how to develop indirect cost rates -...

How to Develop Indirect Cost Rates For Nonprofits with Federal Awards

Under the Super Circular

April 25, 2014

All slides © 2014, Rubino & Company, Chartered

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Presenter:Paul H. Calabrese Rubino & Company, CPAs & Consultants

Senior Manager Tel: 301-214-4137 [email protected] www.linkedin.com/in/pcalabrese

https://twitter.com/Paulcompliance

Sources

FAQ for New Uniform Guidance 2 CFR 200 Uniform Guidance 2 CFR 200 Statement of Functional Expense provided with

client permission HHS “Sample Indirect Cost Proposal Format for

Nonprofit Organizations”, Schedule C

Overview

Update / Impact of Super Circular Definitions of Direct Cost Allocations Definition of Indirect Cost Negotiation & Administration of Rates Types of Allocation Bases Simple, Multiple, Direct & Special Rates HHS SOFE Template for Indirect Rate

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Impact of the Super Circular

Super Circular 2 CFR 200When is it effective? COFAR FAQ:Q II-1 (2/12/14)

Federal agencies implement by 12/26/2014 Subpart F Audit Requirements become applicable

with audits of fiscal years beginning on or after 12/26/2014 or effectively 1/1/15 end 12/31/15

Administrative (pre/post award) requirements and cost principles apply on new awards or additional / incremental funding on or after 12/26/14

Existing awards before 12/26/14 follow existing terms and conditions which are covered by the prior OMB Circulars A-110, A-122, A-133 7

Super Circular 2 CFR 200When is it effective? COFAR FAQ:Q II-2 (2/12/14)

Non-Federal entities wishing to implement entity-wide system changes to comply with the “uniform guidance” (Super Circular) on or after 12/26/2014 will not be penalized by Federal agencies, in that they may still have older agreements covered by the prior OMB Circulars

FAQ Q III-5: Words in the uniform guidance: “Must” is a requirement. “Should” is a best practice or recommended approaches, COFAR wanted to bring to attention of non-Fed entities

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Subpart E Cost PrinciplesSuper Circular 2 CFR 200.400Fundamental Basis of Indirect Cost Recovery

Responsible for administering Federal funds consistent with terms and conditions, program objectives of award

Accounting practices must be: Consistent with cost principles Support accumulation of cost Adequate documentation to substantiate

costs charged to Federal awards Cost principles are used as a guide to price

fixed price contracts / subcontracts 9

Subpart E Cost PrinciplesSuper Circular: Cannot Keep Excess Funds

Requirement to account to the Federal government for actual costs incurred 200.401(a)(5) reverse logic where principles do not apply

May not earn or keep any profit 200.400 (g) The Non-Federal Entity (NFE) must promptly refund

any balances of unobligated cash that the Federal awarding agency or pass-through entity paid in advance or paid and that is not authorized to be retained by the non-Federal entity for use in other projects. 200.343(d)

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Subpart E Cost PrinciplesSuper Circular: Cannot Keep Excess Funds

The obligation of the Non-Federal Entity (NFE) to return any funds due as a result of later refunds, corrections, or other transactions including final indirect cost rate adjustments. 200.344 (a)(2)

The 10% de minimis rate: per 200.414(f) free lunch? Never received a negotiated indirect rate Charge on a modified total direct cost base May use indefinitely until negotiate an indirect rate Direct and indirect costs charged consistently but not

as both causing double-charging Use consistently on all Federal awards 11

Subpart E Cost PrinciplesSuper Circular: New Options

10% de minimis rate per 200.414(f) NFE has existing negotiated indirect rate:

One-time extension of current indirect rate For a period of up to 4 years If granted, cannot request a rate review until

extension period ends At end of 4 year period, must re-apply to

negotiate a new rate

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Direct cost allocation principle 200.405(d)

1. If cost benefits two or more direct programs2. In proportions that can be determined without

undue effort or cost3. Costs should be allocated to projects If 1 and 2 cannot determine proportions based on

interrelation of work involved, then allocated on benefited projects on a reasonable documented basis

Purchase of equipment or capital assets for a specific award are assignable to that award only regardless of use on other projects or no longer needed as acquired

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Direct charging of admin staff wages may be appropriate when all items are met: 200.413(c) Administrative services are necessary to a project Individuals involved can be specifically identified to a

project, such as time reports Administrative wages are included in the budget or prior

written approval from agency Such costs are not recovered as indirect cost

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Subpart E Cost PrinciplesSuper Circular: New Requirements

Unallowable activities and donated services receive allocation of indirect costs 200.405(b)

Costs allocable to a Federal award may not be charged to cover fund deficiencies to avoid restrictions in the regulations 200.405(c)

Limitation on allowable costs 200.408

If maximum amount allowable under a limitation is less than total amount determined, the delta is not recoverable and cannot be charged to another award 15


Payments made for costs determined to be unallowable must be refunded including interest to Federal government 200.410

Unallowable by Federal awarding agency Cognizant agency for indirect cost Pass-through entity Either direct or indirect unallowable cost

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Adjustments of previously negotiated indirect cost rates containing unallowable costs 200.411

Negotiated indirect cost rates later found to have costs:1. Unallowable specified by Federal statutes, regulations or

terms and conditions of a Federal award2. Unallowable as not allocable to Federal award(s) Must be adjusted for a refund Adjustments are used to correct established negotiated

rates Will not re-open for rate negotiation Applied to all types of rates: fixed, final, predeter, prov.17


Adjustments of previously negotiated indirect cost rates containing unallowable costs 200.411 For projected rates of a future year, the costs are

removed from cost pools and rates appropriated adjusted downward

For historical rates of a past period, the unallowable costs will be computed by fiscal year and a cash refund including interest

For current year rates, either a rate adjustment or refund per cognizant agency

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Adjustments of previously negotiated indirect cost rates containing unallowable costs 200.411

For multiple years, the proportional amount of unallowable costs in the base year will be extrapolated to the out-year rates

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Subpart E Cost PrinciplesSuper Circular: New Certifications

Assure proper expenditures 200.415(a)

Certifying project budgets, annual and final fiscal reports or vouchers requesting payments

“By signing this report, I certify to the best of my knowledge and belief that the report is true, complete, and accurate, and the expenditures, disbursements and cash receipts are for the purposes and objectives set forth in the terms and conditions of the Federal award. I am aware that any false, fictitious, or fraudulent information, or the omission of any material fact, may be subject to criminal, civil or administrative penalties for fraud, false statements, false claims or otherwise”. 20

Subpart E Cost PrinciplesSuper Circular: New Certifications

Certification of indirect rates 200.415(b)

An Indirect Cost Rate Proposal (ICRP) must have a Certificate of Indirect Costs signed at a level not lower than VP or CFO

Cost are not unallowable and not inallocable If an ICRP does not include a certification

The agency can unilaterally disallow all indirect costs The agency can unilaterally establish their own rate

based on historical cost or other such data, to ensure that unallowable costs won’t be reimbursed.

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To summarize

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Basic Indirect Rate Principles Account for incurred cost

Documentation such as time reports which supports the incurrence and allocation of cost

Identify unallowable cost Unallowable items remain in allocation

base, receive a share of indirect cost Unallowable items, items not entitled to

retain, profit/excess funds must be returned to agency

Unallowable expenses determined later will be returned and rates adjusted downward

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Basic Indirect Rate Principles

What is direct remains direct, same for indirect, no double charging,e.g. 10% de minimis

Consistent allocation to avoid double-charging

Direct costs more latitude: proration of cost or admin salaries identified/supported

Statutory limitations, limits the recovery in an award, even though the rate is determined higher 10% limitation on Ryan White administrative cost

Cost Accounting Definitions

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Adequate project costing Segregate cost for each government grant Distinguish between direct and indirect cost Consistent cost allocation of indirect cost Identify unallowable, non-recoverable cost Assign cost to the appropriate accounting period Sufficient accounting controls to ensure compliance

with government grant regulations Capable of performance measurement, such as

provisional vs. actuals for indirect burden rates Facilitate the development of indirect cost rates

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Direct Expenses Direct Cost are costs specifically identified or

traceable to a Federal award, project or activity200.413(a)

Examples: direct labor and related fringe benefit cost, direct material, supplies, consultants, sub-awards, travel 200.413(b) & Appendix IV B.3.b.(4)2nd¶

Direct charging of salaries of administrative personnel 200.413(c) [slide 13]

Direct proration of cost between 2 or more activities without undue effort 200.405(d)

Unallowable direct cost remain in base 200.413(e)

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Reasons for Indirect Rates Develop cost estimates for grant

proposals used in the SF 424a Manage within cost measurement and

performance requirements Full Cost Recovery

Difficult to achieve Certain grants restrict administrative cost Certain NEA vehicles exclude indirect State and local units of gov’t limit rates

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Conditions Clauses

Limitation on Indirect Costs Award – specific rate (predetermined) Limitation on indirect cost recovery, i.e.

if awardee did not provide an indirect rate percentage in 6j of the SF 424-a, the awardee is barred from claiming and recovering indirect cost for this grant

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Indirect Rates Indirect rates synonymous with:

Burdens Loading “Overhead”

Types Fringe G&A (Indirect, Management &

General from IRS Form 990) F&A: Facilities & Administrative rates

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Indirect Cost Definitions Indirect Cost are costs not directly identified with a

single final cost objective (grant), but rather relates to two or more final cost objectives, or a service center, like occupancy department.

Indirect costs cannot be economically traced to each grant so they must be placed in a cost pool to be allocated on a causal-beneficial basis to the final cost objective or grant.

In developing a cost pool special care that costs can first be identified direct to a program, no double-charging Appendix IV B.3.b.(4) 2nd¶ (paragraph)

Typical indirect expenses are: office supplies, postage, local telephone, periodicals, memberships per Appendix IV B.3.b.(4) 2nd¶

Indirect Rate Negotiation and Administration

No indirect rate system fits all

OMB Circular A-122, Attachment A, § Cand 2 CFR 200.414(b)

Due to diverse characteristics and accounting practices of nonprofits, it is not possible to specify the types of cost which may be classified as indirect in all situations.

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Advance UnderstandingsPrior Written Approval 200.407

OMB Circular A-122, Attachment A, § A.6 Under any award, the allocation and

reasonableness of certain expenses may be difficult to determine

Purpose is to avoid subsequent disallowance or dispute

Seek a written agreement with cognizant awarding agency in advance of incurrence of cost

Examples provided such as pre-award costs34

Indirect Cost Allocations

OMB Circular A-122, Attachment A, § D.1.e Appendix IV B.1.e to 2 CFR 200

Period for allocating and accumulating incurred indirect cost to grants Base period equals the org’s fiscal

year Grants cross over two fiscal years

Two different indirect rates35

Indirect Rate AdministrationAppendix IV C to 2 CFR 200

Negotiation and Approval of Indirect Rates per OMB Circular A-122, Attachment A, § E Agency with largest dollar value = cognizant

agency Appendix IV C.2 Indirect rate proposal submitted 90 days after

new award to an organization App. IV C.2.b May not happen if you have program restrictions,

HRSA Part B, CFDA 93.914 limits adm. to 10% Issues when agency is not proactive in the

negotiation and settlement of indirect rates 36

Indirect Rate Administration

Negotiation and Approval of Indirect Rates Existing org’s submit new rate proposals within

6 months after the end of their fiscal year Appendix IV C.2.c

Predetermined rate is based on estimate of costs to be incurred for the current or future fiscal year. The predetermined rate is not subject to adjustment. Appendix IV C.2.d

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Fixed (ceiling) rates are similar to pre-determined rates except: App. IV C.2.e The difference between the estimated and

actual costs of the period are carried forward as an adjustment to the subsequent period’s indirect rate computation

Final rate Appendix IV C.1.d & C.2.f

Based on actual cost for period Once negotiated, not subject to adjustment

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“Provisional” Rate Appendix IV C.1.e & C.2.f

Temporary indirect cost rate pending final rate Used for funding, interim billing or cost

reporting The results of any negotiation is distributed to other

participating agencies Appendix IV C.2.g Negotiating rates must be accepted by ALL Federal

awarding agencies 200.414 (c)(1)

Many clients complain they cannot find the office for negotiating indirect rate Look at conditions clauses attached to grant 39

Basic Indirect RateMechanics

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Fringe as a Service Center

For example, fringe cost includes pension, medical insurance and payroll taxes for direct personnel, working on multiple programs, that cannot be economically assigned to each of those grants.

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Fringe Cost Pool & Base

Each of the fringe expenses reside in a cost pool to be allocated on a causal-beneficial basis to the final cost objective or grant.

Fringe expenses is the numerator and total labor dollars is the denominator to develop a % via a fraction.

Total labor has a functional relationship with fringe expense where total labor is the independent variable and fringe is the dependent variable.

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Fringe Rate Computation Fringe Pool & Base Example:

Fringe Indirect Cost Pool:$1,500 Pension1,500 Medical Insurance

500 Payroll Tax$3,500 Total Fringe

*

$ 2,000 Direct Labor (D/L) Grant A8,000 D/L Grant B

$10,000 Total Grant D/L* (Allocation Base)*

$3,500/$10,000 = 35% Fringe Indirect Burden Rate*Missing indirect labor applied to G&A.

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Fringe Applied to GrantsFringe Application Example:Grant A:$ 2,000 D/L

700 Fringe ($2,000 D/L x 35% fringe rate)1,400 Other Direct Costs (ODCs)

$ 4,100 Total cost for Grant A-final cost objectiveGrant B:$ 8,000 D/L

2,800 Fringe ($8,000 D/L x 35% fringe rate)9,600 ODC

$20,400 Total cost for Grant B-final cost objective

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Indirect Cost Example General fund = administrative costs

Executive director’s office Finance, HR, IT, Purchasing, Facility Mgmt. Office Space, Utilities, Audits, Insurance Value = $150,000 (A)

Programs, Value = $1,000,000 (B) $900,000 in non-federal: programs, fundraising,

membership, promotion, P/R $100,000 federal grant

Fractional relationship between general fund (M&G) and Programs = 15%

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$135,000 , 90%

$15,000 , 10%

Distribution of Indirect Cost Pool Using 15% Indirect Rate

Non-Federal Activity of $900,000

Federal Award of $100,000

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Example of Total Cost Total Cost of Grant

$100,000 direct costs $ 15,000 applied indirect (15% x $100,000) $115,000 = total value of grant

Total Cost Definition The sum of direct and indirect costs allocable

to an award less credits, refunds, rebates; and excluding unallowable costs.

OMB Circular A-122, Attachment A, A.1 and 200.402

Analysis of Indirect Expenses

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Indirect Rate Multiplier Indirect Rate Loading Factor:

Fringe (1.35) x G&A (1.25) = 1.6875 For every D/L $1.00 spent, there will be an

additional cost of 69¢ in burden cost.

What is an ideal rate?

1. 15% is lower for IRS 9902. 40% higher recovery? Which is better 1 or 2? It depends. Rates are a function of base Foundations place limits on rates Under Federal rules you get all of

your cost pool Evaluate your indirect rate based

on a comparison between 2 FYs50

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Percent of Base Analysis

Fringe Pool Example:

FY 2013 FY 2014 Account$1,500 15% $1,500 20% Pension1,500 15% 2,500 33% Medical

500 5% 500 7% Payroll $3,500 35% $4,500 60% Fringe Pool

$10,000 $7,500 Total Labor Base

Simplified Allocation Method

OMB Circular A-122, Attch A, D.2.a. App. IV B.2 Single purpose entity, small or large nonprofit with

small amount of awards Separate allowable indirect less credits from direct

cost Divide indirect by direct cost base (w/unallowable $) Facility cost is combined with administrative pool Facility cost supports direct and indirect personnel Amount of federal awards is small

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Construction of an F&A Rate

Indirect cost classified into two broad activities: A-122, Attachment A, § C.3 and Appendix IV B.3.b Facilities: buildings, equipment and capital

investments, maintenance and operation expenses and interest

Administration: general administration, director’s office, accounting, HR, library expenses and other types of expenditures not mentioned under “facility”

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Isolate Admin. From Facility

If an organization has more than $10 Million in federal funding of direct costs in a fiscal year, a breakout of indirect cost into two components: facility and administration, having indirect cost rates.

OMB Circular A-122, Attachment A, § C.3.e and 200.414 (a) last sentence of ¶, Appendix IV B.2.e

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General & Administrative MTDC Base App. IV B.2.c Allocate on Modified Total Direct Cost (MTDC) Direct labor, applied fringe, non-labor direct Exclusions from MTDC base shown on next slide

G&A Salaries and Fringe Base Direct labor and applied fringe only Appendix IV B.2.c

G&A Salary Base (per HHS indirect template) Only direct labor

Results of special cost studies must not be used to determine and allocate indirect cost to Federal awards per Appendix IV B.3.c (last sentence of paragraph)

G&A Bases (denominator)

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Distribution Basis for MTDCA-122, Attachment A, § D.3.f. Appendix IV B.2.c

Salaries and wages (direct labor) Fringe benefits on direct labor Materials and supplies, services & travelSub-grants and subcontracts up to the first

$25,000 of each sub-grant or subcontract, regardless of period covered by sub-grant

Amounts excluded from MTDC: Sub-grants/subcontracts > $25,000 Equipment, capital expenditures (rent removed)

Participant support cost must be excluded

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Direct Cost under A-122/SFE OMB Circular A-122, Attachment A, § B.3 and

200.413(e) Cost of Certain Activities – Direct Cost Functions

Remain in MTDC base though unallowable, must be treated as direct costs to determine ind. rates Fundraising (not mentioned in super circular) Membership Promotion, lobbying, & public relations

Bid & Proposal allowable per 45 CFR 74.27 B&P is not fund raising Proposal Costs new cost principle 200.460

Allocate occupancy direct

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Charge Rent Direct & Indirect

Rent example of allocability:1. Rent charged directly for a separate office

devoted to one grant2. Rent (G&A) applied via square footage

(SF) to various departments/programs based on SF or some other basis (next slide)

3. Allocating rent for executive director or director of finance, no direct relationship to grant or direct activities

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Charge Rent Direct & Indirect

Rent example of allocability:2. Rent (G&A) applied to various departments/programs

based on SF or payroll dollars

a. If site devoted to grant is 1,000/10,000 SF for 10% of total rental cost ($5,000 = $500)

b. If $5,000 in total rent is allocated via D/L dollars over $20,000/$80,000 = 25% for this program/grant (total rent = $1,250), i.e. Direct Allocation Method Appendix IV B.4

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Direct Allocation Method Joint costs – depreciation, rental cost, repair &

maintenance, telephone, and the like (utility, property insurance, etc)

Prorate on a base that accurately measures benefits provided to each direct award and indirect departments Appendix IV B.3.c(1)(c) & (d)

Direct and indirect FTE positions Hours worked direct and indirect Direct and indirect labor dollars

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Direct Allocation Method Square footage for direct and G&A areas is

difficult to measure and keep up to date In order to use the Direct Allocation

Method, make sure the grant budget has a line item for joint costs or occupancy

Set up a separate department to track and allocate joint costs to direct and indirect cost objectives

OMB Circular A-122, Attachment A, § D.4.

Multiple Cost PoolsStep Allocations & Overhead

Multiple Allocation MethodAppendix IV B.3.a and 3.b

Indirect costs benefit major functions in varying degrees

Indirect costs accumulated into separate cost groupings

Constitute a pool of expenses that are of like character as they relate to base

Allocated to functions by means of a base which best measures relative benefits

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Step Allocation / OrderAppendix IV B.3.d Order of Distribution

Costs assigned to direct programs + adm dept’s Fringe allocated to all dept’s including G&A Occupancy allocated to all dept’s including G&A Program Administration (PA) can be allocated

PA is not G&A PA cannot be recovered under OMB

Special allocation of studio 50010 G&A allocated to 10000 through 60000

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When is Overhead necessary Grouping (PA) administrative costs by

department under a functional grouping Department Head or VP Receptionist or other admin personnel

PA supports the programs under 10000 series … Governmental group w/ multiple grants

Burden is necessary to recover adm. $

Can you recover local overhead? NO

Special Rates & Double-Charging

Special Indirect Cost RatesA-122, Attachment A, § D.5 - Appendix IV B.5

A single rate for all functions may not take into account factors that may impact a particular segment of work

Factors might include: Site location: geographic or gov’t site Level of administrative support required Level of facility or other resources used

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Special Indirect Cost RatesA-122, Attachment A, § D.5 - Appendix IV B.5

Bifurcated G&A to avoid double-charging Same administrative rate % for segments Some segments have different facility

cost due to different geographic locations Some segments have no facility cost since

the effort is performed at a government site

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Cannot Double ChargeA-122, Attachment A, § B.1 & C.1 – 2 CFR 200.412

Major problem to get first NICRA approved It is essential that each item of- Cost incurred for the same purpose- Be treated consistently in like circumstances- Either as a direct or indirect (F&A) cost - In order to avoid double-charging on Federal

Awards. 200.414(f) 10% de minimis rate must be charged

consistently as direct or indirect, but not be double-charged or inconsistently charged AS BOTH. 71

Conflicting Cost Layers

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Develop multiple G&A rate

Administrative is 10% and Facility: Rent cost is 5%

5% facility cost recap: (facility/ rent cost) 1% facility cost for indirect personnel 1% facility cost charged as direct-purpose

rent to some grants as a direct cost 3% facility cost for direct-purpose rent that

could not be recovered direct

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Indirect Rate Agency Models

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Templates for ICRP

U.S. Department of Labor Indirect Cost Rate Determination Guide:http://www.dol.gov/oasam/boc/dcd/np-comm-guide.htm

HHS ICRP Templatehttps://rates.psc.gov/fms/dca/np_exall2.html

Statement of Functional Expense (SOFE) used in Indirect Templates

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Importance of SOFE

Service and Not For Profit (NFP) Non-Profit org’s – OMB Circular A-122

and Appendix IV Dept. of Labor & DHHS models

Outside forces on NFPs IRS 990 SOFE (FASB 117) ASC 958 SOFE

79Permission to use from client

HHS Indirect SOFE Template

Any Questions

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DISCLAIMER

The materials contained herein or discussed in the seminar or shown in the MS Powerpoint slides, are for illustrative and academic purposes only and should not be considered appropriate for your organization without careful adaptation by experts in the appropriate field of endeavor.

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