that meets the criteria for cost allocation/indirect cost plans described under "Direct Costs, Allocated Costs, and Indirect Costs" earlier in this manual.

1. Audit Expense - Audit expense is allowable if the audit is required by federal or state law or regulation or is authorized by the Department and if the audit is performed in accordance with the applicable federal and state guidelines. The guidance that will be applicable to a particular agency depends on the type of agency and the amount and type of financial assistance received by the agency. In general,

a. All audits shall be in accordance with generally accepted auditing standards and the U.S. General Accounting Office Government Auditing Standards.

b. Audits of local governments and Tribes shall also be in accordance with the Single Audit Act of 1984, OMB Circular A-128, and the Wisconsin Department of Administration's State Single Audit Guidelines, if the amount of federal financial assistance is above the threshold for requiring an audit in accordance with the Single Audit Act and OMB Circular A-128.

c. Audits of institutions of higher education and other non-profit agencies shall also be in accordance with OMB Circular A-133 and the Department's Provider Agency Audit Guide, if the amount of federal financial assistance is above the threshold for requiring an audit in accordance with OMB Circular A-133.

d. Audits of other agencies shall also be in accordance with the Department's Provider Agency Audit Guide.

2. Bad Debts Losses - See "Collection Expense and Bad Debt Losses."

3. Care in Nursing Homes - Community Services Programs, Development Disabilities County Programs, and County Human Services Programs may not expend Community Aids or county match funds for the purpose of paying for either the base rate or supplemental payment for the care of people with developmental disabilities or mental illness in nursing homes. This includes long term as well as short term care. State grant-in-aid or county match funds may only be used to pay for care in nursing home for alcohol and other drug abuse (AODA) clients being serviced in a nursing home that has been certified under DHS § 61.67, Extended Care - Medical.

4. Client Related Costs - All client services must be authorized in writing by the purchasing agency. The authorization may be for an individual client or target group of clients and must be consistent with the requirements of the funding source (for example, consistent in time frame, units of service, type of service, etc.). Whether for an individual or for a group of clients, the authorization procedure must be established through written policy and be on file.

In addition, facilities which provide alcohol and other drug abuse (AODA) services for mental health services must hold the proper certification as a provider of these services in order for any costs incurred in providing these services to be allowable for reimbursement. (Wis. Stat. § 46.031 and DHS § 61.03).

a. Holding Space - With respect to all special living arrangements, foster or family care home placements, payment may be made for no more than the maximum of the established rate for up to 14 consecutive days of absence from the facility when provided in the contract and payment is made on a unit cost basis. Payment shall not be made in any case after it is known that the client will not be returning to the same facility.

When an unusual situation arises and it can be justified that the best interest of the client would be served, payment may be extended with prior approval of the applicable Department program division.

b. Payment Allowances - Payment allowances are payments made to clients as part of an individual service or rehabilitation/training plan and do not represent wages for work performed. The payments may be contingent upon client behavior or an accomplishment which may be related to the performance of physical tasks as part of a plan for the individual. Payment allowances which are made according to a written plan justifying such costs are allowable.

c. Transportation - The cost of transportation for clients is allowable if provided through use of:

(1) A contracted transportation service.

(2) Public transportation, e.g., bus or taxi.

(3) Volunteers using private vehicles.

(4) Agency-operated vehicles. Reimbursable costs are limited to the actual cost of operation which includes salary, fringe, maintenance costs, repairs, gas, oil, lease costs, and/or depreciation.

(5) Emergency transportation provided by ambulance or sheriff's department.

d. Clothing - The cost of clothing for clients is not allowable as reimbursable except in the following instances:

(1) The clothing is expensed as part of the Uniform Foster Care Standard.

(2) The clothing is expensed as part of the institution rate.

(3) Work related clothing is expensed pursuant to an approved plan.

e. Food - The cost of food provided to clients is allowable when provided in the following settings and when appropriate to the treatment plan:

(1) Inpatient.

(2) Residential Care.

(3) Special Living Arrangements.

(4) Day Services provided at the normal meal time.

(5) Other settings specifically authorized by the Department.

Residents in certain kinds of group living arrangements may be eligible for and receive food stamps while in placement at a facility. (See the Food Stamp Handbook, Appendix, Section 2.3.0 for eligibility criteria.) The food stamps that are used by the facility to purchase food shall be a cost offset against the cost of food purchased.

The cost of meals for staff who have no meal period and must remain on duty is allowable.

The cost of meals provided to other staff of the facility is not allowable. Staff having meals shall be charged a cost-based fee.

f. Guardianship Fees - Guardianship fees are allowable when necessary as part of an individual service or treatment plan. To be an allowable cost for a nursing home client, the client must be receiving Medicaid or SSI and one or more services.

g. Laundry Expense - In a residential or outpatient setting, the cost of laundering patient clothing, facilities linens, uniforms, and required staff uniforms is allowable.

h. Medical Supplies and Drugs -

(1) The cost of first aid supplies is allowable.

(2) Drugs prescribed on an outpatient basis by the physician must meet the following criteria in order to be allowable:

(a) Costs must not be covered by Title XVIII, Title XIX or other insurance coverage.

(b) The dispensing pharmacy must have a centralized agreement with the 51 Board agency.

(3) Medical supplies and drugs administered in an inpatient medical facility are allowable.

i. Space Costs - Using part of a building for agency operations and part for personal use (e.g., Group Home) causes some unique allocation problems. The normal operating costs appropriate to the business aspect of the building are allowable. The space costs may be determined by using one of the two methods below:

(1) Actual Costs - The appropriate share of the following costs shall be allowable:

(a) Straight line depreciation based on historical cost. See the federal cost circulars for a discussion of depreciation and use allowances.

(b) Interest expense on a mortgage.

(c) Real estate taxes.

(d) Operation and maintenance costs.

(2) Fair Rental Value - This method is appropriate only for agencies which are not subject to either 2 CFR Part 225 or 2 CFR Part 230, i.e., the agency is not a local government, tribe, or non-profit organization. In lieu of depreciation, insurance, taxes, and interest a fair rental value may be determined and be allowed as an allowable expense in addition to operating and maintenance costs. This determination shall be a written appraisal from an appraiser selected by the purchaser to be paid for by the agency. Such costs shall be considered as allowable.

5. Collection Expense and Bad Debt Losses - To encourage agencies to pursue reasonable collection efforts, administrative costs necessary to secure collections are allowable. Such costs may include legal fees, collections agency fees, and other associated expense. However, any losses arising from uncollectible accounts and other claims and related costs, such as legal fees or other expenses incurred for specific bad debts or other losses, are not allowable.

For accounts referred to the Department's Bureau of Fiscal Services Collection Unit, the portion of uniform fee collections not returned to agencies due to statutory requirements is not an allowable expense.

6. Compensation - See the federal allowable cost guidance for extensive discussion of the factors affecting the allowability of compensation expense, which includes salary, fringe benefits, vacation, bonuses, etc. In general, however, these costs are allowable for reimbursement by Department programs only if in accordance with written policies and procedures approved by the agency's board of directors or the equivalent.

7. Data Processing - Local governments using federal financial assistance under certain programs from the U.S. Department of Health and Human Services and the U.S. Department of Agriculture for automated data processing equipment or services must comply with the rules established by these federal agencies requiring prior approval of the use of funding for these purposes. These rules are detailed in the Division of Economic Support Administrator's Memo Series "Local Agency Automated Data Processing (ADP) Plans," which the Division periodically updates and sends to all local government agencies that are subject to these requirements.

8. Depreciation and Use Allowances Waiver - See "Equipment and Other Capital Expenditures."

9. Entertainment - The cost of entertainment, amusements, social activities, and any incidental cost relating thereto, such as meals, beverages, lodging, transportation, etc., which are not directly a program need are not allowed.

10. Equipment and Other Capital Expenditures - Equipment and other capital expenditures with an acquisition cost of $5,000 or less may be expensed at the time of purchase. Generally, the cost of equipment and other capital expenditures with an acquisition cost exceeding $5,000 is be recovered through use of depreciation or allowances. (See the federal cost principles for a full discussion of the allowability of depreciation and use allowances). However, under certain circumstances and only with a written waiver from the Department obtained prior to making the purchase, equipment and other capital expenditures with an acquisition cost exceeding $5,000 can be expensed at the time of purchase. In keeping with the policy that costs cannot be charged to programs more than once, depreciation associated with equipment that was expensed at the time of purchase is not allowable for reimbursement.

(Effective for expenditures made before 1/1/98)

10.a. Equipment and Other Capital Expenditures – Equipment and other capital expenditures with an acquisition cost of $5,000 or less may be expensed at the time of purchase. Except as provided for under paragraph 10.b., in general, the cost of equipment and other capital expenditures with an acquisition cost exceeding $5,000 is to be recovered through use of depreciation or allowances. (See the federal cost principles for a full discussion of the allowability of depreciation and use allowances.)

However, under certain circumstances not already described under 10.b., and only with a written waiver from DHS obtained prior to making the purchase, equipment and other capital expenditures with an acquisition cost exceeding $5,000 can be expensed at the time of purchase. In keeping with the policy that costs cannot be charged to programs more than once, depreciation associated with equipment that was expensed at the time of purchase is not allowable for reimbursement.

(Effective for expenditures made on or after 1/1/98)

10.b. Equipment and Other Capital Expenditures Exempt from Depreciation Requirements - An expenditure on equipment or another capital item which exceeds $5,000 and meets the following criteria does not need to be depreciated. An expenditure can be expensed at the time of purchase if the equipment or capital item:

• is for the exclusive benefit of an eligible client in need of assistance to live independently in the community;
• is owned and controlled by the client or by the family or guardian of the client who is intended to benefit from the purchase; and
• does not become part of the purchasing agency’s assets. 

Examples of the types of equipment or other capital expenditures over $5,000 which can be expensed at the time or purchase include: (1) a purchase or significant retro-fitting of a wheelchair; (2) construction of a wheelchair ramp to allow access to a client’s home; and (3) remodeling of a client’s kitchen or bathroom to allow a client to live independently in the community.

(Effective for expenditures made on or after 1/1/98)

11. Fines and Penalties - Costs resulting from violation of or failure to comply with federal, state, and local laws and regulations are not allowable. Such costs include fines, penalties, settlements resulting from lawsuits, payments to terminated employees, cash settlements, damages, and back wages.

12. Gifts and Donations to the Agency - Gifts and donations to the agency shall be reported as permanently restricted net assets, temporarily restricted net assets, or unrestricted net assets based on the existence or absence of donor-imposed restrictions. The governing board of an agency may choose to designate its unrestricted funds for specific purposes. Information about restrictions and designations shall be provided in the financial statements or notes thereto. Unrestricted gifts and donations that have not been designated for a specific purpose at the time of receipt shall be used to offset expenses.

13. Interest - Interest is generally not an allowable expense under federal cost policies. However, Department policy allows interest for space costs if there is a direct relationship such as a mortgage or bond issuance, and the Department allows financing costs for specific items of equipment such as leases. Interest expense incurred for newly-constructed buildings that are capitalized prior to the date of occupancy are allowable. Interest costs for unsecured loans, general operating expenses, working capital, retirement of other debt, or for any other purposes are not allowable. Professional and legal fees for financing are not allowable unless directly associated with an allowable interest expense for space costs or equipment.

14. Legal Expense - See the federal allowable cost guidance for discussion of the allowability of legal expenses. The Department has additional policies on the allowability of legal expenses which are applicable for all agencies which receive financial assistance and some that are applicable only to Counties and 51 Boards.

>a. All agencies - The following policies are applicable to all agencies receiving financial assistance from the Department:

• Legal expenses incurred in the normal course of providing service to clients are allowable. Expenses incurred pursuing recovery on assignment of insurance benefits, filing claims in court, and processing sales of property deeded to the agency or county, etc. are allowable.
• Claims for reimbursement of legal services must be based upon the compensation or salary authorized by the county board, the board of directors, or equivalent.
• Time sheets or actual time logs must be used to substantiate reimbursement claims for legal services. This documentation will be examined during routine audits performed by the Department and/or the independent auditor.
• The cost of legal services acquired to sue a governmental agency are not allowable.
• Legal fees associated with incorporating or organizing an agency are not allowable.

b. Counties and 51 Boards - The following policies are applicable only to Counties and 51 Boards:

The opinion of the Attorney General (OAG-33-81) concluded that county social service departments and 51 Boards may not contract with private attorneys to provide legal services nor may they directly employ attorneys on their staff who are solely supervised by that department. The authority to advise and represent county offices and agencies rests solely with the District Attorney or corporation counsels offices.

The opinion of the Attorney General (OAG 3-86) concluded that Wis. Stat. § 51.42 (5) (h) 7 permits multi-county 51.42/51.437 boards to retain private legal counsel only where the corporation counsel of each county, or district attorney of each county not having a corporation counsel, notifies the board that he or she is unable to provide specific services in a timely manner. Litigation, as used in Wis. Stat. § 59.44(3), applies only to civil court proceedings and does not include grievance proceedings or proceedings before an administrative agency.

• The department will reimburse only for legal services provided to county departments of social services, 51 Boards and HSDs by district attorneys, assistance district attorneys, corporation counsels and assistant corporation counsels. Legal services which are the statutory responsibility of the District Attorney or Corporation Counsel are not allowable except when specifically authorized by the department.
• The department will reimburse multi-county 51.42/51.437 boards for legal services provided by private legal counsel only when the corporation counsel of each county, or district attorney of each county not having a corporation counsel, notifies the board that he or she is unable to provide specific services in a timely manner.

15. Production/Commercial Service Costs - Production/Commercial Services are subcontract work, prime manufacturing, and/or providing a service (janitorial, greenhouse worker, microfilm technician, etc.) in conjunction with a rehabilitation or training program. In general, all costs incurred in the production or service activity must be recovered in the price of the product or service. Therefore, the following production/commercial service costs are not allowable:

a. Cost of direct labor to produce the product or provide the service (wages and fringe benefits).

b. Cost of indirect labor required to support the production/service activity (wages and fringe benefits of administration, clerical, and supervisor personnel).

c. Cost of direct materials, inventory, tooling, and/or equipment (raw materials, machinery, tools, etc.).

d. Cost of indirect materials, and supplies required to support the production activity (tape, cartons, staples, etc.).

e. Procurement and selling expense (promotional activities, advertising, travel, shipping/receiving warehousing expenses, wages and fringe benefits of procurement/salesperson).

f. Production/commercial service overhead expenses needed to support the production/service activity (workshop floor space which includes offices, depreciation of building, building insurance, maintenance/replacement of equipment and depreciation, utilities, etc.).

However, rehabilitation/training costs are not generally included in the price of the product or service and can be charged to the respective funding sources. The facility must use a justifiable, logical, and equitable method of establishing rehabilitation training costs based on measurable, identifiable factors which are consistently applied to the total agency operations and are acceptable to the respective funding sources.

16. Profit for For-Profit Agencies Which Provide Client Care - Per Wisconsin statutes, an allowance of a reasonable return on equity capital invested and used in the provision of client care may be included as an element of reasonable cost of covered services furnished to beneficiaries by proprietary providers. The amount allowable on an annual basis is determined by applying a percentage equal to 7 1/2% of net allowable operating costs plus 15% applied to the net equity defined below, the sum of which may not exceed 10% of the net allowable operating costs. "Net Equity" is defined as the cost of equipment, cost of buildings, cost of land and cost of fixed equipment less accumulated depreciation and long term liabilities. The average net equity for the year shall be used. All other profit is unallowable.

Calculator for Allowable Profit for For-Profit Agencies That Provide Client Care

17. Reserved Amount for Nonprofit Agencies Using a Prospectively Set Rate - Reserves may be retained, in accordance with the following statutory provisions, by non-profit organizations that are reimbursed for services through a prospectively set rate.

Selected portions of Wis. Stat. § 46.036 as revised by 1993 Wisconsin Act 380:

46.036(5m)(a)1. In this subsection, "Provider" means a nonprofit, nonstock corporation organized under ch. 181 that contracts under this section to provide client services on the basis of a unit rate per client service.

2. "Rate-based service" means a service or a group of services, as determined by the department, that is reimbursed through a prospectively set rate and that is distinguishable from other services or groups of services by the purpose for which funds are provided for that service or group of services and by the source of funding for that service or group of services.

46.036(5m)(b)1. Subject to subds. 2 and 3, if revenue under a contract for the provision of a rate-based service exceeds allowable costs incurred in the contract period, the provider may retain from the surplus generated by that rate-based service up to 5% of the contract amount. A provider that retains a surplus under this subdivision shall use that retained surplus to cover a deficit between revenue and allowable costs incurred in any preceding or future contract period for the same rate-based service that generated the surplus or to address the programmatic needs of clients served by the same rate-based service that generated the surplus.

2. Subject to subd. 3, a provider may accumulate funds from more than one contract period under this paragraph, except that, if at the end of a contract period the amount accumulated from all contract periods for a rate-based service exceeds 10% of the amount of all current contracts for that rate-based service, the provider shall, at the request of a purchaser, return to that purchaser the purchaser's proportional share of that excess and use any of that excess that is not returned to a purchaser to reduce the provider's unit rate per client for that rate-based service in the next contract period. If a provider has held for 4 consecutive contract periods an accumulated reserve for a rate-based service that is equal to or exceeds 10% of the amount of all current contracts for that rate-based service, the provider shall apply 50% of that accumulated amount to reducing its unit rate per client for that rate-based service in the next contract period.

3. If on December 31 of the year of the effective date of this subdivision (January 1, 1995), the amount accumulated by a provider from all contract periods ending on or before that date for all rate-based services provided by the provider exceeds 10% of the provider's total contract amount for all rate-based services provided by the provider in the year of the effective date of this subdivision (1995), the provider shall, at the request of a purchaser, return to that purchaser the purchaser's proportional share of that excess.

46.036(5m)(f) All providers that are subject to this subsection shall comply with any financial reporting and auditing requirements that the department may prescribe. Those requirements shall include a requirement that a provider provide to any purchaser and the department any information that the department needs to claim federal reimbursement for the cost of any services purchased from the provider and a requirement that a provider provide audit reports to any purchaser and the department according to standards specified in the provider's contract and other standards that the department may prescribe.

With the passage of 1993 Wisconsin Act 380, the Department modified the provisions affecting reserves as allowable costs under grants from the Department. Effective January 1, 1995, the reserves language above, from the statutes, replaces the provisions relating to reserves for Child Caring Institutions (CCIs) and reserves for residential providers, which are found in the previous version of the Allowable Cost Policy Manual. The statutory provisions in § 46.036 (5m) (e), relating to in-patient alcohol and other drug abuse programs remain in place.

a. Some of the major changes resulting from the new legislation are:

• The reserves concept has been extended so that it is applicable to other service providers in addition to CCIs, Group Homes, and Community Based Residential Facilities (CBRFs) which are reimbursed for their services via a prospectively set rate.

• The accumulation and retention of reserves by any organization for which reserves are an allowable cost under the new legislation are limited as specified in the legislation.

• Reserves will only be considered allowable costs for non-profit organizations. For-profit organizations will still be allowed a profit as provided for in this manual, but reserves will not be an allowable cost for them.

b. 46.036 (5m)(b) 1 indicates that an organization could conceivably have more than one reserve amount since reserves are generated when revenue received under a contract exceeds the allowable costs incurred in providing a rate-based service. 46.036 (5m)(a) 2 indicates that "rate-based service" means a service or a group of services which is reimbursed through a prospectively set rate and is distinguishable by the purpose for which funds are provided and by the source of funding.

In order to evaluate the potential impact of reserves upon its claims for federal reimbursement, the department needs to be able to determine the existence and amounts of reserves associated with the various programs for which federal funds are claimed. In addition, prudent financial management, and the reserves legislation, specify circumstances under which reserves generated by contracts for a particular rate-based service should be used to reduce the cost of, or address the programmatic needs of the clients receiving, a particular rate-based service.

There is no intention to unnecessarily increase the identification of separate rate-based services and their associated potential reserve amounts. However, where an organization provides services which are completely federally funded, these services and any reserves associated with them need to be identified separately. Where it is not possible to clearly distinguish between services by funding sources, the practice of identifying a single reserve amount associated with all of the services taken together is acceptable.

c. Both §§ 46.036 (5m)(b) 2 and 3 specify that purchasers may request that providers return their proportional share of amounts exceeding specified amounts remaining at the ends of contract periods.

However, purchasers do not typically find out what the amounts remaining at the ends of contract periods are until they receive a copy of the audit report from the provider, which is often six months or more after the close of a contract period. Because purchasers need to obtain an audit to enable them to decide whether they wish to exercise their option to request a return of funds, it is legitimate for them to exercise their option when the audit report is obtained and reviewed by them.

Again, although both §§ 46.036 (5m)(b) 2 and 3 specify that purchasers may request that providers return their proportional share of amounts exceeding specified amounts remaining at the ends of contract periods, the method or methods for determining the purchaser's "proportional share" is not addressed.

Given this, it is reasonable to suppose that any method for determining the purchaser's "proportional share" which is fair and agreed to by both purchaser and provider may be used. Whatever method is used should be applied consistently for all purchasers. It would probably be in the best interests of the provider, and minimize potential conflict, for the provider to establish, through policy, the method used to determine proportional shares.

Where actual data exists which allows a precise determination of each purchaser's proportional share, such data should be used. However, it is not anticipated that either purchasers or providers should develop and maintain elaborate records for the purposes of determining proportional shares should the need arise.

For example, it is not always possible to determine from a provider's audit report, where it discloses a reserve, which purchasers have contributed how much to the reserve amount reported. In these circumstances, one might devise a method for calculating a purchaser's proportional share which does not depend on knowing which purchasers contributed how much to the reserve. How such a method might work is discussed in the example below:

(NOTE: This example, and the one provided in section d of this explanation, should be read in conjunction with the provisions of Wis. Stat. §§ 46.036 (5m)(b) 2 and 3, respectively.)

EXAMPLE: Suppose that at the end of a particular contract period a provider has an accumulated reserve of $60,000 and that the provider received $400,000 in contract revenue during that contract period. Under Wis. Stat. § 46.036 (5m)(b) 2, the provider could retain up to $40,000 of the reserve, unless retention is specifically prohibited by contract. $20,000 of the accumulated reserve would need to be returned to purchasers, if the purchasers request. If a particular purchaser believed itself entitled to a return of some portion of the provider's excess reserve, but did not know whether it contributed to the reserve, how might this be accommodated? Suppose further that the purchaser requesting a return of a portion of the reserve had provided $50,000 of the provider's $400,000 in contract revenue for the period. The purchaser and provider might agree that a reasonable method for calculating the purchaser's proportional share would be to base it on the purchaser's percentage of business with the provider. Thus the purchaser provided $50,000 (or 12.5%) of the provider's $400,000 in contract revenue. And 12.5% of the $20,000 to be returned at the request of a purchaser is $2,500. In this case, the purchaser's proportional share of the reserve to be returned would be $2,500, even if it could not be determined whether this particular purchaser had contributed to the reserve amount disclosed in the audit report.

d. 46.036 (5m)(b) 3 limits the amounts that a provider may retain from contract periods preceding the effective date of the new legislation. It indicates that:

If on December 31, 1995, the amount accumulated by a provider from all contract periods ending on or before December 31, 1995 for all rate-based services provided by the provider exceeds 10% of the provider's total contract amount for all rate-based services provided by the provider in 1995, the provider shall, at the request of a purchaser, return to that purchaser the purchaser's proportional share of that excess.

For the purposes of implementing this provision, those dollars associated with any and all of the provider's rate based services should be considered together as one pool of dollars.

EXAMPLE: Suppose a particular provider has accumulated $100,000 in reserves from all rate based services it provided in years preceding January 1, 1995, and had $70,000 remaining on December 31, 1995. Suppose further that during calendar year 1995, the provider had received $400,000 in revenue for all rate based contracts. This provision would allow the provider to retain up to $40,000 (10% of $400,000) of the $70,000 in reserves previously accumulated and still retained. Individual purchasers, however, could request their proportional share of the remaining $30,000 to be returned.

e. The process of establishing rates for services is driven by two main items: the estimated costs of providing services and the estimated number of recipients of services. In an ideal world, if these estimates are accurate and realized, then the provider will break even. Otherwise the provider will experience either an operating loss or a surplus.

The goal of rate development and negotiation should be to arrive at a break even rate. This may include the consideration of anticipated vacancies, but should not include budgeting (in any number of ways) to generate a planned surplus at the end of the year.

It is also worth pointing out that while it may be useful to think of a reserve as basically the difference between operating revenues received and otherwise allowable costs as defined in the allowable cost principles, there are some qualifications. Thus, for example, one could not take an amount that has been identified as an audit disallowance (or an audit adjustment), call it part of a reserve, and be entitled to retain the funds involved.

f. 1993 Wisconsin Act 380 created § 46.037 (1m), which permits county departments or groups of county departments to negotiate a per client rate for the services of a residential child care center or group home if that county department or group of county departments agree to place 75% or more of the residents of that residential child care center or group home.

The provision also requires that "A residential child care center or group home that negotiates a per client rate under this subsection shall charge that rate to all purchasers of its services."

The intention of this section is to ensure that providers who negotiate with counties under this provision do not negotiate a favorable rate with counties to ensure a high volume of utilization and then make up any losses by charging unfavorable rates to other purchasers to subsidize any losses realized on the county contracts.

18. Start-up Costs - Start-up costs apply to new or expanded services only. Reimbursement to an agency may be based on total allowable costs agreed to by the parties regardless of the actual number of service units to be furnished when the agency is entering into a contract for a new or expanded service that the purchaser recognizes will require a start-up period not to exceed 180 days. Such reimbursement applies only if identified client needs require the establishment of a new service or expansion of an existing service. A written agreement shall state the new or expanded services, the relevant time period, and the type of costs to be reimbursed. When the Department contracts with an agency with an existing program(s), costs of operations prior to the contract effective date may not be claimed unless specifically authorized. Providers may not be reimbursed based on planned or budgeted costs for services when the planned or budgeted services could not be provided during the contract period because of delays in starting up the program.

19. Travel Expense - See the federal allowable cost guidance for extensive discussion of the factors affecting the allowability of travel expense. In general, however, these costs are allowable for reimbursement by Department programs only if in accordance with policies and procedures approved by the agency's board of directors or the equivalent.

Section IV -- ITEMS DELETED

The following list if items from the 1989 revision of the Department's Allowable Cost Policy Manual were deleted for the 1995 revision because they are either (1) specifically covered in the federal cost circulars or (2) sufficiently covered by the general criteria of allowability.

Summary of Revisions to the Allowable Cost Policy Manual