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Indirect Cost Rates

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Trainer: Karl Eck, CPA, Senior Manager

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Agenda

• What an indirect costs are

• What an indirect cost rate is

• Indirect cost distribution bases

• Costs to include in the indirect cost pool

• Types of indirect cost rates

• Negotiation and approval of indirect cost rates

• Changes from 2 CFR Part 200 (The Super Circular)

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Common questions• Am I required to have an indirect cost rate?

– Answer: No

• How about under 2 CFR Part 200?– Answer: Probably not, or at least not yet

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Indirect Costs…..What are they?• Indirect costs are those that have been incurred

for common or joint objectives and cannot be readily identified with a particular final cost objective

• Examples include: Executive Director, rent for administrative space, phone, utilities, etc.

• Equipment and other capital expenditures are unallowable as indirect costs but costs can be recovered through depreciation

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Indirect Cost Rate• A ratio, expressed as a percentage, of the

indirect costs (pool) to a direct cost “base”.

• The base is usually total direct costs (excluding capital expenditures and other distorting items) or direct salaries and wages.

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Total organization indirect costs 835,000$ ÷

Total organization direct salaries 8,000,000$

Indirect cost rate 10.4%

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Applying an Indirect Cost Rate

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Grant period 07/01/12 - 06/30/13

Calendar Year Ended

12/31/2012 12/31/2013 Total

Direct cost base 400,000$ 500,000$ 900,000$ X X

Indirect cost rates 10.0% 15.0%

Indirect costs 40,000$ 75,000$ 115,000$

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What an indirect cost rate looks like in a perfect world

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Federal Federal Federal State Fund-raising For-Profit Indirect CostGrant 1 Grant 2 Grant 3 Grant Events Activity Discretionary Pool Total

Salaries 3,457,895 1,413,978 2,804,387 640,752 18,406 9,204 205 743,945 9,088,772 Fringe benefits 1,469,248 834,801 1,604,789 248,904 8,297 3,004 94 307,823 4,476,960 Supplies 365,087 36,484 930,481 34,057 483 5,804 236 23,841 1,396,473 Occupancy 168,974 46,089 143,657 21,042 102 810 45 209,871 590,590 Travel 56,048 60,787 304,897 10,564 35 724 130 65,412 498,597 Other 190,487 100,291 841,098 18,467 209 2,105 657 80,741 1,234,055 Indirect expenses 593,234 242,581 481,119 109,927 3,158 1,579 35 (1,431,633) -

Total 6,300,973 2,735,011 7,110,428 1,083,713 30,690 23,230 1,402 - 17,285,447

NOTE: based on direct salaries, actual rate is 17.16%

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Indirect Costs

What an indirect cost rate looks like in the real world (sort of)

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Federal Federal Federal State Fund-raising For-Profit Indirect CostGrant 1 Grant 2 Grant 3 Grant Events Activity Discretionary Pool Total

Salaries 3,457,895 1,413,978 2,804,387 640,752 18,406 9,204 205 743,945 9,088,772 Fringe benefits 1,469,248 834,801 1,604,789 248,904 8,297 3,004 94 307,823 4,476,960 Supplies 365,087 36,484 930,481 34,057 483 5,804 236 23,841 1,396,473 Occupancy 168,974 46,089 143,657 21,042 102 810 45 209,871 590,590 Travel 56,048 60,787 304,897 10,564 35 724 130 65,412 498,597 Other 190,487 100,291 841,098 18,467 209 2,105 657 80,741 1,234,055 Indirect expenses 593,234 242,581 481,119 109,927 3,158 1,579 35 (1,431,633) - Indirect transfers - (101,183) - (109,927) - - 211,110 - -

Total 6,300,973 2,633,828 7,110,428 973,786 30,690 23,230 212,512 - 17,285,447

NOTE: based on direct salaries, actual rate is 17.16%NOTE II: Federal grant 2 is charged net indirect expenses of $141,398 because of a limit on indirect in the grant budget, state grant does not allow any indirect and therefore has a net charge of $0.

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What are the advantages of an indirect cost rate agreement?• Provides for one method to allocate almost all

administrative costs

• Potentially can make budgeting easier – direct salaries might be easier to estimate than the number of transactions finance will perform

• Rate and method are federally approved

• You still likely will have to do some cost allocation.

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What are the disadvantages of an indirect cost rate agreement?• Rate and method are federally approved –

subject to individual cost negotiator preferences

• May lose some flexibility in how you determine the manner in which programs are charged for administrative costs

• Typically need to finalize and approve the rate every year

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Distribution bases for indirect cost recovery:• Total direct costs (excluding capital

expenditures and other distorting items, such as major subcontracts or subgrants)

• Direct salaries and wages

• Other base that results in equitable distribution

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What is the best distribution base? Depends on your organization.

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Program A Program B

Direct Salaries 4,000 1,000 Other Direct Expenses 1,000 4,000

Indirect Expenses 1,000,000 Total Expenses 5,000 5,000 Total Direct Expenses 10,000,000

Indirect rate 10% Direct Salaries 4,000 1,000 Direct Salaries Indirect Rate 20% 20%

Indirect Expenses 1,000,000 Total Direct Salaries and Wages 5,000,000 Indirect Charged to Program 800 200

Indirect rate 20%Direct Expenses 5,000 5,000

Direct Expenses Indirect Rate 10% 10%

Indirect Charged to Program 500 500

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Total direct costs:• Excludes subcontracts and sub awards over

$25,000

• Equipment/capital expenditures

• Participant support costs

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2 CFR 200.407 – Prior written approval (prior approval)

In order to avoid subsequent disallowance or dispute based on unreasonableness or nonallocability, the non-Federal entity may seek the prior written approval of the cognizant agency for indirect costs or the Federal awarding agency in advance of the incurrence of special or unusual costs.

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Executive Director

Finance Director

Toner

Utilities

AP Clerk

Paper

IT Director

Maintenance

Travel

Software

Board costs

Training

Independent Auditor Funding

Sources

Division of Cost Allocation

What’s in Your Pool?

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What to include in the base• Total direct costs for all activities that benefit the

organizations indirect costs

• This would include certain unallowable costs such as fundraising

• Also includes programs that do not allow for indirect charges

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DCA FAQ:Question # 6: What is the primary issue the DCA

faces when receiving indirect cost rate proposals?

Answer: The primary issue usually falls into one of two categories. The documentation submitted to support the development of the indirect cost rate is not adequate and/or the proposal is not reconciled to the organization’s audited financial statements.

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Indirect CostsDCA FAQ:Question # 12: What should a grantee do when an award does not

provide for indirect cost reimbursement or provides for indirect costs at a rate lower than the one in the negotiation agreement? How does this effect the development of the indirect cost rate?

Answer: The decision to accept an award that does not pay indirect costs or pays indirect costs using a rate lower than what has been negotiated is a grantee decision. However, when developing the indirect cost rate, all awards, regardless of whether they pay full indirect costs or not, must be included in the direct cost base.

Indirect costs that are not reimbursable under a Federal or non-Federal award due to administrative or statutory restrictions may not be shifted to another Federal award unless specifically authorized by Federal legislation or regulation. Non-Federal revenue sources must be used to pay for these un-recovered costs. 18

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DCA FAQ:Question # 13: Our grant with HHS totals $500,000 and includes a

provisional indirect cost rate of 10%. Our final indirect cost rate is 13%. Will HHS provide us with additional grant funds due to our higher indirect cost rate?

Answer: HHS will not provide your organization with additional grant funds due to a higher final indirect cost rate than the established provisional rate. However, a grant modification may be allowed to transfer budgeted direct costs to the indirect cost category due to the increased indirect costs.

This would be subject to the terms and conditions of the grant agreement, e.g. approval of grant officer, indirect cost ceilings, and administrative cost limitations. The grants officer should be contacted for additional information.

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DCA FAQ:Question # 14: Can our indirect cost rate proposal be

developed using only Federal funds since it only represents 15% of our total revenue?

Answer: No. An indirect cost rate proposal must be based on total organization costs, regardless of funding.

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Types of indirect cost rates• Provisional Rate

– Temporary rate established for a given period of time pending the establishment of a final rate for that period

– It is very important to budget accurately with a provisional rate

• Final Rate– Permanent rate established after the organization’s

actual costs are known – Used to adjust indirect costs initially clamed based

on provisional rates

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Types of indirect cost rates (cont.)• Predetermined Rate

– A permanent rate established for a specific future period

– Not subject to adjustment except in very unusual circumstances

– Will lose money if the rate is too low– Could generate a profit if the rate is high enough

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Types of indirect cost rates (cont.)• Fixed Rate With Carry-Forward Provision

– Permanent rate with the same characteristics of a predetermined rate, however, the difference between the estimated an actual costs is carried forward into the next year

– If the rate is too low, you will have to use unrestricted cash to cover the shortfall until the rate is revised upwards

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• Most often we see nonprofits are issued a provisional indirect cost rate

• The DHHS guide for indirect cost rates states“Organizations are encouraged to use either predetermined rates or fixed rates with carry forward provisions where feasible and permissible under law and regulation. These rates permit a more timely closing of complete awards and generally eliminate the necessity making retroactive adjustments on individual awards as would be the case when provisional and final rates are used.”

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Provisional Rate Timeline• Grant end date – March 31, 2014

• Agency year-end – December 31, 2014

• Indirect proposal due date and submitted – June 30, 2015

• Final rate received – September 30, 2015??

• In this scenario, 18 months have passed since the grant ended – do you and your funding sources want to make changes?

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Provisional Rates• Budgeting is critical as the provisional rate will

be finalized later at the actual rate• Since many grants are closed, it is not desirable

to refund funds back to funding sources on closed grants

• Even more difficult to obtain more money on a closed grant

• We recommend obtaining a sufficiently high rate and adjusting to the final rate during the year

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Provisional Rates (cont.)• Some are getting provisional rates at the prior

year final rate• Can you charge more than your provisional

rate?

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Indirect Allocation Methods• Simplified – after making adjustments for

unallowable costs, a single rate is computed by dividing the indirect costs by the costs of direct functions or activities

• Multiple – where an organizations indirect costs benefit its major functions in various degrees

• Special – when a particular segment of work is performed in an environment which appears to generate a significantly different level of indirect costs, provisions should be made for a separate indirect cost pool applicable to such work

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How to get an indirect cost rate if you do not have one• First, you need a direct federal grant that

mandates and indirect rate, otherwise the feds likely will not approve an indirect rate

• Submit a proposal to your cognizant agency– Cognizant agency is the department that provides

your organization with the most direct federal funding

– If the cognizant agency is DHHS, the proposal is submitted to the Regional Division of Cost Allocation (DCA) responsible for your geographical area

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How to get an indirect cost rate if you do not have one (cont.)• If you do not have direct federal funding, then it

is up to the agency that provides the most indirect federal funding– Most non-federal entities are hesitant to award

indirect cost rates to their subrecipients but may change with 2 CFR Part 200

• If you already have an indirect cost rate– Due 6 months after the end of your fiscal year, you

can request an extension under extenuating circumstances

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What to submit with your proposal• Must be accompanied by and cross referenced

to your independently audited financial statements

• If a rate is based on future projected costs, the rate must be cross-referenced and reconciled to the organization’s budget for that year

• Approximate amount of direct cost base costs incurred under federal awards

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What to submit with your proposal (cont.)• Fringe benefit information

– A listing of the fringe benefits provided to the organization’s employees

– A copy of the organization’s fringe benefit policies– A description of the method(s) used to budget and

charge fringe benefit costs to programs or activities– The funding practices of a “defined benefit” pension

plan along with the treatment of prior service costs and actuarial gains and losses

– If a fringe benefit rate is used, reconciled and cross referenced to the organization’s financial statements

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Approval of Rates• DCA will approve an indirect cost rate(s) with

the organization• In some cases, DCA may request an audit of

the proposal before the rates are approved• Approval will be formalized by a Rate

Agreement signed by the DCA and an authorized representative of the organization

• Rate Agreement will include the type of rate, base used and other general terms and conditions

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Indirect CostsApproval of indirect cost rates with subgrantees

and subcontractors• Prime contractors and grantees are responsible

for approving indirect cost rates

• Approvals must be based on the federal cost principles

• The procedures followed by the grantee or contractor in evaluating the subawardee’s indirect cost proposal and approving the rate should be should be documented and are subject to review

• Upon request, DCA will provide technical assistance

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Disputes• DCA will make an unilateral determination of

the rate(s) considered acceptable by the Department and will notify the organization of the determination

• DCA will also advise the organization of its right to appeal the determination and the appeal procedures to follow

• The organization may appeal the determination under either the Department’s Grant Appeals Regulations (45 CFR, Parts 75 and 16) or the disputes provision of affected contracts

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Resources to help you:• Many indirect cost links are on our NGP website

• https://rates.psc.gov

• Your auditors

• Federal agency websites

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Indirect cost rates and your auditors:• OMB Circular A-133, Sec. 305

– An auditor who prepares the indirect cost proposal or cost allocation plan may not also be selected to perform the audit required by this part when the indirect costs recovered by the auditee during the prior year exceeded $1 million.

• Keep in mind Government Auditing Standards on independence as well – no management decisions

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Other matters to keep in mind• Not all programs allow for indirect costs or

some programs limit them – you need to determine what funds will cover those costs

• Generally, all activities need to be included in your indirect cost allocation plan, this would include any for-profit or fundraising activities in your organization

• There also is an option to allocate fringe benefit costs using a separate indirect cost rate for fringe benefits

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Changes from the super circular• Organizations that have never had an indirect

cost rate agreement can implement a flat rate of 10% of modified total direct costs (MTDC)– No approval is necessary– Required to disclose in your audit if you use or not in

the notes to your federal awards schedule– Must be consistently used once elected until the

entity choses to negotiate for a rate

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Indirect CostsChanges from the super circular (cont.)

• 200.413(c) – The salaries of administrative and clerical staff should normally be treated as indirect (F&A) costs. Direct charging of these costs may be appropriate only if all of the following conditions are met:

(1) Administrative or clerical services are integral to a project or activity;

(2) Individuals involved can be specifically identified with the project or activity;

(3) Such costs are explicitly included in the budget or have the prior written approval of the Federal awarding agency; and

(4) The costs are not also recovered as indirect costs.

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Changes from the super circular (cont.)• Any non-Federal entity can apply for a one-time

extension of a currently negotiated rate for up to 4-years.

• 200.431(b)(3)(i) - Payments for unused leave when an employee retires or terminates employment are allowable as indirect costs in the year of payment.

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Changes from the super circular (cont.)• Actual claims paid to or on behalf of employees

or former employees for workers' compensation, unemployment compensation, severance pay, and similar employee benefits (e.g., post-retirement health benefits), are allowable in the year of payment provided that the non-Federal entity follows a consistent costing policy and they are allocated as indirect costs.

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