During the 2016 NADO Annual Training Conference, Robert Lloyd shared tips on negotiating indirect costs.

1. 1
Indirect Cost Negotiation for
RDO’s
NADO Annual Training
Conference
October 18, 2016
Bob Lloyd, Presenter

2. 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
--- Foundation and corporate funders
• The folly of comparing indirect cost rates
(“The Overhead Myth”)

3. 3
Related Terminology
• (F&A) Facility and Administrative Costs
• Overhead Costs
• “Back Office” Activities
• “Rear Echelon Troops”
• Program vs. Administrative Costs

4. 4
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.

5. Total Recovery under a Federal
Award
• Allowable Direct Costs
PLUS
• Allocable Indirect Costs
MINUS
• Applicable Credits
5

6. 6
Federal Concerns about Indirect
Costs
• Overcharges Resulting from Multiple
Negotiations with Individual Agencies
• Charges Skewed in Their Direction
• Unreasonable Charges
• Cost Containment

7. 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
7

8. 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
8

9. 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
9

10. 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

11. 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
11

12. 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) 12

13. 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
13

14. 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)” 14

15. 15
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)

16. 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 16

17. 17
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

18. 18
Organizational Review and
Description
• The Financial Reporting Entity
• Affiliates
• Off-site Locations
• Central Services vs. Operations

19. 19
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?

20. 20
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

21. 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
21

22. 22
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)

23. 23
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

24. 24
Calculation Options for
Governmental Organizations
• Simplified Method
• Multiple Allocation Bases
• Display of the Calculations
• Section III, DOL Guide

25. 25
Calculating the Rate
Allowable, Allocable Indirect Costs
___________________________ = ___%
Selected Direct Cost Base
* Note—Base must include cost items
excluded from IDC pool (e.g., fundraising)

26. 26
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

27. Additional Documents Needed?
• Description of Operation of Internal
Service Funds/Recharge Centers
• Description of Self-Insurance Funds
• Description of Fringe Benefit and Pension
Plans
27

28. 28
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

29. 29
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

30. 30
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

31. 31
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

32. 32
Elements of a Rate Agreement
• Rates
--- Type
--- Effective Period
--- Percentage
--- Location
--- Applicability
• Limitations
• Changes
• Notification
• Special Provisions
• Sample: Appendix II, DOL Guide

33. 33
Issuance of a Rate Agreement
• Types of Rates
--- Provisional/Final
--- Predetermined
--- Fixed Rate with Carry-Forward
--- Temporary “Billing” Rate
• Multiple or Off-site Rates

34. 34
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

35. 35
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