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INDIRECT COST RECOVERY
- 1. MEETING THE INDIRECTCOST 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 • Widelymisunderstood 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 2
- 3. RELATED TERMINOLOGY • Program costsvs. administrative costs • Facility and administrative (F&A) costs • Overhead • “Back office” activities • Rear echelon “troops” 3
- 4. THE REAL THINGS • Directcosts: 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” 4
- 5. THE TOOLS • Indirect costallocation 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 5
- 6. TOTAL RECOVERY UNDER A FEDERAL AWARD • Allowabledirect costs PLUS • Allocable allowable indirect costs MINUS * Applicable credits 6
- 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 7
- 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 8
- 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) 9
- 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” 10
- 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 11
- 12. REVISED INDIRECT COST POLICIES • Required federalagency 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)) 12
- 13. FEDERAL INDIRECT COST GUIDES • “Cookbook” approach --- Department of Interior --- Department of Labor ----- Indirect Cost Determination Guide --- Department of Health and Human Services ----- Negotiation programs 13
- 14. PROCEDURES FOR GOVERNMENTAL UNITS • Governmentwidecentral 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 14
- 15. WHO PREPARES • In-house capacityvs. 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 15
- 16. THE INDIRECT COST RECOVERY PROCESS • Receipt ofa 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 16
- 17. INDIRECT COST ALLOCATION PLAN • Descriptionof central services --- Functions performed --- Benefit to federal awards --- Basis for distributions • Items of expense --- Exclusion of unallowables --- Exclusion of distorting factors 17
- 18. INDIRECT COST RATE PROPOSAL • Totalof 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 18
- 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 19
- 20. COPING WITH NO FEDERAL REVIEW • Prepareplan and rate proposal in accordance with 2 CFR 200 • Complete the standard certification • Arrange for separate independent auditor review 20
- 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 21
- 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 • Recordsretention and access (2 CFR 200.334(f)) • Appeals at the federal level • OMB assistance role 23
- 24. AUDIT OF INDIRECT COSTS • Singleaudit (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 24
- 25. GOING FORWARD • Build in-houseknowledge 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” 25
- 26. QUESTIONS • Now • Later ---Bob Lloyd (864) 235-8680 Consultlloyd@aol.com 26