Cost Principles, HRS Chapter 103F, Purchases of Health and Human Services


1. Purpose

To provide uniform cost principles among state purchasing agencies in procuring health and human services under HRS Chapter 103F. These cost principles represent guidelines for determining which types of expenditures will be allowable. These cost principles are intended for use when managing contracts executed under HRS Chapter 103F, for Purchases of Health and Human Services and should be used to guide decisions regarding:

• proposal budgets submitted by providers in response to Request for Proposals (RFP);

• contract budgets and unit costs negotiated between state purchasing agencies and providers;

• financial reporting requirements established by state purchasing agencies; and

• fiscal monitoring requirements established by state purchasing agencies.

2. Federal Cost Principles

Providers receiving Federal funds must comply with applicable Federal requirements. Therefore, to the extent that Federal cost principles conflict with these cost principles, the Federal requirements, if more restrictive, shall control.

3. Factors Affecting the Allowability of Costs

3.1  Criteria

To be allowable, costs must meet the following criteria:

a.  Be reasonable for the performance of the contract and be allocable under these cost principles;

b.  Conform to any limitations or exclusions set forth in these cost principles or in the contract as to type or amount of cost items;

c.  Be consistent with policies and procedures that apply uniformly to the contract and other activities of the organization;

d.  Be accorded consistent treatment;

e.  Be determined in accordance with generally accepted accounting principles (GAAP; and

f.  Be adequately documented.

3.2 Reasonable Costs

A cost is reasonable if, in its nature or 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 costs. In determining the reasonableness of a given cost, consideration shall be given to:

a.  Whether the cost is a type generally recognized as ordinary and necessary for the operation of the provider or the performance of the contract;

b.  The restraints or requirements imposed by such factors as generally accepted sound business practices, arms length bargaining, State laws and regulations, and terms and conditions of the contract; and

c.  Significant deviations from the established practices of the organization which may unjustifiably increase the contract costs.

3.3 Allocable Costs

 a. A cost is allocable to a particular cost objective, such as a grant, contract, project, service, or other activity, in accordance with the relative benefits received. A cost is allocable if it is treated consistently with other costs incurred for the same purpose in like circumstances and if it:

(1) Is incurred specifically for the contract;

(2) Benefits both the contract and other work and can be distributed in reasonable proportion to the benefits received; or

(3) Is necessary to the overall operation of the provider, although a direct relationship to any particular cost objectives cannot be shown.

b. Any cost allocable to a particular contract, award or other cost objective under these principles may not be shifted to other State contracts to overcome funding deficiencies, or to avoid restrictions imposed by law or by the terms of the contract.

3.4 Conform to Limitations or Exclusion

Many costs are subject to various restrictions, conditions, and/or documentation requirements that must be followed before such cost is allowable. Certain types of costs require prior approval before they are allowable, while other types of costs are unallowable.

3.5 Consistent Costing Treatment

The budgeting, recording and reporting of all costs of a particular nature must be done in the same manner regardless of the source of funding (i.e., Federal or Non-Federal) associated with a project or activity.

3.6. Generally Accepted Accounting Principles (GAAP)

These are standards and guidelines promulgated by the Financial Accounting Standards Board and the Governmental Accounting Standard Board, depending upon the type of organization involved. These principles direct how and when they should recognize costs on accounting records and financial statements

4. Direct Costs

Direct costs are those that can be identified specifically with a particular final cost objective, i.e., a particular award, project, service, or other direct activity of an organization. Costs identified specifically with a final cost objective of the organization are direct costs of that cost objective and are not to be assigned to other cost objectives directly or indirectly.

5. Indirect Costs (Joint Costs)

Indirect costs are those that have been incurred for common joint objectives and cannot be readily identified with a particular final cost objective.

6. Negotiated Federal Indirect Cost Rates

Indirect costs are equitably distributed to benefiting cost objectives by using current rate(s) negotiated with the federal government. To utilize the indirect cost rate, the rate must be approved by the cognizant federal agency.

7. Method of Allocation

7.1 Basis and Documentation

Organizations incurring costs that benefit more than one cost objective such as a grant, contract, project, services, or other activity must allocate these costs using a reasonable base. Organizations must have a written cost allocation plan.

7.2 Allocation to Cost Objective

Joint costs, such as depreciation, rental costs, operation and maintenance of facilities, telephone expenses, administrative salaries, and the like must be allocated individually to each objective using a base most appropriate to the particular cost being allocated. An allocation for any expense item exceeding 100% of its total cost, or its depreciation value, is unallowable.

7.3 Basis for Allocation

Each joint cost must be allocated using a base which accurately measures the benefits provided to each cost objective. The bases must be established in accordance with reasonable criteria and be supported by current data. Actual conditions must be taken into account in selecting a base to be used in allocating the joint costs. In general, any cost element or cost related factor associated with the organization’s work is potentially adaptable for use as an allocation base, provided:

a. It can readily be expressed in terms of dollars or other quantitative measures (total direct costs, direct salaries and wages, staff hours applied, square feet used, hours of usage, number of documents processed, population served, and the like); and

b. It is common to the benefiting functions during the base period.

Each joint cost must be allocated using a base which accurately measures the benefits

7.4 Unallowable Allocation of Costs

Allocation of costs based on forecasts, revenues received, budgeted revenues, budgeted costs, or anticipated contract reimbursements are not acceptable or allowable.

8. Unallowable Costs

8.1 Bad Debts

Any portion of the accounts receivable which has been determined to be uncollectible, is termed “Bad Debts.” Any losses arising from uncollectible accounts, other claims and related costs that are actual or estimated are unallowable.

8.2 Contingencies

Contingency costs are contributions to a reserve account for unforeseen costs. Contingency costs are unallowable because they are speculative in nature and do not represent an actual incurred cost.

8.3 Capital Expenditures for Land or Buildings

Capital expenditures for acquisition of land or buildings are unallowable. This does not apply to costs associated with Capital Improvement Project (CIP) funds received from the State for that purpose. (Interest on debt incurred is allowable as specified in the cost principle table.)

8.4 Capital Expenditures for Improvement

Capital expenditures for improvements to land or buildings which materially increase their value or useful life is unallowable. This does not apply to cost associated with Capital Improvement Project (CIP) funds received from the State for that purpose.

8.5 Entertainment

Costs unrelated to service delivery, client activities or client programs, such as costs related to public relations, social activities and incidental costs relating thereto, including meals, beverages, tips and gratuities are unallowable.

8.6. Fines and Penalties

Fines and penalties include all costs resulting from violations of, or failure to comply with, Federal, State, local laws and regulations, and contract requirements. Fines and penalties are unallowable.

8.7 Fund Raising

All costs of fund raising, including financial campaigns, endowment drives, solicitation of gifts and bequests, and similar expenses incurred solely to raise capital or obtain contributions are unallowable.

8.8 Gifts, Contributions and Donations

A gift is property transferred without receiving return consideration of equivalent value. Contributions and donations are property transferred which are not transferred in exchange for supplies or services of equivalent fair market value. Gifts, contributions and donations are unallowable.

8.9 Income Taxes

Federal and State income taxes are unallowable

8.10 Lobbying

All costs associated with attempts to influence the enactment or modification of any pending legislation through communication with any member or employee of the state legislature, or with any government official or employee concerning a decision to sign or veto enrolled legislation are unallowable.

8.11 Losses Incurred Under Other Contracts

A loss incurred under one contract may not be charged to any other contract. Losses incurred on other contracts are unallowable.

8.12 Organization Costs

Costs incurred under one contract may not be charged to any other contract. Losses incurred on other contracts are unallowable.

8.13 Perquisite

A privilege furnished or a service rendered by an organization to an employee, officer, director, or member of that organization to reduce the individual’s personal expenses is unallowable.

8.14 Security Deposits

Funds held as a guaranty or assurance required by agreement is unallowable

8.15 Idle Facilities

Facilities that are not being used are unallowable.

9. Definition of Column Titles for Form SPOH-201

9.1 “Cost Item”

“Cost item” refers to the items within budget categories. For example, “Compensation for Personal Services,” should appear within the budget element category for “Personnel Costs.”

9.2 “Description”

A description of each line item is provided to briefly characterize applicable costs within the category. Descriptions are intended to be informative.

9.3 “Allowable/Unallowable”

Costs are allowable when they are reasonable, allocable, lawful, and for costs invoiced for reimbursement, actually incurred or accrued and accounted for in accordance with generally accepted accounting principles, for contract related expenditures. Certain costs are treated specially and are specifically identified as “Allowable” or “Unallowable” costs. The list of unallowable costs is not all-inclusive.

• Costs indentified as “Allowable with Prior Approval” are generally unallowable. Providers must receive approval of these costs, prior to expenditure. The head of the state purchasing agency may approve “unallowable” costs, if it is in the best interests of the State and all costs are reasonable, lawful and allocable.

9.4 “Remarks”

This column describes special instructions, restrictions on the allowable limits, and required documentation that the State purchasing agency may require. All required documentation should be available upon request by the state purchasing agency. RFPs may require that certain documents be submitted at the time of application.

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