Time-and-Effort Documentation: What the Regulation Requires and What Auditors Accept

The short answer. Charges to federal awards for salaries and wages must be based on records that accurately reflect the work performed (2 CFR 200.430(g)). The regulation lists the characteristics those records must have. It does not mandate timesheets, monthly certifications, or any particular form, and the older requirement for “personnel activity reports” was removed in 2014. What auditors accept is any system that meets the listed characteristics and that the organization actually follows.

The standard, in plain terms

Section 200.430(g) requires that records supporting personnel charges:

1. Be supported by a system of internal control that provides reasonable assurance the charges are accurate, allowable, and properly allocated
2. Be incorporated into the organization’s official records
3. Reasonably reflect the total activity for which the employee is compensated, not exceeding 100 percent of compensated activities
4. Encompass both federally assisted and all other activities compensated by the organization on an integrated basis
5. Comply with the organization’s established accounting policies and practices
6. Support the distribution of the employee’s salary among specific activities or cost objectives where the employee works on more than one federal award, or on a federal award and a non-federal activity

The regulation further provides that budget estimates alone do not qualify as support for charges, but may be used for interim accounting purposes if the organization’s system produces reasonable approximations of the activity actually performed, and if significant changes are identified and entered into the records in a timely manner. Where budget estimates are used, the organization must perform after-the-fact review at least annually to confirm that the distribution of salaries reflects actual activity.

What this permits

An organization with a well-designed system can support personnel charges with less documentation than it may currently produce.

An employee who works 100 percent on a single federal award does not need to track hours by activity. A semiannual certification, signed by the employee or a supervisor with first-hand knowledge, stating that the employee worked solely on the award during the period, satisfies the standard. Many organizations still collect daily timesheets from such employees. Doing so is permissible but not required.

An employee who works on two or more cost objectives must have records supporting the distribution. This can be a timesheet showing hours by award, a monthly activity report showing percentage of effort by award, or a payroll allocation based on budgeted percentages that is reviewed against actual activity and adjusted, provided the review is documented and occurs at least annually. The choice is the organization’s.

What this does not permit

Three practices generate findings with some regularity.

The first is charging salaries to awards based on the budget with no after-the-fact review. The regulation is explicit that budget estimates alone are insufficient. If the organization allocates 40 percent of a case manager’s salary to a federal award because the budget said 40 percent, and no one has confirmed that the case manager’s actual work approximated 40 percent, the charge is unsupported.

The second is records that do not encompass total activity. A timesheet that shows the hours worked on the federal award but not the hours worked on anything else does not permit the auditor to verify that federal charges do not exceed the federal share of the employee’s time. The record must show the whole.

The third is retroactive preparation. Records completed months after the fact, in anticipation of an audit, do not reflect work performed; they reflect what someone later believed the work to have been. Auditors recognize them. The remedy is a system that produces records contemporaneously, even if the record is a monthly percentage rather than a daily log.

Designing a system that will be followed

The system that survives an audit is the one that is simple enough to be used every pay period without exception. In our experience the following configuration works for most nonprofits with fewer than fifty employees on federal awards:

• Employees working on a single cost objective sign a semiannual certification.
• Employees working on multiple cost objectives complete a monthly effort report showing the percentage of time on each award and on non-federal activity, totaling 100 percent, signed by the employee and approved by a supervisor.
• Payroll is allocated from the effort reports, not from the budget.
• Finance reconciles allocated payroll to the general ledger quarterly and adjusts where the effort reports and the ledger diverge.
• The written policy describing this system is adopted by the board or the executive director and kept with the organization’s other financial policies.

The last item matters more than it appears. The regulation requires that records comply with the organization’s established policies. An organization that has no written policy cannot demonstrate compliance with one.

Regulatory references: 2 CFR 200.430 (compensation, personal services), in particular paragraph (g) (standards for documentation of personnel expenses); 2 CFR 200.431 (compensation, fringe benefits); 2 CFR 200.302 (financial management); 2 CFR 200.303 (internal controls).

This article is general information about federal grant administration. It is not legal or accounting advice.