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Indirect Cost Negotiation for RDO’s

NADO Annual Training Conference

October 18, 2016Bob Lloyd, Presenter

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The Topic of Indirect Costs

• Widely misunderstood by--- Some (or many) awarding agency staff--- Some (or many) recipient program staff--- Most of the media--- Most elected officials--- Foundation and corporate funders• The folly of comparing indirect cost rates

(“The Overhead Myth”)

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Related Terminology

• (F&A) Facility and Administrative Costs• Overhead Costs• “Back Office” Activities• “Rear Echelon Troops”

• Program vs. Administrative Costs

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The “Real Things”• Direct Costs: Those that can be specifically identified with a

particular final cost objective (such as a particular award, project, service, or other activity of an organization).

• Indirect Costs: Those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective (without effort disproportionate to the benefit received).

--- A term of “accounting convenience”

• Indirect Cost Allocation Plan: A document that identifies, accumulates, and distributes indirect costs to benefiting organizational units and activities.

• Indirect Cost Rate: A device used to determine what portion of an organization’s indirect costs each activity (such as U.S. Government awards) should bear and employed in lieu of separately negotiating that portion of indirect costs with each awarding agency.

Total Recovery under a Federal Award

• Allowable Direct Costs PLUS• Allocable Indirect Costs MINUS • Applicable Credits

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Federal Concerns about Indirect Costs

• Overcharges Resulting from Multiple Negotiations with Individual Agencies

• Charges Skewed in Their Direction• Unreasonable Charges• Cost Containment

Common Issues in Indirect Cost Audits

• Inaccurate Effort Reporting• Inconsistent Cost Treatment• Unallowable Activities Not Burdened• Applicable Credits Not Posted• Fees on Inter-organizational Transfers• General Documentation Weaknesses

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Recipient and Subrecipient Concerns

• Complexity of policies and absence of guidance and technical assistance

• Federal awarding agency failure to recognize federally negotiated rates

• Federal reluctance to get involved with subrecipient indirect costs

• Pass-through entity failure to recognize federally negotiated rates

• Pass-through entity refusal to accept rates unless negotiated with a federal agency

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OMB’s Grant Reform Initiative

• Previous Regime: Eight Circulars Plus One Directive Affecting Three Sets of Performers; Three Cost Circulars with Separate Indirect Cost Recovery Policies

• Consolidate, Harmonize, Simplify, Reduce Burden

--- Key Policy Areas Addressed: Subrecipient Management and Monitoring; Effort Reporting; Indirect Cost Recovery

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Cost Principles Changes

• Consolidation (2 CFR 200, Subpart E)• Still a “Bridge Too Far”• Retention of General Policies (with Some

Word Changes)• Changes to Selected Items of Cost (2 CFR

200.420-475)--- Documentation of Personnel Costs (2

CFR 200.430(i))10

Key Changes Affecting Indirect Cost

• Relocation of Indirect Cost Proposal Procedures for Governmental Entities (Appendices V-VII)

• Roles for IDC Cognizant Agency on Effort Reporting and Performance Based Awards

• Instructions for Governmental Entities (2 CFR 200.413)

--- Recognition of Organizational Diversity• Changes Requiring Indirect Charging of Certain

Costs

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Key Changes Affecting Indirect Cost Rate Recognition

• Required Federal Recognition of Federally Negotiated Rates

--- Management of Exceptions• Required Recognition of Subrecipient

Indirect Costs--- Acceptance of Federally Negotiated Rates--- Pass-through Entity Negotiation of Rates--- Use of De Minimis Rate (10% of MTDC)

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Who Should Prepare the Plan and Rate?

• In-house vs. Outside Assistance• Specific Restriction affecting Audit Firms--- 2 CFR 200.509(b)• Possible Auditor Role in Certifying Final

Rates

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What Guidance Should They Use?

• 2 CFR 200, Subpart E and Appendices V-VII• COFAR FAQ• Indirect Cost Determination Guide, U.S.

Department of Labor (January 2015)• Other Materials (with some caution)--- DHHS “Sample Proposal Format”--- DHHS, “State and Local Government

Guide (OASMB C-10)”

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Federal Indirect Cost Cognizance

• The Cognizant Agency for Indirect Cost Negotiation

• Translation: A “knowledgeable” agency to take the lead because it has more at risk; a unit in the U.S. government agency that provides the greatest amount of U.S. government awards

• Not to be confused with the Cognizant Agency or Oversight Agency for Audit (the OIG of the predominant U.S. government funding agency)

No Matter What…Take These Steps!

• Review the new cost principles • Use 2 CFR 200.421-475 as a template and add

expense categories not mentioned, if necessary• Develop a “cost policy” statement--- Exhibit F. DOL Guide• Prepare an indirect cost allocation plan• Calculate rate(s)• Certify the rate• Be prepared to have the rate audited

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Your Process• Review Organizational Structure• Review Accounting System• Review Current Federal Funding• Document Cost Policies• Prepare Indirect Cost Allocation Plan• Calculate Indirect Cost Rate • Submit or Retain Rate Documentation• Negotiate Rate and Obtain Agreement• Prepare Claims on Federal Awards• Audit

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Organizational Review and Description

• The Financial Reporting Entity• Affiliates• Off-site Locations• Central Services vs. Operations

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Review of Federal Funding

• Which Agency Should Be Approached?--- Initial Contact?• Configuration of Prime Awards vs.

Subawards?• Any Properly Imposed Restrictions on

Indirect Cost Recovery?

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Review Accounting Structure• Chart of Accounts• Relationship of Organization Structure to Chart

of Accounts• Flow of Services• Tying Costs to Functions

• Depreciation on Owned Assets that Benefit Federal Awards

--- Useful Life • Specialized Service Centers/Recharge Centers

Cost Policy Statement

• Detailed description of all cost elements contained in an indirect cost rate proposal and the consistent cost allocation methodology (direct vs, indirect) that will be used.

• Example: Materials and supplies

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Exclusions from IDC Pool

• Costs Already Paid for By U.S. Government

• Unallowables (Complete or Partial)

--- Fundraising--- Interest on Borrowed Capital--- Advertising and Public Relations--- Bad Debts--- Contingencies--- Contributions and Donations--- Entertainment--- Fines and Penalties--- Lobbying--- Uninsured Losses--- Losses on Other Federal Awards--- Defense or Prosecution of Government Related Claims

• Distorting Factors (Capital Expenditures)

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Determining Allocation Bases• No “Mandatory” Bases• Budgeted Amounts May Not be Used• Readily Available• Most Equitable• Federal “Suggestions” (Exhibit E, DOL Guide)

• Importance of Up-to-Date Data and Studies• Balancing Effort of “Cost Finding” Against a

Greater Degree of Accuracy

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Calculation Options for Governmental Organizations

• Simplified Method• Multiple Allocation Bases

• Display of the Calculations• Section III, DOL Guide

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Calculating the Rate

Allowable, Allocable Indirect Costs ___________________________ = ___%Selected Direct Cost Base

* Note—Base must include cost items excluded from IDC pool (e.g., fundraising)

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Submission or Retention of the Documentation

• Documentary Support--- Organization Chart and Description----- Affiliated Organizations----- Off-site Locations--- Audited Financial Statements/Executive Budget--- Standard Certification (2 CFR 200, Appendix IV,D)--- Cost Policy Statement--- Narrative Descriptions of Indirect Cost Pools--- Items of Expense--- Methods of Allocation/Distribution--- Summary Schedule of Rate Components

Additional Documents Needed?

• Description of Operation of Internal Service Funds/Recharge Centers

• Description of Self-Insurance Funds• Description of Fringe Benefit and Pension

Plans

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Cognizant or Awarding Agency Review

• Timely Submission?• Initial Negotiation or Renewal?--- Prior Negotiations--- Advance Understandings• Coordination with Other Agencies?• Documentation Check?--- Reliability• Financial Capability?• Comparative Analysis

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Review (continued)

• Cost Allowability (Exclusion of Unallowables)• Cost Allocability• Consistent Treatment• Proper Calculation for Use of Capital Assets

Obtained Using Own Source Revenue• Fringe Benefits

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Review (continued)

• Allocation Bases--- Bases Suggested in Federal Guidance--- Alternatives--- Equitable?--- Inclusive of All Activities?--- Timeliness of Data (Square Footage;

Staffing Levels (FTE); Transactions, etc.)• Arithmetic

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Negotiation, if Necessary

• Possible Issues--- Unallowables--- Changes in Accounting Treatment--- Appropriateness of Allocation Bases--- Explanation of Cost Escalation• Submission of Additional Data• Possible Unilateral Action by Cognizant or

Awarding Agency

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Elements of a Rate Agreement• Rates--- Type--- Effective Period--- Percentage--- Location--- Applicability• Limitations• Changes• Notification• Special Provisions

• Sample: Appendix II, DOL Guide

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Issuance of a Rate Agreement

• Types of Rates--- Provisional/Final--- Predetermined--- Fixed Rate with Carry-Forward--- Temporary “Billing” Rate• Multiple or Off-site Rates

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How the Rate Agreement is Used

• The Grant Application or Contract Proposal• Expenditure of Funds--- Applying the Rate to the Proper Base----- Capital Expenditure Exclusion----- Partial Subgrant and Subcontract Exclusion----- Participant Support Cost Exclusion--- Handling a Rate Change at Midstream of an

Award (e.g., two fiscal years/periods)• Reporting of Claims--- SF425--- SF 1034

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Audit of Rates

• Subpart F of 2 CFR 200 and the OMB Compliance Supplement

--- When a NICRA is Present--- When a NICRA is Not Present--- Auditor Role in Calculation of Final Rates

(if necessary)• Federal Audit