Cost Allocation and the UGG AEFFA October 18, 2016 Pittsburgh, PA Brustein & Manasevit, PLLC Bonnie Little Graham www.bruman.com bgraham@bruman.com Brustein & Manasevit, PLLC © 2016. All rights reserved.

In order to be allowable, all costs must be reasonable, necessary and “allocable” 2 CFR 200.403(a) Brustein & Manasevit, PLLC © 2016. All rights reserved.

Allocable costs – 2 CFR 200.405 A cost is allocable if it is charged “in accordance with relative benefits received” Allocable = Proportional benefit When allocating costs to an award, the non-federal entity must determine whether costs are direct or indirect Brustein & Manasevit, PLLC © 2016. All rights reserved.

Direct Cost Allocation Brustein & Manasevit, PLLC © 2016. All rights reserved.

Allocable costs – 2 CFR 200.405 NEW: Direct cost allocation principles: If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost should be allocated to the projects based on the proportional benefit. If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, the costs may be allocated to benefitted projects on any reasonable documented basis. Brustein & Manasevit, PLLC © 2016. All rights reserved.

What is reasonable? Brustein & Manasevit, PLLC © 2016. All rights reserved.

Direct cost allocation - example Non-federal entity purchases a new printer/copier for its office. The office operates three grants: A, B and C. Option 1: 1/3 to grant A 1/3 to grant B 1/3 to grant C Brustein & Manasevit, PLLC © 2016. All rights reserved.

Direct cost allocation - example There are 10 employees that work on grant A, 20 employees that work on grant B, and 10 employees that work on grant C Option 2: 25% to grant A 50% to grant B 25% to grant C Brustein & Manasevit, PLLC © 2016. All rights reserved.

Direct cost allocation - example Option 3: Employees enter a code identifying the relevant grant when using the printer/copier. Grants are charged in proportion to actual use. Brustein & Manasevit, PLLC © 2016. All rights reserved.

How do you allocate costs when you have a single cost objective supported by multiple federal programs? E.g. Schoolwide program, or federal grant policies and procedures manual Brustein & Manasevit, PLLC © 2016. All rights reserved.

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The nonfederal entity can make a business decision regarding what combination of funds made available under the relevant programs will be applied to this cost objective EDGAR 76.760 (states and subgrantees may use funds to support different parts of the same project if the costs are fully allowable under each funding source.) 2 CFR 200.405(e) (non-federal entity may shift costs that are allowable under two or more awards between those awards) Brustein & Manasevit, PLLC © 2016. All rights reserved.

Equipment If purchase of equipment is specifically authorized, 100% may be allocated to federal award “regardless of the use that may be made of the equipment … when no longer needed for the purpose for which it was originally required.” 2 CFR 200.403(d) Brustein & Manasevit, PLLC © 2016. All rights reserved.

Equipment What about during the time that equipment is still being used for the program for which it was acquired? May share only if doing so “will not interfere” with the work on the program. 2 CFR 200.313(c)(2). Brustein & Manasevit, PLLC © 2016. All rights reserved.

Indirect Cost Allocation Brustein & Manasevit, PLLC © 2016. All rights reserved.

Total Cost of Federal Awards Brustein & Manasevit, PLLC © 2016. All rights reserved.

Indirect Costs Defined: Costs incurred for common or joint purposes Cost cannot be readily and specifically identified with a particular cost objective without effort disproportionate to the results achieved EX: Accounting; Human Resources; Payroll; Legal Division; Utilities Brustein & Manasevit, PLLC © 2016. All rights reserved.

What is the purpose of the Indirect Cost Rate? Allows agency to recover some costs incurred to run federal programs that are otherwise too integrated to identify Take portion of grant as “recovery”; treat as non-federal funding. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Calculation: It’s a fraction! Top: “Indirect Cost Pool” Bottom: “The Base” Can be “Total modified direct cost base” or “Salaries and Wages”, etc. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Top: Indirect Cost Pool EX: Accounting; Personnel; Legal; Utilities All indirect costs must be paid with non-federal funds (even though giving some benefit to federal programs) Employees would not keep time distribution records (as long as not split between indirect and direct) Brustein & Manasevit, PLLC © 2016. All rights reserved.

Bottom: “Modified Total Direct Cost Base” All direct costs (federal and non-federal expenses) Includes unallowable costs Minus: equipment alterations/renovations, portion of each subaward / subcontract exceeding $25,000 (i.e., only first $25k is included in base) Equipment and sub-grant and sub-contract costs are considered “distorting” items. This means they do not affect the indirect cost units (e.g., accounting & personnel) the way most direct costs do. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Applying the Rate Apply rate (percentage) to the base (apply to your current year direct costs minus cap expenditures, etc., NOT entire grant!) That “reimbursement” has no federal accountability Brustein & Manasevit, PLLC © 2016. All rights reserved.

Wrong Way/Right Way Modified Total Direct Cost Base (MTDC) Brustein & Manasevit, PLLC © 2016. All rights reserved.

Applying the Rate - Frequency Can claim indirect costs periodically (monthly, quarterly, annually) Must be based on actual expense already incurred (i.e., couldn’t take all at beginning of year) Brustein & Manasevit, PLLC © 2016. All rights reserved.

Restricted Indirect Cost Rate Special rules for non supplant programs Restricted indirect cost rates EDGAR 34 CFR 76.563 Brustein & Manasevit, PLLC © 2016. All rights reserved.

Restricted Indirect Cost Rate Purpose – Disallows inclusion in rate calculation of admin expenses that would otherwise be incurred Formula: General management costs and fixed costs Other expenditures Brustein & Manasevit, PLLC © 2016. All rights reserved.

Restricted Indirect Cost Rate General Management Costs Direction and control of agency Organization wide Certain Occupancy and space Fixed Costs Retirement, social security, pension Unemployment compensation Property, employee, health and liability insurance Brustein & Manasevit, PLLC © 2016. All rights reserved.

Restricted Indirect Cost Rate General Management Does Not include Divisional administration (component costs) Governing body Chief executive officer Chief executive officer of any component Operation of immediate offices of those officers Brustein & Manasevit, PLLC © 2016. All rights reserved.

Restricted Indirect Cost Rate Other expenditures (MTDC) Grantee total expenditures Occupancy and space Costs related to chief executive officers Costs related to components Does Not include Subgrants (and subcontracts) Capital outlays Others Brustein & Manasevit, PLLC © 2016. All rights reserved.

Frequently asked questions: How should grantees budget indirect costs if there’s an administrative cap? When (and why) do I have to exclude costs in excess of $25,000 when applying my rate? Can contractors charge indirect costs? If so, what rate must they use? SEAs: do I have to negotiate rates with non-LEA subrecipients? Subrecipients: my pass-through agency is refusing my indirect cost rate – now what? Brustein & Manasevit, PLLC © 2016. All rights reserved.

How should grantees budget indirect costs if there’s an administrative cap? Wrong way Grant award: $100,000 ICR: 10% Budgeted indirect costs: $100,000 x 10% = 10,000 Direct costs = $90,000 BUT: ICR is applied to direct costs: 90k x 10% = 9,000! Right way Use the formula: ICR____ x (Award – (1 + ICR) distorting items) 0.1 x ($100k – 0) = $9,090.91 1.1 Direct costs 90,909.09 Indirect costs + 9,090.91 $100,000 Brustein & Manasevit, PLLC © 2016. All rights reserved.

How should grantees budget indirect costs if there’s an administrative cap? Administrative costs may be direct OR indirect Administrative Cost Cap Limit applies against total grant amount Grantee should list administrative costs in budget breakout Direct admin + indirect cost recovery  Admin cap Brustein & Manasevit, PLLC © 2016. All rights reserved.

How should grantees budget indirect costs if there’s an administrative cap? Example: Perkins subgrant = $100,000 5% cap on admin = $5,000 8% restricted rate Assume $50,000 was spent on equipment and other distorting items. 0.08 x ($100,000 - = $3,703.70 (max indirect costs) 1.08 $50,000) Brustein & Manasevit, PLLC © 2016. All rights reserved.

How should grantees budget indirect costs if there’s an administrative cap? Example (cont.): Indirect costs: $3,703.70 If subgrantee has $2,000 in direct admin costs, then subgrantee may only recover $3,000 through the indirect cost rate. Subgrantee would forego the $703.70 in calculated indirect costs because of the admin cap Brustein & Manasevit, PLLC © 2016. All rights reserved.

When (and why) do I have to exclude costs in excess of $25,000 when applying my rate? Exclusions from MTDC Base: Generally: “Subawards in excess of $25,000.” 2 CFR 200.68 UGG defines “subawards” to exclude payments made to a contractor. 2 CFR 200.92 “Subcontracts in excess of $25,000.” Appendix VII, C.2.c. Restricted rate: “Subgrants.” 34 CFR 76.567 Brustein & Manasevit, PLLC © 2016. All rights reserved.

What ED says… “When we talk about subawards, we are talking about subgrants and subcontracts. … We have to look at it on a case-by-case basis.” Whether the portion over $25k will be excluded “depends upon the amount of administrative handling involved in that subaward or subgrant.” ED links to DOL’s guide: As a general rule … only the first $25,000 of each subcontract, subgrant and professional service agreement should be included in the distribution base. This recognizes that grantees/contractors expend a minimal amount of indirect costs on subcontracts. Brustein & Manasevit, PLLC © 2016. All rights reserved.

When (and why) do I have to exclude costs in excess of $25,000 when applying my rate? Whether amounts above $25k under certain contracts must be excluded from the calculation and recovery of indirect costs will depend on your approved rate, as negotiated with the awarding agency. What about multi-year subawards/contracts? May apply the $25k each year Brustein & Manasevit, PLLC © 2016. All rights reserved.

Can contractors charge indirect costs? If so, what rate must they use? Reminder: Contractors aren’t subject to federal grant requirements. BUT grantees / subgrantees are!! Procurement requirements Competition Cost / price analysis Goal: Reasonable Price!! Brustein & Manasevit, PLLC © 2016. All rights reserved.

What ED says: “A non-federal entity will have to determine the reasonableness of cost or price of any contracted item, either by review of cost elements or price. The indirect costs are one of the elements that may need to be reviewed to determine overall reasonableness.” Brustein & Manasevit, PLLC © 2016. All rights reserved.

Can contractors charge indirect costs? If so, what rate must they use? Answer depends on “reasonableness” Yes, grantees may allow contractors to charge an indirect cost rate. However the indirect costs must be reasonable in light of the overall contracted services or goods. Grantees are not required to accept a contractor’s indirect cost rate – even if the contractor’s rate was federally negotiated. Brustein & Manasevit, PLLC © 2016. All rights reserved.

SEAs: do I have to negotiate rates with non-LEA subrecipients? Pass through entities must provide an ICR to subrecipients. 2 CFR 200.331(a)(4). First step – determine the subrecipient’s cognizant agency for indirect costs. Cognizant agency for indirect costs must negotiate the unrestricted rate Institutions of Higher Ed: HHS or DOD (Appendix II, C.11) Nonprofits: federal agency that provides preponderance of direct federal funding (Appendix IV, C.2) Brustein & Manasevit, PLLC © 2016. All rights reserved.

SEAs: do I have to negotiate rates with non-LEA subrecipients? If subrecipient has an unrestricted rate, but not a restricted rate: Subrecipient may negotiate a restricted rate with its cognizant agency, OR SEA may offer a restricted rate of 8% MTDC, if reasonable. 34 CFR 76.564(c) Brustein & Manasevit, PLLC © 2016. All rights reserved.

SEAs: do I have to negotiate rates with non-LEA subrecipients? If subrecipient does not have an ICR, but receives direct federal funding: SEA refers the subrecipient to negotiate the unrestricted rate with its cognizant agency, AND Subrecipient may also negotiate the restricted rate with cognizant agency, OR SEA may offer restricted rate of 8% MTDC, if reasonable. 34 CFR 76.564(c) Brustein & Manasevit, PLLC © 2016. All rights reserved.

SEAs: do I have to negotiate rates with non-LEA subrecipients? If subrecipient does not have an ICR, and does not receive direct federal funding: SEA may negotiate the unrestricted and restricted rates with the subrecipient. SEA may offer 10% de minimis rate (unrestricted rate) if the subrecipient is eligible. 2 CFR 200.331(a)(4). SEA may offer restricted rate of 8% MTDC, if reasonable. 34 CFR 76.564(c) Brustein & Manasevit, PLLC © 2016. All rights reserved.

Subrecipients: my pass-through agency is refusing my indirect cost rate – now what? Are you trying to use an unrestricted rate for a restricted rate program? Reminder: Programs with non-supplanting provisions must use a restricted rate. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Subrecipients: my pass-through agency is refusing my indirect cost rate – now what? COFAR FAQs: Q. Is it acceptable to require a subrecipient to accept a rate lower than 10% MTDC, or in lieu of their negotiated indirect rate? A. If the subrecipient already has a negotiated indirect rate with the federal government, the negotiated rate must be used. It also is not permissible for pass-through entities to force or entice a proposed subrecipient without a negotiated rate to accept less than the de minimis rate. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Subrecipients: my pass-through agency is refusing my indirect cost rate – now what? COFAR FAQs: Q. Can Federal awarding agencies and pass-through entities permit this practice when it is truly voluntary? A. Yes. If a non-Federal entity receiving a direct Federal award or a subrecipient voluntarily chooses to waive indirect costs or charge less than the full indirect cost rate, Federal awarding agencies and pass-through entities can allow this. The decision must be made solely by the non-Federal entity or subrecipient that is eligible for IDC reimbursement, and must not be encouraged or coerced in any way by the Federal awarding agency or pass-through entity. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Subrecipients: my pass-through agency is refusing my indirect cost rate – now what? “You may wish to remind your pass-through entity of their obligation under the uniform guidance in part 200.331. … [T]he pass-through entity will be vulnerable to any of the [enforcement] measures available[.]” Brustein & Manasevit, PLLC © 2016. All rights reserved.

Allocating Salaries and Benefits Time and Effort Brustein & Manasevit, PLLC © 2016. All rights reserved.

Allocation of Effort Using a Basis Other Than Time Reminder: Grantees must prove allocability of salaries to benefitted cost objectives. Direct costs may be allocated to benefitted projects on any reasonable documented basis. 2 CFR 200.405. Typically, salaries are allocated based on the time spent on each cost objective. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Allocation of Effort Using a Basis Other Than Time Sometimes employees are unable to divide the time between each of the programs or cost objectives because of the nature of the project. Allocate costs using a proxy for time spent Brustein & Manasevit, PLLC © 2016. All rights reserved.

Allocation of Effort Using a Basis Other Than Time Example 1 (from ED’s 1992 Guidance on A-87): Employee develops a manual for LEAs to use in improving parental participation in programs supported by an ED grant and several other grants. One manual is produced; the employee is unable to divide the time spent on each grant. Grantee may prorate the costs to each grant on the basis of the proportion of funds allocated for each of the grants benefitting from the manual. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Allocation of Effort Using a Basis Other Than Time Example 2 (from ED’s 1992 Guidance on A-87): Teacher teaches a class composed of 15 Title I and 5 special education students with similar educational needs. The class is not structured in a way that permits allocation of time between groups; the class is taught as a whole. Teacher may prorate time equitably based on the proportion of TI (75%) and sped (25%) students. The allocation would change if the class roster changed. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Allocating Benefits Brustein & Manasevit, PLLC © 2016. All rights reserved.

Allocating Benefits 200.431(b)(3)(i) – unused leave at retirement or termination; 2013, indirect costs; 2014, allowable in year of payment; 2015 FAQs – allocate … as a general admin expense to all activities of the gov’t unit or component or with the approval of the cognizant agency for indirect costs, the costs can be included in fringe benefit rates.   200.431(i)(2)(i) – normal turnover severance payments – allocated to all activities (previously allocated to all activities as indirect) 200.431(e)(3) Workers comp, unemployment, severance pay, 2013, allocated as indirect; 2014: actual claims, follows a consistent costing policy

Allocating Benefits Cost Allocation Guide Unused leave – included as an indirect cost Restricted rates: unused leave associated with unallowable labor costs (e.g. chief executive) removed from the pool and added to distribution base Severance pay – included as an indirect cost Mass severance allowable on case-by-case basis with ED approval Post Retirement Health Benefits – “pay-as-you-go” approach is acceptable if funded within 6 months of the end of the year. Brustein & Manasevit, PLLC © 2016. All rights reserved.

Prior approval Brustein & Manasevit, PLLC © 2016. All rights reserved.

Brustein & Manasevit, PLLC © 2016. All rights reserved. Clear as mud? “Under any given federal award, the reasonableness and allocability of certain items of costs may be difficult to determine.” May obtain prior written approval in advance of incurring special or unusual costs as a safeguard. 2 CFR 200.407 Brustein & Manasevit, PLLC © 2016. All rights reserved.

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This presentation is intended solely to provide general information and does not constitute legal advice or a legal service.  This presentation does not create a client-lawyer relationship with Brustein & Manasevit, PLLC and, therefore, carries none of the protections under the D.C. Rules of Professional Conduct.  Attendance at this presentation, a later review of any printed or electronic materials, or any follow-up questions or communications arising out of this presentation with any attorney at Brustein & Manasevit, PLLC does not create an attorney-client relationship with Brustein & Manasevit, PLLC.  You should not take any action based upon any information in this presentation without first consulting legal counsel familiar with your particular circumstances. Brustein & Manasevit, PLLC © 2016. All rights reserved.