© Wipfli LLP 1 Indirect Cost Rates © Wipfli LLP Trainer: Karl Eck, CPA, Senior Manager

© Wipfli LLP Agenda What an indirect costs are What an indirect cost rate is Indirect cost distribution bases Costs to include in the indirect cost pool Types of indirect cost rates Negotiation and approval of indirect cost rates Changes from 2 CFR Part 200 (The Super Circular) 2

© Wipfli LLP Indirect Costs Common questions Am I required to have an indirect cost rate? – Answer: No How about under 2 CFR Part 200? – Answer: Probably not, or at least not yet 3

© Wipfli LLP Indirect Costs Indirect Costs…..What are they? Indirect costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective Examples include: Executive Director, rent for administrative space, phone, utilities, etc. Equipment and other capital expenditures are unallowable as indirect costs but costs can be recovered through depreciation 4

© Wipfli LLP Indirect Costs Indirect Cost Rate A ratio, expressed as a percentage, of the indirect costs (pool) to a direct cost “base”. The base is usually total direct costs (excluding capital expenditures and other distorting items) or direct salaries and wages. 5

© Wipfli LLP Indirect Costs Applying an Indirect Cost Rate 6

© Wipfli LLP Indirect Costs What an indirect cost rate looks like in a perfect world 7

© Wipfli LLP Indirect Costs What an indirect cost rate looks like in the real world (sort of) 8

© Wipfli LLP Indirect Costs What are the advantages of an indirect cost rate agreement? Provides for one method to allocate almost all administrative costs Potentially can make budgeting easier – direct salaries might be easier to estimate than the number of transactions finance will perform Rate and method are federally approved You still likely will have to do some cost allocation. 9

© Wipfli LLP Indirect Costs What are the disadvantages of an indirect cost rate agreement? Rate and method are federally approved – subject to individual cost negotiator preferences May lose some flexibility in how you determine the manner in which programs are charged for administrative costs Typically need to finalize and approve the rate every year 10

© Wipfli LLP Indirect Costs Distribution bases for indirect cost recovery: Total direct costs (excluding capital expenditures and other distorting items, such as major subcontracts or subgrants) Direct salaries and wages Other base that results in equitable distribution 11

© Wipfli LLP Indirect Costs What is the best distribution base? Depends on your organization. 12

© Wipfli LLP Indirect Costs Total direct costs: Excludes subcontracts and sub awards over $25,000 Equipment/capital expenditures Participant support costs 13

© Wipfli LLP Indirect Costs 2 CFR – Prior written approval (prior approval) In order to avoid subsequent disallowance or dispute based on unreasonableness or nonallocability, the non-Federal entity may seek the prior written approval of the cognizant agency for indirect costs or the Federal awarding agency in advance of the incurrence of special or unusual costs. 14

© Wipfli LLP Indirect Costs 15 Executive Director Finance Director Toner Utilities AP Clerk Paper IT Director Maintenance Travel Software Board costs Training Independent Auditor Funding Sources Division of Cost Allocation What’s in Your Pool?

© Wipfli LLP Indirect Costs 16 What to include in the base Total direct costs for all activities that benefit the organizations indirect costs This would include certain unallowable costs such as fundraising Also includes programs that do not allow for indirect charges

© Wipfli LLP Indirect Costs DCA FAQ: Question # 6: What is the primary issue the DCA faces when receiving indirect cost rate proposals? Answer: The primary issue usually falls into one of two categories. The documentation submitted to support the development of the indirect cost rate is not adequate and/or the proposal is not reconciled to the organization’s audited financial statements. 17

© Wipfli LLP Indirect Costs DCA FAQ: Question # 12: What should a grantee do when an award does not provide for indirect cost reimbursement or provides for indirect costs at a rate lower than the one in the negotiation agreement? How does this effect the development of the indirect cost rate? Answer: The decision to accept an award that does not pay indirect costs or pays indirect costs using a rate lower than what has been negotiated is a grantee decision. However, when developing the indirect cost rate, all awards, regardless of whether they pay full indirect costs or not, must be included in the direct cost base. Indirect costs that are not reimbursable under a Federal or non- Federal award due to administrative or statutory restrictions may not be shifted to another Federal award unless specifically authorized by Federal legislation or regulation. Non-Federal revenue sources must be used to pay for these un-recovered costs. 18

© Wipfli LLP Indirect Costs DCA FAQ: Question # 13: Our grant with HHS totals $500,000 and includes a provisional indirect cost rate of 10%. Our final indirect cost rate is 13%. Will HHS provide us with additional grant funds due to our higher indirect cost rate? Answer: HHS will not provide your organization with additional grant funds due to a higher final indirect cost rate than the established provisional rate. However, a grant modification may be allowed to transfer budgeted direct costs to the indirect cost category due to the increased indirect costs. This would be subject to the terms and conditions of the grant agreement, e.g. approval of grant officer, indirect cost ceilings, and administrative cost limitations. The grants officer should be contacted for additional information. 19

© Wipfli LLP Indirect Costs DCA FAQ: Question # 14: Can our indirect cost rate proposal be developed using only Federal funds since it only represents 15% of our total revenue? Answer: No. An indirect cost rate proposal must be based on total organization costs, regardless of funding. 20

© Wipfli LLP Indirect Costs Types of indirect cost rates Provisional Rate – Temporary rate established for a given period of time pending the establishment of a final rate for that period – It is very important to budget accurately with a provisional rate Final Rate – Permanent rate established after the organization’s actual costs are known – Used to adjust indirect costs initially clamed based on provisional rates 21

© Wipfli LLP Indirect Costs Types of indirect cost rates (cont.) Predetermined Rate – A permanent rate established for a specific future period – Not subject to adjustment except in very unusual circumstances – Will lose money if the rate is too low – Could generate a profit if the rate is high enough 22

© Wipfli LLP Indirect Costs Types of indirect cost rates (cont.) Fixed Rate With Carry-Forward Provision – Permanent rate with the same characteristics of a predetermined rate, however, the difference between the estimated an actual costs is carried forward into the next year – If the rate is too low, you will have to use unrestricted cash to cover the shortfall until the rate is revised upwards 23

© Wipfli LLP Indirect Costs Most often we see nonprofits are issued a provisional indirect cost rate The DHHS guide for indirect cost rates states “ Organizations are encouraged to use either predetermined rates or fixed rates with carry forward provisions where feasible and permissible under law and regulation. These rates permit a more timely closing of complete awards and generally eliminate the necessity making retroactive adjustments on individual awards as would be the case when provisional and final rates are used.” 24

© Wipfli LLP Indirect Costs Provisional Rate Timeline Grant end date – March 31, 2014 Agency year-end – December 31, 2014 Indirect proposal due date and submitted – June 30, 2015 Final rate received – September 30, 2015?? In this scenario, 18 months have passed since the grant ended – do you and your funding sources want to make changes? 25

© Wipfli LLP Indirect Costs Provisional Rates Budgeting is critical as the provisional rate will be finalized later at the actual rate Since many grants are closed, it is not desirable to refund funds back to funding sources on closed grants Even more difficult to obtain more money on a closed grant We recommend obtaining a sufficiently high rate and adjusting to the final rate during the year 26

© Wipfli LLP Indirect Costs Provisional Rates (cont.) Some are getting provisional rates at the prior year final rate Can you charge more than your provisional rate? 27

© Wipfli LLP Indirect Costs Indirect Allocation Methods Simplified – after making adjustments for unallowable costs, a single rate is computed by dividing the indirect costs by the costs of direct functions or activities Multiple – where an organizations indirect costs benefit its major functions in various degrees Special – when a particular segment of work is performed in an environment which appears to generate a significantly different level of indirect costs, provisions should be made for a separate indirect cost pool applicable to such work 28

© Wipfli LLP Indirect Costs How to get an indirect cost rate if you do not have one First, you need a direct federal grant that mandates and indirect rate, otherwise the feds likely will not approve an indirect rate Submit a proposal to your cognizant agency – Cognizant agency is the department that provides your organization with the most direct federal funding – If the cognizant agency is DHHS, the proposal is submitted to the Regional Division of Cost Allocation (DCA) responsible for your geographical area 29

© Wipfli LLP Indirect Costs How to get an indirect cost rate if you do not have one (cont.) If you do not have direct federal funding, then it is up to the agency that provides the most indirect federal funding – Most non-federal entities are hesitant to award indirect cost rates to their subrecipients but may change with 2 CFR Part 200 If you already have an indirect cost rate – Due 6 months after the end of your fiscal year, you can request an extension under extenuating circumstances 30

© Wipfli LLP Indirect Costs What to submit with your proposal Must be accompanied by and cross referenced to your independently audited financial statements If a rate is based on future projected costs, the rate must be cross-referenced and reconciled to the organization’s budget for that year Approximate amount of direct cost base costs incurred under federal awards 31

© Wipfli LLP Indirect Costs What to submit with your proposal (cont.) Fringe benefit information – A listing of the fringe benefits provided to the organization’s employees – A copy of the organization’s fringe benefit policies – A description of the method(s) used to budget and charge fringe benefit costs to programs or activities – The funding practices of a “defined benefit” pension plan along with the treatment of prior service costs and actuarial gains and losses – If a fringe benefit rate is used, reconciled and cross referenced to the organization’s financial statements 32

© Wipfli LLP Indirect Costs Approval of Rates DCA will approve an indirect cost rate(s) with the organization In some cases, DCA may request an audit of the proposal before the rates are approved Approval will be formalized by a Rate Agreement signed by the DCA and an authorized representative of the organization Rate Agreement will include the type of rate, base used and other general terms and conditions 33

© Wipfli LLP Indirect Costs Approval of indirect cost rates with subgrantees and subcontractors Prime contractors and grantees are responsible for approving indirect cost rates Approvals must be based on the federal cost principles The procedures followed by the grantee or contractor in evaluating the subawardee’s indirect cost proposal and approving the rate should be should be documented and are subject to review Upon request, DCA will provide technical assistance 34

© Wipfli LLP Indirect Costs Disputes DCA will make an unilateral determination of the rate(s) considered acceptable by the Department and will notify the organization of the determination DCA will also advise the organization of its right to appeal the determination and the appeal procedures to follow The organization may appeal the determination under either the Department’s Grant Appeals Regulations (45 CFR, Parts 75 and 16) or the disputes provision of affected contracts 35

© Wipfli LLP Indirect Costs Resources to help you: Many indirect cost links are on our NGP website Your auditors Federal agency websites 36

© Wipfli LLP Indirect Costs Indirect cost rates and your auditors: OMB Circular A-133, Sec. 305 – An auditor who prepares the indirect cost proposal or cost allocation plan may not also be selected to perform the audit required by this part when the indirect costs recovered by the auditee during the prior year exceeded $1 million. Keep in mind Government Auditing Standards on independence as well – no management decisions 37

© Wipfli LLP Indirect Costs Other matters to keep in mind Not all programs allow for indirect costs or some programs limit them – you need to determine what funds will cover those costs Generally, all activities need to be included in your indirect cost allocation plan, this would include any for-profit or fundraising activities in your organization There also is an option to allocate fringe benefit costs using a separate indirect cost rate for fringe benefits 38

© Wipfli LLP Indirect Costs Changes from the super circular Organizations that have never had an indirect cost rate agreement can implement a flat rate of 10% of modified total direct costs (MTDC) – No approval is necessary – Required to disclose in your audit if you use or not in the notes to your federal awards schedule – Must be consistently used once elected until the entity choses to negotiate for a rate 39

© Wipfli LLP Indirect Costs Changes from the super circular (cont.) (c) – The salaries of administrative and clerical staff should normally be treated as indirect (F&A) costs. Direct charging of these costs may be appropriate only if all of the following conditions are met: (1) Administrative or clerical services are integral to a project or activity; (2) Individuals involved can be specifically identified with the project or activity; (3) Such costs are explicitly included in the budget or have the prior written approval of the Federal awarding agency; and (4) The costs are not also recovered as indirect costs. (This could result in pushing more organizations into indirect cost rates!) 40

© Wipfli LLP Indirect Costs Changes from the super circular (cont.) Any non-Federal entity can apply for a one-time extension of a currently negotiated rate for up to 4-years (b)(3)(i) - Payments for unused leave when an employee retires or terminates employment are allowable as indirect costs in the year of payment. 41

© Wipfli LLP Indirect Costs Changes from the super circular (cont.) Actual claims paid to or on behalf of employees or former employees for workers' compensation, unemployment compensation, severance pay, and similar employee benefits (e.g., post-retirement health benefits), are allowable in the year of payment provided that the non-Federal entity follows a consistent costing policy and they are allocated as indirect costs. 42

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