1. Cost Allocation and the UGG
AEFFA
October 18, 2016
Pittsburgh, PA
Brustein & Manasevit, PLLC Bonnie Little Graham
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2. In order to be allowable, all costs must be reasonable, necessary and “allocable”
2 CFR (a)
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3. Allocable costs – 2 CFR
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
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4. Direct Cost Allocation
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5. Allocable costs – 2 CFR
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.
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6. What is reasonable?
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7. 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
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8. 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
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9. 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.
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10. 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
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12. 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 (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 (e) (non-federal entity may shift costs that are allowable under two or more awards between those awards)
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13. 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 (d)
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14. 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 (c)(2).
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15. Indirect Cost Allocation
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16. Total Cost of Federal Awards
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17. 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
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18. 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.
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19. Calculation: It’s a fraction!
Top: “Indirect Cost Pool”
Bottom: “The Base”
Can be “Total modified direct cost base” or “Salaries and Wages”, etc.
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20. 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)
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21. 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.
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22. 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
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23. Wrong Way/Right Way Modified Total Direct Cost Base (MTDC)
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24. 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)
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25. Restricted Indirect Cost Rate
Special rules for non supplant programs
Restricted indirect cost rates
EDGAR 34 CFR
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26. 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
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27. 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
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28. 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
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29. 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
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30. 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?
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31. 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, Direct costs 90, Indirect costs + 9, $100,000
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32. 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
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33. 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 x ($100,000 - = $3, (max indirect costs) 1.08 $50,000)
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34. 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 $ in calculated indirect costs because of the admin cap
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35. 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
UGG defines “subawards” to exclude payments made to a contractor. 2 CFR
“Subcontracts in excess of $25,000.” Appendix VII, C.2.c.
Restricted rate:
“Subgrants.” 34 CFR
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36. 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.
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37. 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
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38. 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!!
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39. 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.”
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40. 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.
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41. SEAs: do I have to negotiate rates with non-LEA subrecipients?
Pass through entities must provide an ICR to subrecipients. 2 CFR (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)
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42. 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 (c)
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43. 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 (c)
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44. 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 (a)(4).
SEA may offer restricted rate of 8% MTDC, if reasonable. 34 CFR (c)
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45. 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.
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46. 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.
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47. 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.
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48. 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 … [T]he pass-through entity will be vulnerable to any of the [enforcement] measures available[.]”
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49. Allocating Salaries and Benefits
Time and Effort
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50. 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
Typically, salaries are allocated based on the time spent on each cost objective.
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51. 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
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52. 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.
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53. 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.
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54. Allocating Benefits
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55. Allocating Benefits
(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.
(i)(2)(i) – normal turnover severance payments – allocated to all activities (previously allocated to all activities as indirect)
(e)(3) Workers comp, unemployment, severance pay, 2013, allocated as indirect; 2014: actual claims, follows a consistent costing policy

56. 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.
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57. Prior approval
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58. 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
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