What to Know About F&A Optimization for Your Institution

February 14, 2022

Capital Asset Management
What to Know About F&A Optimization for Your Institution

The asset verification process is often one of the hardest requirements to accurately fulfill due to limited organizational resources. Most departments do not have the resources to invest in a complete inventory verification and reconciliation process every two years. The resulting inaccuracies can lead to audit exposure and have a direct impact on the Facilities and Administrative (F&A) rate. 

What is the F&A proposal submission and negotiation process? 

The F&A proposal submission and negotiation process defines the amount of indirect cost that institutions receive as reimbursements from the federal government for the cost of conducting research. 

Capital assets include two significant components of the uncapped facilities portion of your F&A proposal: equipment and building depreciation.

Equipment Depreciation

For the equipment component, typically the most favorable allocation is to claim depreciation at the room level. When institution-funded equipment is identified accurately to a room, there is no disagreement that the corresponding depreciation will be allocated per the function/activity of the room. Federal auditors from cognizant agencies will often walk the space to verify equipment as part of the F&A negotiation process. Mismatches that exist between equipment and space location records must be investigated and resolved. 

Since most facilities allocation methods rely on space survey results, functional percentages used to code the space must also be defensible. Acceptance of the room-by-room equipment depreciation methodology is predicated on the institution demonstrating that the location of the equipment identified to the room inventoried is accurate.

Building Depreciation 

Building asset records can be optimized for depreciation recovery in the F&A proposal.  Common mistakes include inconsistent asset lives and inconsistent capitalization methods. Uniform Guidance 2 CFR 200 allows for the segregation of construction costs into Building Shell, Building Services, and Fixed Equipment.  Refer to Section “2 CFR § 200.436 – Depreciation” for the details of what is allowed in building componentization. There are several reasons to segregate the construction costs of facilities:

1. Accurately reflect the useful life of the component. For example, the interior flooring will not last as long as the exterior brick.  Just as the roof cover will not last as long as the building foundation.  Segregating these components provides an accurate financial representation of amortizing costs over the period the benefit of the component is received. 

2. Easily identify retirements when renovations occur. If a building roof cover is replaced, instead of attempting to estimate the portion of the original construction costs for the roof, the accountant simply retires the original roof component and adds the new roof cover costs.

3. Inventoried fixed equipment, which is treated as a component of the building, can be allocated to the room level. Reviewing the new construction and allocating a portion of the construction costs to the installed fixed equipment allows for an inventory of equipment such as fume hoods, sterilizers, and cold rooms to the physical room of installation. Typically, this equipment will have a much shorter useful life than the other construction components. The federal government accepts a 15-year depreciable life.

4. Accurate useful life analysis through the data. Analysis can be done periodically to validate if the useful lives assigned are consistent with how often replacements are occurring. In some environments, roof replacement may occur more often depending on storm exposure, or an HVAC system may not last as long depending on temperature variances. Reviewing the data provides averages for each institution as to how long the components are providing the benefit.

5. Capital Planning. By utilizing the useful life analysis and the fixed equipment inventory, facilities management and capital planning groups can gain insight into upcoming needs and potential facility replacement or renovation requirements. This data can also be compared to industry standards or peer institutions to see if facilities are being extended beyond industry averages.

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