How to Develop Indirect Rates Under the New Super Circular

How to Develop Indirect Rates Under the New Super Circular

Part 1 Webinar Rubino & Company, Chartered

May 8, 2014

•  Click to edit Master text styles – Second level

o Third level –  Fourth level

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•  Update / Impact of Super Circular

•  Definitions of Direct Cost Allocations

•  Definition of Indirect Cost

•  Negotiation & Administration of Indirect Rates

•  Types of Allocation Bases

•  Simple, Multiple, Direct Allocation Methods

•  Special Rates

•  Problem of Double-Charging

•  Statement of Functional Expense for Indirect Rate Development



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•  To provide participants with both conceptual and hands-on tools for developing indirect rates for not-for-profits that receive federal rates.

•  The session will cover different types of indirect rates: fringe, occupancy, and general and administrative.

•  To provide participants with the new options available under the Super Circular given the fact of the administrative recovery restrictions under Ryan White programs.



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Paul H. Calabrese Rubino & Company, CPAs & Consultants

Senior Manager Tel: 301-214-4137

[email protected] www.linkedin.com/in/pcalabrese

https://twitter.com/Paulcompliance

All slides copyright 2014, Rubino & Company, Chartered



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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



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•  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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•  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



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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)



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•  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



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•  Cannot spend more than 10% of Federal funds on administrative expenses in a grant year for Ryan White

•  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 programs 2.  In proportions that can be determined without undue

effort or cost 3.  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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•  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 o  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.



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•  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 award 2.  Unallowable as not allocable to Federal award(s)

o Must be adjusted for a refund o Adjustments are used to correct established negotiated

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



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•  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 o  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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•  Assure proper expenditures 200.415(a) o  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”.



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•  Certification of indirect rates 200.415(b) o  An Indirect Cost Rate Proposal (ICRP) must have

a Certificate of Indirect Costs signed at a level not lower than VP or CFO

o  Cost are not unallowable and not inallocable o  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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•  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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•  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



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Cost Accounting Definitions



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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



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•  Direct Cost are costs specifically identified or traceable to a Federal award, project or activity 200.413(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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•  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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•  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 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 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¶



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Indirect Rate Negotiation and Administration



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•  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.



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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



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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

o Two different indirect rates



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•  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,

o HRSA Part B, CFDA 93.914 limits adm. to 10%

–  Issues when agency is not proactive in the negotiation and settlement of indirect rates



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•  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



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Basic Indirect Rate Mechanics



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•  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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•  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 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.



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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



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•  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

Federal Award of $100,000



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•  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



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Analysis of Indirect Expenses



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•  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.



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1.  15% is lower for IRS 990 2.  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



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Fringe Pool Example: FY 2013 FY 2014 Account $1,500 15% $1,500 20% Pension 1,500 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



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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



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•  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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•  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)



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•  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



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•  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



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Allocate occupancy direct



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

devoted to one grant

2.  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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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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•  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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•  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.



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Multiple Cost Pools Step Allocations

& Overhead



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•  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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•  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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•  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 admin $

•  Can you recover local overhead? NO



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Special Rates & Double-Charging



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•  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 government site –  Level of administrative support required –  Level of facility or other resources used



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•  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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•  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



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•  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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•  U.S. Department of Labor

•  Indirect Cost Rate Determination Guide: http://www.dol.gov/oasam/boc/dcd/np-

comm-guide.htm

•  DHHS ICRP Template: https://rates.psc.gov/fms/dca/np_exall2.html



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Statement of Functional Expense used in Templates



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•  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 SFE – (FASB 117) ASC 958 SFE



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Permission to use from client



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HHS Indirect SOFE Template



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Any Questions?



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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.

Documents

How to Develop Indirect Rates Under the New Super Circular