1. Budget Criteria. The budget is a plan of action expressed in figures. The provider and DFPS regional staff prepare the budget. In preparing the budget, staff and the provider must ensure that the following objectives are met:
a. Planning. Collect data to show the relationship of budget items to program needs and to support reasonable and necessary cost.
b Performance evaluation. Compare services provided to resources used.
c. Communication and coordination. Identify and quantify how many physical resources are requested in the different areas of the program.
d. Authorization. The basis for authorization of expenditures.
e. Commitment. A commitment to make funds for resources available; gives security to the operation.
f. Control. Set limits and require reassessment of facts to document and obtain approval for changes in limits.
A budget is effective in achieving the above objectives if it is representative of a realistic plan of action.
2. General Information.
a. Budget changes. Changes between line items of a budget are allowed without prior approval if the changes do not result in a cumulative increase or decrease in the line item of more than $2,000 or 2% of the total budget, whichever is less. The changes are allowed if they do not result in a significant change in the character or scope of a program. The provider must notify DFPS about any budget changes.
Line items are personnel salaries, fringe benefits, travel, supplies, equipment, or other costs.
b. Allowable costs. Allowable costs are items that represent an actual cash outlay or that reflect a use charge or depreciation charge on agency owned buildings or fixed equipment. The value of donated goods or services (in kind) is not an allowable cost. An agency, however, may include a use or depreciation charge on a donated building or on donated fixed equipment. Federal regulations specify items which may or may not be reimbursed with federal funds.
Federal regulations specify that any costs must be reasonable, properly allocated, and budgeted according to generally accepted accounting principles (OMB Circular A-122, Attachment A,2). A cost is reasonable if the type or amount does not exceed that which would be incurred by an ordinarily prudent person in the conduct of competitive business. The following are considered:
1) The cost is of a type generally recognized as ordinary and necessary for the operation of the facility or the performance of the contract.
2) The restraints or requirements imposed by factors generally accepted as sound business practices, arms length bargaining, federal and state laws and regulations, and contract terms and specifications.
3) Significant deviations from the established practices of the facility which may unjustifiably increase the contract costs (OMB Circular A-122, Attachment A,3).
c. Multiple budgets. In preparing a detail of program costs, the contract manager determines if the total contract cost should be divided into separate budgets. Budgets must be prepared separately for each service. Facilities operating more than one program usually have a separate administrative budget and a summary budget for the total costs of all programs covered under the contract. The contract manager and the provider must decide on the number of budgets and then prepare the budgets.
d. Budgeting procedures for unit rate. DFPS developed a uniform unit of measurement for each type of service to help measure efficiency and effectiveness and to compare the costs of similar services purchased from different providers. The negotiated unit rate is reviewed at least every six months and adjusted if necessary. DFPS and the provider may agree to adjust the rate at other times. If the adjustment to the unit rate results in an increase, the adjustment is documented by a contract amendment.
e. Startup costs. When DFPS purchases services under a cost reimbursement contract from a provider who is either just beginning or is expanding into a new service area, time is needed to implement the program. This involves activities such as hiring and orienting staff, purchasing equipment and supplies, and recruiting eligible clients. During this time, the provider may not be able to provide services to clients. Therefore, for 30 days from the effective date of the contract, the provider may bill DFPS for startup costs even if services have not been provided to clients. The provider bills DFPS by Form 4116, Purchase Voucher, and Form 2014, Purchased Services Expenditure Report. The provider does not use Form 2015, Purchased Services Delivery Report, to bill DFPS for startup costs.
If a license or certificate is required for delivering services, the provider must be licensed or certified within 30 days after the effective date of the contract. During this 30-day period, allowable startup costs include activities such as hiring and training staff, purchase of equipment, and securing required medical exams for day care clients. DFPS does not pay a non-licensed or certified provider for direct services to clients. If the provider does not receive the license or certification within the stated time limit, DFPS does not pay for start-up costs.
f. Salaries. Providers compensate employees according to policies and procedures that effectively compare compensation to the employee's contribution. The provider must ensure that the policies for compensation result in consistent treatment of employees in similar positions, and compensation that is equivalent to that paid for similar services outside the provider's organization. DFPS has the authority to review and approve salaries by position or function. DFPS does not consider retroactive salary increases as an allowable cost.
1) For providers mainly engaged in activities other than federally funded activities, the provider's compensation for employees should be comparable to those found in the provider's other activities. (OMB Circular A-122, Attachment B, 5c(1).)
2) If the provider is mainly engaged in federally funded activities and needs types of employees that are not used in the provider's other activities, the provider may compensate these employees according to compensation paid for similar work in the labor market. (OMB Circular A-122, Attachment B, 5c(2).)
Overtime is allowable only if approved by the Department of Health and Human Services except:
1) If necessary to cope with emergencies, such as those resulting from accidents, natural disasters, or temporary and unavoidable situations. (OMB Circular A-122, Attachment B,27(a).)
2) If the total cost to the government will be lower (OMB Circular A-122, Attachment B, 27(d).)
3) If services are required to meet client needs and DFPS direct delivery staff are not available.
h Incentive compensation. The following requirements apply to merit raises or other additional compensation.
"Incentive compensation to employees based on cost reduction, efficient performance, suggestion awards, safety awards, etc., are allowable to the extent that the overall compensation is determined to be reasonable and such costs are paid or accrued pursuant to an agreement entered into in good faith between the organization and its employees before the services were rendered, or pursuant to an established plan followed by the organization so consistently as to imply, in effect, an agreement to make such payment" (OMB Circular A-122, Attachment B, 6(h).)
i. Fringe benefits. Fringe benefits are allowances and services given by the provider to its employees besides regular wages and salaries. Examples are health insurance and retirement plans. Fringe benefits include items required by law such as F.I.C. a. (social security) and unemployment insurance. Some providers are exempt from some of the requirements under Section 501 (c)(3) of the Internal Revenue Code. If a provider is exempt, the provider should request a Form L178 specifying the exemption from the district director of Internal Revenue Service. DFPS urges providers to protect their employees by participating in FICA even if exempt. Each contracted provider determines its responsibilities and liabilities regarding the following state and federal regulations:
1) Worker's compensation — questions may be sent to a qualified local insurance agency, the State Board of Insurance, or the State Industrial Accident Board.
2) F.I.C.A. — questions may be sent to IRS.
3) Federal unemployment taxes — questions may be sent to IRS.
4) State unemployment taxes — questions may be sent to the Texas Employment Commission.
Providers operating under purchase of service contracts must determine their own personnel policies including leave and holiday benefits. DFPS assesses these benefits and other relevant factors to determine their effect on the cost of the service provided.
Fringe benefits usually average 10-15% of gross salaries. Vacation and sick leave are not budgeted separately but are fringe benefits. The contract manager should review the provider's personnel policies to ensure that vacation and sick leave are not excessive. If the contract manager determines that these benefits are unreasonably affecting the service cost, he must negotiate with the provider to lower this cost, including changes in leave and holiday benefits if indicated.
The total salary may not be taxable. The contract manager considers this when budgeting for F.I.C.A., federal unemployment taxes, and state unemployment taxes. These taxes are computed on a maximum base salary. The maximum base may vary each year. The contract manager should verify the maximum base through IRS or the Texas Employment Commission.
j. Travel costs. Costs incurred by the provider's employees for travel (mileage, food, and lodging) and travel-related expenses (air fare, auto rental) are allowable on a cost reimbursement basis according to the following procedures:
1) Mileage. Budgeting and reimbursement for mileage is computed on a per mile rate, and must not exceed the current state mileage rate. Providers may reimburse employees at higher rates if the provider pays the difference. The provider must keep documentation of mileage and the purpose of the travel on forms approved by DFPS.
2) Food and lodging. Budgeting and reimbursement may be on a per diem or cost incurred basis. Only one method may be used for each trip:
A. Per diem rate — Budgeting and reimbursement is computed on a per diem rate not more than the current state per diem rate. The provider must have documentation to support reimbursement.
B. Cost incurred basis — The provider must keep receipts to substantiate the expense claimed and the expense must be reasonable.
3) Other expenses. Other travel-related expenses, such as air fare and taxi fare, are allowable on a cost incurred basis if these costs are reasonable, necessary, and substantiated by adequate documentation.
4) Volunteer travel. Volunteers may be paid for travel for agency business, not travel between the volunteer's home and the agency.
5) Out-of-state travel. Out-of-state travel is allowable. The provider must state the purpose and destination of the travel and obtain approval from the contract manager. DFPS determines if out-of-state travel is allowable by comparing the total cost for similar or comparable travel available within the state.
· Provider staff in El Paso can attend a program-related workshop in Las Cruses, New Mexico at a total cost of $350 or a comparable workshop in Austin, Texas at a total cost of $520. DFPS approves the out-of-state travel request if there are no other relevant considerations.
· Provider staff in Austin, Texas can attend comparable program related workshops offered in Dallas, Texas at a total cost of $340 or in Denver, Colorado, at a total cost of $620. DFPS does not approve the out-of-state travel request.
k. Consumable supplies. Consumable supplies are items costing less than $50 per unit and that have a useful life of less than one year. Items meeting the cost standard but that have a greater useful life expectancy, such as chairs, are not consumable supplies if the cost of control and record keeping on the items is reasonable. Consumable supplies are usually within the following categories:
1) Office supplies — clerical and bookkeeping items such as pencils, paper, ledgers, typewriter ribbons, staplers, binders, and attendance books.
2) Program supplies — varies depending on the service.
3) Kitchen and maintenance supplies — soap, wax, paper products, and mops.
4) Food — meats, produce, canned goods, and dairy products. Food expenses for child care facilities may be budgeted in the contract (breakfast, lunches, and snacks) for children and staff who eat with the children and are included in the staff/child ratio. Food costs paid for by another source, such as USDA, are included in the total, but not the reimbursable costs.
l. Equipment. Equipment is any item costing $50 or more per unit and that has a useful life expectancy of more than one year. Items not meeting the cost standard are considered equipment if the life expectancy warrants the cost of the control. The contract manager may consult with budget consultants, to decide if an object is equipment or a consumable supply.
Equipment should be adequate in quality and reasonable in cost based on the service. The provider and the contract manager agree on reasonable cost. If they cannot reach an agreement, the contract manager should contact program or budget staff.
The purchase of equipment costing $1,000 or more per unit is not allowed as a direct charge to the contract. Equipment purchased through the contract legally belongs to Texas. The contract manager must mark each item so the items are permanently identifiable. The contract manager maintains an inventory list and differentiates these items from other equipment. The contract manager conducts a physical inventory of the equipment periodically. When the contract terminates, the equipment or the money from its sale reverts to the state. The state determines the use of the equipment after a contract ends. Once an item has been paid for through a contract, no additional charges (depreciation or use charge) may be budgeted for the item. Interest charges are not included in the budgeted purchase price.
The provider is responsible for the care and location of equipment purchased through a contract. If it is stolen, lost, vandalized, or misused, the provider must replace or repair the equipment. DFPS recommends that the provider insure the equipment even though this is not required. This insurance may be included in the budget.
Rent or lease of equipment may be included in the budget. This is recommended for short-term contracts if the provider or DFPS does not intend to renew the contract. The provider should not lease equipment if the cost of leasing (over the life of the contract) is the same or more than the cost to purchase it.
m. Depreciation and use allowances. Providers may be compensated for the use of buildings, capital improvements, and usable equipment on hand through depreciation or use allowances. Depreciation is an accounting procedure that distributes equitably and logically, the cost of an asset over the useful life period of the asset. Use allowances are a means of compensation if depreciation is not used. Depreciation or a use allowance on assets donated by third parties is allowable. Any limitations on the amount of depreciation which would have applied to the donor also applies to the recipient organization.
DFPS considers government-furnished facilities used by the provider when computing use allowances and depreciation if the government-furnished facilities are material in amount. In computing the use allowance or depreciation, DFPS excludes any portion of the cost of buildings and equipment paid by or donated by the federal government.
The use allowance or depreciation excludes the cost of grounds. Capital expenditures for land improvements (paved areas, fences, streets, sidewalks, utility conduits and similar improvements) not included in the cost of the buildings are allowable if the amortization of the capital expenditures has been documented in the provider's account books. A determination is made about the probable useful life of the items involved. The share allocated to the contract is developed from the amount amortized for the base period involved.
If the use allowance method is used, the use allowance for buildings and improvements is computed at an annual rate not exceeding 2% of the acquisition cost. The use allowance for equipment is computed at an annual rate not exceeding 6 2/3% of acquisition cost of usable equipment if the provider maintains current records on the equipment on hand. If equipment records are not maintained, the provider must justify the reasonable estimate of the acquisition cost of usable equipment used to compute the use allowance. (OMB Circular A-122, Attachment B,9(d).)
Acquisition cost is the amount spent for the property and, for property acquired with trade-in, the book value (acquisition cost less amount depreciated through the date of trade-in) of the property traded in. Property which was expensed when acquired has a book value of zero when traded in.
Depreciation expense is the portion of the acquisition cost of property which is assignable to that time period. The acquisition cost of the property is divided by the number of years of estimated useful service life of the property to arrive at the depreciation expense per year (straight line method with no salvage value). The number of years of estimated useful service life of property is based on IRS policies on depreciation for tax purposes.
If the depreciation method is used, the provider must maintain adequate property records. The period of useful service (service life) established for usable capital assets is determined based on factors such as type of construction, nature of the equipment used, technological developments in the particular area, and the renewal and replacement policies followed for the individual items or classes of assets involved. If the depreciation method is applied to assets acquired in previous years, the annual charges will not exceed the amounts that would have resulted if the depreciation method was in effect from the date of acquisition of the assets.
Depreciation on idle or excess facilities is not allowed unless it is necessary to maintain the facilities. If a provider elects to use depreciation for a particular type of asset, depreciation rental or use charges are not allowed on the assets that have been completely depreciated.
n. Other costs.
1) Transportation of clients. Is budgeted one of three ways:
A. At a specified rate per mile, the same as or less than the state rate per mile. Documentation is the same as that required for employee travel;
B. On a cost reimbursement basis (depreciation or use charge for the vehicle plus the estimated operating expenses). Includes gas, repairs, and insurance; or
C. As a subcontract with a transportation company. The provider must send the subcontract to the contract manager who may retain it or leave it in the provider's files. If the contract manager has questions, he contacts Legal Division through the appropriate program office.
A. Specify who or what is covered and the type of coverage included, such as "fire and theft, building and contents" or "liability on children @$_____per child." May include bonding.
B. If the provider does not want to budget the insurance, the provider must submit a plan for self-insurance. If insurance is not available, the provider must provide documentation of rejection.
C. If the insurance coverage has a deductible clause, the deductible amount may be budgeted and billed. Example: If the policy has a $100 deductible provision on an item valued at $1,000, the insurance company pays $900; the provider may budget and bill for the remaining $100. If the provider chooses not to insure an item, the provider must not charge loss of the item to the contract.
D. Bonding is required for advance payment.
3) Occupancy costs.
A. Provider owned buildings are budgeted on a use charge basis. (See m. Depreciation and use allowance in this Appendix.) This applies even if there is a close relationship between the operating facility and the building owner. Direct questions about building ownership and use to the Procurement Division.
B. Budgets for space rental specify the number of square feet and the cost per square foot. The total area is reasonable for the number of staff and clients served, and the cost is reasonable as defined under Allowable Costs. The provider shows a copy of the lease agreement to the contract manager.
C. If a facility is shared with other programs, the cost is allocated based on square footage used for each program. This allocation applies to rent, utilities, maintenance service and supplies (including custodian's salary), repairs, insurance, and other related costs. Sometimes other allocation bases are used, but only if square footage is inappropriate.
D. Renovations and remodeling are not budgeted unless specifically approved by DFPS.
E. Janitorial service may be budgeted instead of salaried janitorial or housekeeping staff.
4) Telephone. The budget specifies the number of lines, monthly base rate, and estimated monthly long distance charges. For billing purposes, all long distance charges must be fully documented to show applicability to the contract.
5) Professional fees.
A. Consultants for staff training, parent workshops, and consumer education workshops are allowable if the services are not available without cost and the services are not the responsibility of provider staff.
B. Accounting services, including data processing, are allowable if the services are a reasonable cost to the contract and are not the responsibility of provider staff. Audit fees are allowable if required by other funding sources, such as United Way. A copy of the audit report must be available to DFPS.
6) Unallowable costs. Some unallowable costs identified by OMB Circular A-122 are:
A. Advertising costs for anything other than recruitment of staff, procurement of scarce items, or disposal of scrap or surplus materials.
B. Bad debts.
D. Contributions and donations by the provider.
E. Entertainment costs.
F. Excess facility costs.
G. Fines and penalties.
H. Interest costs and investment counsel costs.
I. Fund raising costs.
J. Losses on other grants or contracts.
K. Organization or reorganization costs.
L. Public information service, except as specified in the contract.
M. Publication costs, unless approved by HHS.
This list is not all-inclusive. Refer questions concerning allowable costs to consultants in Child Protective Services or the Office of the General Counsel.