Indirect Cost Rate: Meeting the Cost Recovery Challenge Bob Lloyd, Robert M. Lloyd Consulting Services, Greenville, SC

1. MEETING THE INDIRECT COST
RECOVERY CHALLENGE
Collaborating, Innovating, Transforming:
2023 Economic Development Conference
for the EDA Denver Region
April 11, 2023
Presented by Bob Lloyd

2. 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
• The “folly” of comparing indirect cost
rates
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3. RELATED
TERMINOLOGY
• Program costs vs. administrative
costs
• Facility and administrative (F&A)
costs
• Overhead
• “Back office” activities
• Rear echelon “troops”
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4. THE REAL
THINGS
• Direct costs: Those that can
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”
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5. THE
TOOLS
• Indirect cost allocation plan: A
narrative and financial
document that identifies,
accumulates, and distributes
indirect costs to benefiting
organization units and activities
• Indirect cost rate: A device used
to determine what portion of an
organization’s indirect cost each
activity (such as individual
federal awards) should bear;
normally employed in lieu of
separately negotiating that
portion of indirect costs with
each awarding agency
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6. TOTAL
RECOVERY
UNDER A
FEDERAL
AWARD
• Allowable direct costs
PLUS
• Allocable allowable indirect
costs
MINUS
* Applicable credits
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7. ALLOWABLE
COSTS
• Subpart E, 2 CFR 200
• Replaced separate
corresponding policies on the
subject affecting various
performers such as OMB
Circulars A-21, A-87, and A-122
• Key components
--- General tests of allowability
----- 2 CFR 200.402-6
--- “Selected” items of cost
----- 2 CFR 200.420-476
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8. OMB’S
GRANT
REFORM
• Stated motivations
--- Policy consolidation
--- Regulatory relief
--- Burden reduction
--- Cost containment
• Original proposals re: indirect
costs
--- Election of “fixed” rates
--- Longer durations
• Recipient comments in response
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9. REVISED
INDIRECT
COST
POLICIES
• Definitions ( 2 CFR 200-56-57, 2 CFR
200.68)
• General indirect (F&A) policies (2 CFR
200.409, 2 CFR 200.411-419)
--- The “general cost of government”
(2 CFR 200.444)
• Required or encouraged indirect cost
charging of certain costs (example:
proposal costs)
• Cognizant agency involvement in
innovative effort reporting and handling
of performance based awards
• “Performer specific” instructions (2 CFR
Appendices III-VII)
--- Governmental units (Appendices V-VII)
--- Nonprofit organizations (Appendix IV)
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10. RESULTS
AND
REALITIES
• IDC instructions = “A Bridge Too
Far”
• Imperfections and gaps in new
policy statements
• Federal cognizance and staffing
issues
• Pass-through entity motivations
• “Be your own best friend”
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11. INDIRECT COST
COGNIZANCE
• Cognizant = knowledgeable;
familiar
• Not to be confused with audit
cognizance
• Policy for organizations with direct
relationships with the federal
government
--- General rule: predominate source
of funds
--- Sustained period
--- Migration policy
--- Special rule for economic
development districts
• Policy for organizations with no
direct relationship with the federal
government
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12. REVISED
INDIRECT
COST
POLICIES
• Required federal agency acceptance
of federally negotiated rates (2 CFR
200.414(c))
--- Limited exceptions
• Required pass-through entity
acceptance of federally approved
rates (2 CFR 200.332(a)(4))
--- No exceptions
• Pass-through entity negotiation (2
CFR 200.332(a)(4))
• Subrecipient election of the “de
minimis” indirect cost rate (10% of
MTDC) (2 CFR 200.414(f))
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13. FEDERAL
INDIRECT
COST GUIDES
• “Cook book” approach
--- Department of Interior
--- Department of Labor
----- Indirect Cost Determination
Guide
--- Department of Health and
Human Services
----- Negotiation programs
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14. PROCEDURES FOR
GOVERNMENTAL
UNITS
• Governmentwide central service
cost allocation plans (2 CFR 200,
Appendix V)
• Indirect cost rate proposal (2
CFR 200, Appendix VII)
• Submission policy
--- Entities receiving more that
$35 million
--- Entities receiving less than $35
million
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15. WHO
PREPARES
• In-house capacity vs. outside
assistance
• Specific restriction affecting
public accounting firms that
perform the organization's
single audit (2 CFR 200.509)
--- Non-federal entity annual
indirect cost recovery > $1M
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16. THE
INDIRECT
COST
RECOVERY
PROCESS
• Receipt of a federal award
• Organizational review
• Documenting cost policies
• Preparation of indirect cost
allocation plan
--- Descriptions of central services
and benefit to federal programs
• Preparation of indirect cost rate
proposal
--- Bases for distribution of costs
----- Federal suggestions
--- Exclusion of unallowables and
distorting factors
• Possible submission, negotiation,
and issuance of rate agreement
• Preparation of claims (financial
reports)
• Audit
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17. INDIRECT COST
ALLOCATION
PLAN
• Description of central services
--- Functions performed
--- Benefit to federal awards
--- Basis for distributions
• Items of expense
--- Exclusion of unallowables
--- Exclusion of distorting factors
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18. INDIRECT
COST RATE
PROPOSAL
• Total of allocated indirect costs
DIVIDED BY
• A selected direct cost base
--- Modified total direct costs (2
CFR 200.68)
--- Salaries, wages, and fringe
benefits
--- Salaries and wages
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19. DOCUMENTARY
SUPPORT
• Organizational chart
--- Affiliated organizations
--- Geographic locations
• Audited financial statements
• Standard certification ( 2 CFR
200.415 and 2 CFR 200,
Appendix VII, Paragraph D(3))
• Cost policy statement
• Narrative description of indirect
cost pools
• Associated items of expense
• Explanation of internal service
funds
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20. COPING
WITH NO
FEDERAL
REVIEW
• Prepare plan and rate proposal
in accordance with 2 CFR 200
• Complete the standard
certification
• Arrange for separate
independent auditor review
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21. ELEMENTS OF
A RATE
AGREEMENT
• Rate type
--- Provisional/final
--- Predetermined
--- Fixed with carry forward
• Effective period
• Percentage
• Location(s)
• Applicability
• Limitations
• Handling of accounting changes
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22. HOW THE
RATE IS
USED
• Grant application or contract
proposal
--- THE KEY EVENT
--- Treatment of unrecovered
indirect cost (2 CFR 200.306 (c))
• Expenditure of funds
--- Applying the rate to the
proper base
--- Capital expenditure exclusion
--- Partial subaward and
subcontract exclusion
--- Handling a rate change in
award midstream
• Reporting of claims
--- SF 425
--- SF 1034 22

23. ADDITIONAL
ISSUES
• Adjustments
• Records retention and access (2
CFR 200.334(f))
• Appeals at the federal level
• OMB assistance role
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24. AUDIT OF
INDIRECT
COSTS
• Single audit (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 audits
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25. GOING
FORWARD
• Build in-house knowledge of
the process
• Develop and maintain your
documentary tools
--- Clear cost policy statement
--- Current data and studies (e.g.,
space utilization)
--- Rationale for cost escalation
• Use the federal “lingo”
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26. QUESTIONS
• Now
• Later
--- Bob Lloyd
(864) 235-8680
Consultlloyd@aol.com
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