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Interpreting Balances

Research Administrator Snack and Share Slide Deck. 'Interpreting Balances'. STARS Category: Project Monitoring. (6/26/24)

What is a balance?

A balance can be thought of in absolute terms as the amount of the overall award budget that has been received from the funder to date, minus the cumulative actual costs that have been charged to date.

Balance Type 1 = Budget Received from Funder to Date - Total Actual Costs

In the context of Award Management, balances often consider some kind of projection of anticipated future budget received and/or anticipated future encumbered costs.

Balance Type 2 = Budget Received from Funder to Date - (Total Actual Costs + Total Encumbered Costs)

This is the balance type shown in iO SPFF

In certain discussions and contexts, the balance may be considered as per below.

Balance Type 3 = (Budget Received from Funder to Date + Expected Future Budget from Funder) - (Total Actual Costs + Total Encumbered Costs)

Be careful using the third balance type as while it there may valuable planning reasons to consider the expected future budget to determine an anticipated remaining balance, doing so will generate a balance that is often not the same balance as the second type, which is one shown in iO and most commonly used.

What is a cost?

A cost is an actual expense that can either be direct or indirect.

In the context of Research Cost Accounting on Sponsored Projects, a cost is distinct from an encumbrance in so far as it has posted to the ledger as an 'actual' cost (put another way, it is a transaction that exists presently, is charged to the Sponsored Project subledger, and is identifiable against a recorded direct or indirect cost, be it labor, non labor, service, good, or activity).

What is an encumbrance?

An encumbrance is a university accounting method that reserves funds for an anticipated expense. The encumbrance transaction shows an outstanding commitment by the institution. Funds are encumbered when an individual is appointed, or a purchase order is issued.

The purpose and main benefit of encumbrance accounting is to avoid budget overspending by showing open commitments as part of projected expenses and free balances. Encumbrances are an important tool in determining funding availability on projects.

The accuracy of the projected labor encumbrance entirely depends on how accurate the labor distributions that generate the encumbrances are. The greater the degree of specificity indicated in the end date of a labor distribution, the greater the degree of utility of labor encumbrance projections in assessing a balance that takes into account encumbrances.

What is a budget?

The budget is the financial representation of the scope of work of a project.

As the budget is a reflection of the work that is proposed, a good budget at the proposal stage is one that is well referenced and consistent in its consideration of costs associated with a proposed project. If the scope of the project changes after a project has begun, the onus is on the faculty to re-budget the project (usually after seeking and receiving permission to do so from the funder).

Determined by the funding entity, and specified formally via an 'Award Letter' prior to the start of an award, the budget is a representation of the total dollars available to be spent by the Lead PI during the 'Period of Performance'. The subcategories of the budget indicate the total available to be spent in each budget category.

What are budget categories?

Within the context of Sponsored Projects (and the iO subledger where they are managed), there are eight potential budget categories against which the budget of each award is budgeted.

Salaries & Wages (Faculty, Staff, Post Docs, Graduate Students, Undergraduates doing paid work)

Fringe Benefits (Rate-determined labor costs to the university associated with Salaries and Wages)

Equipment (Non-expendable capital item of a value greater than $5k per unit)

Travel (Direct costs associated with travel)

Other Direct Costs (Direct costs that are not appropriate to include in any of the other defined cost categories)

Subawards (Project work transferred to another organization under a Contract, Grant or Cooperative agreement)

Tuition Remission (Fee remission for Graduate Student Research Assistants)

Facilities and Administrative Costs (Rate-determined institutional expenditures that cannot be readily connected to a particular sponsored project)

Interpreting Balances

Given the various ways in which a balance can be calculated, there is potential for both communication and for interpretation misunderstanding.

When one looks at a standard iO balance, know that there are two main areas of potential uncertainty involved that can render like-for-like comparisons between awards incorrect.

Budget
What does the iO 'Budget' column actually represent? Is it subject to caveats or imminent changes?
Encumbrance
What does the encumbrance column actually represent, and in particular the labor encumbrance column(s)? Are they a reliable projection?

What does the budget value in iO SPFF Represent?

Prior to considering some of the encumbrance-related factors that might influence the interpretation of a budget, it is important to make sure that factors pertaining to the budget value shown in iO are understood. Primary among these is to understand the difference between obligated budget and anticipated budget.

Obligated Budget

The budget shown in iO SPFF is the current 'obligated budget'.

An 'obligated budget' is the amount of funds that a project's sponsor has authorized for a specific period of time that can be spent on that project.

Typically a funder will issue 'continuation' amendments over the course of the award.

These amendments will obligate additional budget and/or extend the corresponding period of performance relative to which the budget may be spent.

Each continuation amendment is additive to all prior increments to form a cumulative 'obligated' budget total.

The key point here is that budget values are rarely static in iO across the course of an award. When looking in SPFF, one does not have any indication of the proportion of the anticipated budget that has been obligated. The process of moving and allocating obligated budget to intended projects is called 'rebudgeting' and it is not automatic. At present, there is no representation or record of rebudgeting actions in iO SPFF.

Anticipated Budget

When a sponsor wishes to fund a proposal, it will issue a 'notice of award'. The total budget amount indicated in this notice is considered to be the 'anticipated budget'.

Both the 'anticipated budget' and the 'obligated budget' are indicated within the corresponding Cayuse project record.

A funder will issue 'continuation' amendments until the 'obligated budget' matches the 'anticipated budget'. On occasion, a funder may obligate the full 'anticipated' budget at the outset of the award.

Note: A funder may also issue a different type of 'supplement' amendment which has the effect of increasing both the 'anticipated budget' and the 'obligated budget'.

How does this knowledge impact the interpretation of a balance in iO?

In practice, what the above means in terms of interpreting balances, is that it is necessary to understand what is expected from a funder in terms of their schedule for issuance of future amendments to the budget amount (i.e. the 'obligated budget' total), or to the period of performance (i.e. moving the project end date into the future).

If one does not know these things then an evaluation of a balance may only function at a two-dimensional 'snapshot' level.

In order to conduct a meaningful analysis, one should also understand these additional dimensions and factor them in.

Example scenario. Increases to obligated budget total via 'continuation' amendments

If a proposal to a funder is for $5M total across a five-year period, and the funder issues a corresponding award letter ('notice of award') indicating the intention is to prospectively fund the proposal in full, then the total anticipated budget is $5M.

The funder may issue $1M for the first 12-month budget period (months 0-12) for the award along with (or sometimes separately from) this original award letter.

So, in this scenario, the following has happened.

Anticipated Budget = $5M
Obligated Budget = $1M (for project months 0 through 12)
Unobligated Budget = $4M

A subsequent 'continuation' budget amendment may be issued by the funder to coincide with the second 12 months (months 13-24) of the award. If the awarded continuation budget amendment is once again $1M then the following becomes true at that point.

Anticipated Budget = $5M
Obligated Budget = $2M (for project months 0 through 24)
Unobligated Budget = $3M

The important thing to understand is that 'continuation' amendments are additive in nature.

The combined sum of such amendments is the 'obligated budget' total, and may be subtracted from the 'anticipated budget' to determine the 'unobligated budget' that may (or may not) go on to be issued via future award actions.

Example scenario. Assigning obligated budget to a project

The budget received from the funder is $1M for the specified budget period (months 0-12).

Assuming that the award only has one project (base project), and that the incoming budget will be added correspondingly.

Budget for Months 0-12 = $1M

Salaries & Wages $458,962
Fringe Benefits $116,118
Equipment $100,000
Facilities and Administrative Costs $324,920
Total $1,000,000

Towards the end of this budget period, a 'continuation' amendment is then sent to Rice that obligates a further $1M for budget period 2 (months 13-24) of the award.

This incoming budget will be assigned additively to existing categories on the base project via a rebudget action. No additional Equipment budget is proposed for budget period 2. The budget for period two is spread across Salary, Fringe, and F&A only.

Budget for Months 13-24 = $1M

Salaries & Wages $509,958
Fringe Benefits $129,019
Equipment $0
Facilities and Administrative Costs $361,022
Total $1,000,000

After this second budget action, the base project will show category budgets as follows:

Budget for Months 0-24 = $2M

Salaries & Wages $968,920 ($458,962 + $509,958)
Fringe Benefits $245,137 ($116,118 + $129,019)
Equipment $100,000 ($100,000 + $0)
Facilities and Administrative Costs $685,942 ($324,920 + $361,022)
Total $2,000,000

What does the encumbrance value in iO SPFF Represent?

Encumbrances in iO show projections of both direct costs and associated indirect costs.

Encumbrances are either associated with projected non labor cost or projected labor costs.

Non Labor Encumbrances

Non Labor encumbrances are the costs that are projected for non-labor goods or services.

The data associated with a non labor encumbrance is held within a Purchase Order (PO).

A purchase order can be generated to a certain dollar amount, and it contains the information about either the general COA or the subledger project location where the charge is anticipated. The purchase order also specifies the anticipated Expenditure Type (link to glossary) or account code combination.

The supplier of the non labor good or service, submits an invoice for payment and this invoice is then matched with the PO. Invoices are matched to purchase orders to verify that the information is correct prior to payment. Once the invoices have been matched, and instruction for payment has been sent, the encumbrance transforms into an actual cost.

Types of Non Labor Encumbrance, and what each is comprised of

OTHER DIRECT COSTS

ODC

F&A

(calculated at sum of ODC x F&A rate)

TRAVEL

Travel

F&A

(calculated at sum of Travel x F&A rate)

EQUIPMENT

Equipment

(Equipment >$5k does not generate F&A)

SUBAWARDS

Subawards

F&A

(Up to $25,000 per subaward x F&A rate)

PARTICIPANT SUPPORT

Participant Support

(check sponsor policy but usually does not generate F&A)

When searching the commitment detail dashboard in iO, the full value of the PO (including the dollar value of correspondingly calculated F&A will be incorporated within the direct cost amount only.

It is important to be aware of this factor when reviewing individual PO information, or commitment details in SPFF.

Note that within the Budget to Actuals tab in SPFF, and also within the Excel Award Monitoring tool, the F&A component of a non labor encumbrance is calculated and the encumbrance components are split to a direct and indirect elements accurately.

Example Scenario. Non Labor Encumbrance in Budget to Actuals vs Commitment Detail

Let's say we have a project where a student puts in an order for $1000 worth of a specific supply material (Other Direct Costs).

A Purchase Order is generated with the instruction for $1000.

The Purchase Order that is created will create a total encumbrance to the project that is equivalent to the value of the Other Direct Cost ($1,000) plus the value of the Indirect Cost that the purchase order will generate should the purchase order be matched and paid in full ($565)

Other Direct Cost = $1,000
Indirect Cost (56.5% of Direct Cost) = $565
Combined Direct and Indirect Cost = $1,565

In the Budget to Actuals dashboard, and in the excel monitoring tools available on this site, this will be represented as

Other Direct Cost = $1,000
Indirect Cost = $565

In the Commitment Detail dashboard this will be represented as

Other Direct Cost = $1,565

In short, be aware that the commitment detail dashboard will show the full calculated encumbrance, but it will not apportion the component of if that is indirect.

Labor Encumbrances

Labor encumbrances are a calculated estimate of future labor costs.

There are several factors involved in this projection and these factors are determined by the specific category of salary or wage that is due to be received by an individual

FACULTY

Salary (Direct)
Fringe Benefit (Direct)
Sum of Salary x Fringe Benefit Rate
F&A (Indirect)
Sum of Salary and Fringe x F&A rate

POST DOCS

Salary (Direct)
Fringe Benefit (Direct)
Sum of Salary x Fringe Benefit Rate
F&A (Indirect)
Sum of Salary and Fringe x F&A rate

STAFF

Salary (Direct)
Fringe Benefit (Direct)
Sum of Salary x Fringe Benefit Rate
F&A (Indirect)
Sum of Salary and Fringe x F&A rate

GSRAs

Salary (Direct)
Tuition Remission (Direct)
Sum of Salary x Tuition Remission Rate
F&A (Indirect)
Sum of Salary x F&A rate

UNDERGRADUATES

Salary (Direct)
Fringe Benefit (Direct)
Sum of Salary x Fringe Benefit Rate
F&A (Indirect)
Sum of Salary and Fringe x F&A rate

How to factor in Non Labor Encumbrances when evaluating a balance?

When labor costs are encumbered to a project in iO, there are several factors that impact the calculation.

1) The line % allocated to the project.

2) The period of the encumbrance (i.e. the window of time between the start date and the end date specified on the labor distribution instruction.

If there is no end date, then the iO system will default to using the end date of the project.
- If this is not a good prediction of end date and one expects the labor distribution to conclude or change before project end date then the encumbrance will be inaccurately projected and impact the interpretation of the balance.
If the end date of the project is not aligned with the period of performance for the obligated budget against the project, then the absence of an end date will lead to an inaccurate projection, even if the end date for the labor distribution is left unbounded with a date to reflect an intention for the labor distribution to be assigned through project end.

Much confusion in the appropriate interpretation of balances can be mitigated through the consistent use of well-considered end dates for labor distributions. Being able to do this requires good award knowledge, and good tools for tracking the current and potential future labor encumbrances of staff.

Management of an Obligated budget

Many funders require the award recipient to submit programmatic and/or financial reports at specified intervals to indicate indicate progress or completion of milestones. The successful completion of this process being a factor that triggers issuance of the next budget 'continuation' amendment.

This process sequence has an administrative purpose. It enables funders to apply some oversight and control over the way that the award is being managed. Where such management sequences exist, non compliance with them may result in the funder prematurely calling an end to the award.

Management of Obligated Budget

Once obligated, the funds are available for disbursement, or drawdown. Put another way, obligated funds can be spent and the corresponding costs can be billed to the funder.

Obligated budget also becomes eligible for assignment to projects within an award. The standard procedure is that it will be added to a holding project for the award, from which it can be re-allocated to the projects within an award. This process is known as 'rebudgeting' and is an extremely important step in award management as it determines the category and project level budget allocations, against which actual and projected costs are subtracted to determine the balances shown.

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