How to Develop Indirect Cost Rates
For Nonprofits with Federal Awards
Under the Super Circular
April 25, 2014
All slides © 2014, Rubino & Company, Chartered
Presenter:
Paul H. Calabrese
Rubino & Company, CPAs & Consultants
Senior Manager

Tel: 301-214-4137
[email protected]
www.linkedin.com/in/pcalabrese
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https://twitter.com/Paulcompliance
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2
Sources
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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
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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
4
Impact of the Super Circular
Super Circular 2 CFR 200
When is it effective? COFAR FAQ:Q II-1 (2/12/14)


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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 200
When is it effective? COFAR FAQ:Q II-2 (2/12/14)


Non-Federal entities wishing to implement entitywide 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
8
Subpart E Cost Principles
Super Circular 2 CFR 200.400
Fundamental Basis of Indirect Cost Recovery

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Responsible for administering Federal
funds consistent with terms and
conditions, program objectives of award
Accounting practices must be:

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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 Principles
Super Circular: Cannot Keep Excess Funds


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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)
10
Subpart E Cost Principles
Super 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?
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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 Principles
Super Circular: New Options

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10% de minimis rate per 200.414(f)
NFE has existing negotiated indirect rate:
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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
12
Subpart E Cost Principles
Super Circular: New Options

Direct cost allocation principle 200.405(d)
1.
2.
3.


If cost benefits two or more direct programs
In proportions that can be determined without
undue effort or cost
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
13
Subpart E Cost Principles
Super Circular: New Options

Direct charging of admin staff wages may be
appropriate when all items are met: 200.413(c)
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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
14
Subpart E Cost Principles
Super Circular: New Requirements

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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
Subpart E Cost Principles
Super Circular: New Requirements

Payments made for costs determined to be
unallowable must be refunded including
interest to Federal government 200.410

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Unallowable by Federal awarding agency
Cognizant agency for indirect cost
Pass-through entity
Either direct or indirect unallowable cost
16
Subpart E Cost Principles
Super Circular: New Requirements


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 award
2.
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
Subpart E Cost Principles
Super Circular: New Requirements

Adjustments of previously negotiated indirect
cost rates containing unallowable costs 200.411

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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
18
Subpart E Cost Principles
Super Circular: New Requirements

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
19
Subpart E Cost Principles
Super 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 Principles
Super Circular: New Certifications

Certification of indirect rates

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
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.
21
To summarize
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 downward23

Basic Indirect Rate Principles
What is direct remains direct, same for
indirect, no double charging,e.g. 10% de minimis
 Consistent allocation to avoid doublecharging
 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

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10% limitation on Ryan White administrative cost
24
Cost Accounting Definitions
Adequate project costing
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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
26
Direct Expenses

Direct Cost are costs specifically identified or
traceable to a Federal award, project or activity
200.413(a)
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Examples: direct labor and related fringe benefit
cost, direct material, supplies, consultants, subawards, 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) 27
Reasons for Indirect Rates
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Develop cost estimates for grant
proposals used in the SF 424a
Manage within cost measurement and
performance requirements
Full Cost Recovery
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Difficult to achieve
Certain grants restrict administrative cost
Certain NEA vehicles exclude indirect
State and local units of gov’t limit rates
28
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

29
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
30
Indirect Cost Definitions

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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 doublecharging 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¶
31
Indirect Rate Negotiation and
Administration
No indirect rate system fits all


OMB Circular A-122, Attachment A, § C
and 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.
33
Advance Understandings
Prior Written Approval 200.407
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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 costs
34
Indirect Cost Allocations
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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 rates
35
Indirect Rate Administration
Appendix IV C to 2 CFR 200

Negotiation and Approval of Indirect Rates
per OMB Circular A-122, Attachment A, § E

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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
37
Indirect Rate Administration

Fixed (ceiling) rates are similar to predetermined rates except: App. IV C.2.e

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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
38
Indirect Rate Administration

“Provisional” Rate
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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 Rate
Mechanics
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.
41
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.
42
Fringe Rate Computation
Fringe Pool & Base Example:

Fringe Indirect Cost Pool:
$1,500 Pension
1,500 Medical Insurance
500 Payroll Tax
$3,500 Total Fringe
*
$ 2,000 Direct Labor (D/L) Grant A
8,000 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.
43
Fringe Applied to Grants
Fringe 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 objective
Grant 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
44
Indirect Cost Example

General fund = administrative costs

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Programs, Value = $1,000,000 (B)

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Executive director’s office
Finance, HR, IT, Purchasing, Facility Mgmt.
Office Space, Utilities, Audits, Insurance
Value = $150,000 (A)
$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%
45
Distribution of Indirect Cost Pool Using 15% Indirect Rate
$135,000 , 90%
Non-Federal Activity of $900,000
$15,000 , 10%
Federal Award of $100,000
46
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

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Total Cost Definition
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
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
47
Analysis of
Indirect Expenses
Indirect Rate Multiplier

Indirect Rate Loading Factor:

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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.
49
What is an ideal rate?
1.
2.
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15% is lower for IRS 990
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 FYs
50
Percent of Base Analysis
Fringe Pool Example:
FY 2013
$1,500 15%
1,500 15%
500
5%
$3,500
35%
$10,000
FY 2014
$1,500
2,500
500
$4,500
Account
20% Pension
33% Medical
7% Payroll
60% Fringe Pool
$7,500
Total Labor Base
51
Simplified Allocation Method
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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
52
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”
53
Isolate Admin. From Facility

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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
54
G&A Bases (denominator)

General & Administrative MTDC Base App. IV B.2.c

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
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)
55


Allocate on Modified Total Direct Cost (MTDC)
Direct labor, applied fringe, non-labor direct
Exclusions from MTDC base shown on next slide
Distribution Basis for MTDC
A-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 & travel
Sub-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


56
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
57
Allocate occupancy direct
Charge Rent Direct & Indirect
Rent example of allocability:

1.
2.
3.
Rent charged directly for a separate office
devoted to one grant
Rent (G&A) applied via square footage
(SF) to various departments/programs
based on SF or some other basis (next slide)
Allocating rent for executive director or
director of finance, no direct relationship to
grant or direct activities
59
Charge Rent Direct & Indirect
Rent example of allocability:

2.
Rent (G&A) applied to various departments/programs
based on SF or payroll dollars
a.
b.
If site devoted to grant is 1,000/10,000 SF
for 10% of total rental cost ($5,000 =
$500)
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
60
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
61
Direct Allocation Method

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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.
62
Multiple Cost Pools
Step Allocations & Overhead
Multiple Allocation Method
Appendix 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
64
65
Step Allocation / Order
Appendix 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
66
When is Overhead necessary

Grouping (PA) administrative costs by
department under a functional grouping


Department Head or VP
Receptionist or other admin personnel
…
 Governmental group w/ multiple grants
 Burden is necessary to recover adm. $


PA supports the programs under 10000 series
Can you recover local overhead?
NO
67
Special Rates &
Double-Charging
Special Indirect Cost Rates
A-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
69
Special Indirect Cost Rates
A-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

70
Cannot Double Charge
A-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 double71
charged or inconsistently charged AS BOTH.
Conflicting Cost Layers
72
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
73
74
Indirect Rate
Agency Models
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 Template
https://rates.psc.gov/fms/dca/np_exall2.html
76
Statement of Functional
Expense (SOFE) used in
Indirect Templates
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

78
Permission to use from client
79
HHS Indirect
SOFE Template
81
Any Questions
82
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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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