1. NSAA/NASC Joint Middle Management Conference April 10 - 12, 2006 INDIRECT COST PLANS Presented by Bob Antrim Director, MAXIMUS robertantrim@maximus.com

2. Basic terminology, concepts and reference material Indirect Cost Rates– what is it? Responsibilities, Timing and incentives Types of indirect cost rates and proposals Methods of Recovery Review a sample Rate Calculation Agenda

3. Key Points of the Training Understand the concepts of indirect costs, direct costs and allocated costs Understand the general guidance contained in Federal material To learn how to construct a basic indirect cost rate proposal (single rate) To be aware of issues that involve indirect cost rate and indirect cost recovery

4. Terminology and Alphabet Soup ` Indirect costs (IDC) are overhead costs Statewide level Department Administration level Division level Cognizant Federal Agency Federal agency assigned to review and approve indirect costs rates and cost allocation Plans Indirect Cost Rate (ICR) Ratio of Indirect Costs divided by a chosen base Must be approved by a federal cognizant agency for State departments Indirect Cost Rate Proposal (ICRP) Document that is sent to the federal cognizant agency to obtain approval of a rate or fixed costs

5. Terminology and Alphabet Soup Direct Cost Base Salary and Wage (S&W) Total Direct Cost (TDC) Modified Total Direct Cost (MTDC) Single Rate or Multiple Rate proposals Single rate applies to all direct organizations (divisions) Multiple rates applies to specific sub-organizations Cost allocation Plan (CAP) Needed to establish indirect allocations to direct sub-organizations Supports the allocation needed for multiple rates Departmental Indirect Cost Allocation Plan (DICAP) A Department-level Cost Allocation Plan

6. Terminology and Alphabet Soup Public Assistance Cost Allocation Plan (PACAP) Narrative Public Assistance Cost Allocation Plan Describes in detail all the cost assignment methods Actual claiming is completed quarterly, including indirect Federal Negotiation Agreement Signed agreement from the Federal cognizant agency to establish indirect rates, or fixed costs for use by the State agency Statewide Indirect Cost Allocation Plan (SWCAP or SCAP, or even SWICAP) A Cost Allocation Plan to allocate the States overhead, and to present information on direct billed costs like fringe benefits Section I costs and Section II costs refer to the sections of statewide Cost Allocation Agreement Section I refers to statewide allocated overhead Section II refers to any directly billed costs (fringe, ISFs etc)

7. Reference Material OMB Circular A-87 COST PRINCIPLES FOR STATE, LOCAL, AND INDIAN TRIBAL GOVERNMENTS Original version in 1968 Major Revision in 1995 Available on the WEB: http:/www.whitehouse.gov/omb/circulars/ a087/a87_2004.pdf The Circular does apply to Cost-reimbursement contracts Grants and cooperative agreements Sub-grants or subcontracts awarded to governmental units under grants awarded to the Federal recipient

8. Reference Material OMB Circular A-87 (now 2 CFR Part 225) Sets POLICIES/PROCEDURES for Identification of Costs to Programs Identifies ALLOWABLE AND UNALLOWABLE costs Specifies COST ALLOCATION criteria/requirements Stipulates DOCUMENTATION requirements Mandates COGNIZANT AGENCY approval/appear concept Brings ORDER AND RATIONALITY to the cost determination and approval process A-87 DOES NOT OVERRIDE a programs specific laws or regulations

9. Reference Material Other specific guidance ASMB C-10 Supplemental Guide published by DHHS to provide procedural guidance for implementation http://www.hhs.gov/grantsnet/state/asmbc10.pdf Review Guide for State and Local Governments – State/Local wide Central Service Cost Allocation Plans – from US DHHS Div of Cost Allocation http://rates.psc.gov/fms/dca/s&lguide.pdf Specific program legislation may supersede A-87 Single Audit Act and OMB Circular A-133 established uniformity among federal audit requirements GAAP - Audit guides, such as Federal Acct Standards Board EDGAR – Education Department Administrative Regulations applicable to funding under US DOE only. Restricts indirect costs http://www.ed.gov/policy/fund/reg/edgarReg/edgar.html

10. Indirect Costs Defined: Indirect Costs are overhead costs incurred for joint purposes that may not be identified with a single use without effort out of proportion to the benefit of that analysis. They must be allocated using an allocation method. They may cross lines of departments and funds. They may even extend outside the grantor department. Examples: costs of providing accounting, budgeting and financial support (purchase orders, vouchers, warrants etc.) (See later slide on factors affecting the allowability of costs) Indirect Costs - General

11. Ratio of Indirect Cost to Direct Cost = Indirect Cost Rate INDIRECT COSTS Divided by DIRECT COSTS (chosen base) Equals INDIRECT COST RATE (% Ratio) (% Ratio)

12. Indirect Costs - General ` WHY do we use indirect cost rates? To recover some of the overhead cost related to the administration of federal and state grants Rates make it relatively easy - since no extensive tracking of costs is necessary to every direct activity Rates allow for recovery to increase or decrease in proportion to the base – if a grant program grows in size, so does the indirect recovery WHEN should we use an indirect cost rate? When we have a timely rate on file that is completed in accordance with OMB Circular A-87 And when award allows reimbursement of indirect costs as part of the award approved budget And when we choose to actually claim and recovery indirect cost Or when we choose to identify the indirect cost as part of required State match

13. Factors affecting the allowability of COST Necessary and reasonable Allocable to Federal awards. This means joint costs that must be allocated to ALL benefiting activities, including non-federal and unallowable All allocated cost elements must at least have some POTENTIAL BENEFIT to Federal awards Authorized and not prohibited under State or local laws or regulations Indirect Costs - General

14. Responsibilities, Timing and Incentives Responsibilities - Individual State Departments/agencies that need an ICRP Prepare the Indirect Cost Rate Proposal Usually annually, based on one full fiscal year of cost (or budgeted) Submit the ICRP to the federal cognizant agency (6 months) Negotiate the Plan with the agency Receive and sign the agreement and return to cognizant agency Notify internal and grantor agencies as necessary Responsibilities - Central State Budget or Administrative agency Prepare the Statewide Cost Allocation annually Submit to the cognizant agency (6 months) Negotiate, receive approval, sign agreement Distribute agreement to individual departments

15. Responsibilities, Timing and Incentives Responsibilities - Federal Cognizant Agency Receives Indirect Cost Rate Proposal and/or Cost Allocation Plan –Submitted within six months after SFY end, unless formal extension requested and granted Negotiate and approve the rate(s) Sign the Cost Allocation Agreements and transmit to the agency for signature The two-party signed agreement is made available to other Federal awarding agencies as necessary The cognizant Federal agency should defend the approved rate(s) if challenged by other federal awarding agencies

16. Responsibilities, Timing and Incentives Timing: What is the Cycle of How are Costs Recovered? Individual departments review grant budgets and determine if any grants potentially allow reimbursement of Indirect Costs Agency prepares and submits an indirect cost proposal to the cognizant agency State Department receives approval of rate(s) from the cognizant agency Discuss/negotiate the grant budget with federal program coordinators, and seek to include a line item for indirect cost in the grant budget application As quarterly cost claims are prepared, the approved rate is used to estimate the recovery (And to close-out grant fiscal years) If the rate is not yet approved for the period - contact the federal grant coordinator to see what rate to use until approval The amount claimed as grant cost is the indirect rate X the chosen base Be aware that a provisional rate will require a final rate adjustment

17. Responsibilities, Timing and Incentives Indirect Cost Recovery: Typical underlying incentives and motivators: Central State Budget Agency – Typically seek to recover as much indirect cost as possible, and prefer to deposit the receipts into the General Fund and reappropriate Departmental Budget Office and Executive Administration – Typically seek to recover as much indirect cost as possible and deposit the recovery into a Departmental Fund, and seek appropriation from that fund for Department objectives Grant program staff – Typically seek to avoid indirect cost recovery so that the available grant money can be used for direct program purposes Departmental Budget and Financial Management staff – Strive to keep everyone listed above happy!

18. Methods of Recovery – Indirect Cost Rates How are Costs Recovered? Calculates indirect costs for year X. Applies them to current year as a percentage of salary rather than as a fixed dollar amount. Costs reconciled when known, affecting future rate. Basic advantages of using rates Indirect cost are claims and paid as percentage of salary (if salary base) Allows for indirect recovery to float flexibly, based on level of salary. As programs grow and as salaries rise, indirect support costs rise (and vice versa ) Multiple rates may allow the indirect costs to be assigned more closely to those areas that incur greater costs.

19. Single Rate: Provides a single to rate to use for all programs Department-wide Does not provide for recovery of Division-level costs Single Rate Calculation – refer to Sample Agency Single Rate ICRP handout Summarize the allowable indirect costs, including SWCAP (statewide) costs and administration (Col 1) Enter exclusions for non-operational costs like capital, debt service, and flow-through sub-grants or other non-operations costs (Col 2) Exclude unallowable costs from the indirect pool, including costs that may have no potential benefit to all programs (Col 3) Add adjustments for equipment use charge, depreciation, or other adjustments such as SWCAP, centrally paid fringe benefits, interest on buildings, etc (Col 1 in Adjustments Section) Methods of Recovery: Single vs. Multiple Rate

20. Single Rate Calculation – refer to Sample Agency worksheet handout Summarize the total allowable indirect costs, including departmental indirect plus adjustments (Col 1 grand total) Summarize the direct salary base - assuming the chosen base is Total Direct Salary (Col 13 – Salary and Wage line only) Calculate the proposed rate Total Indirect from Column 1 divided by Direct Base

21. Methods of Recovery: Single vs. Multiple Rate Single Rate Calculation Advantages Simple. This provides an easy method of recovery Works well when all direct programs benefit relatively uniformly from Indirect Cost – e.g. in reasonable proportion to their direct costs May understate the true cost of some programs, but works well if federal programs and grants have limited indirect budget anyway Single Rate Calculation Disadvantages May not be permitted to include Division-level overhead in the indirect cost pool Less likely to be approvable for a large, complex agency Does not work well when some direct programs use higher cost resources May limit recovery opportunities! Because single rate may understate actual cost in areas that have unlimited indirect cost recovery potential

22. Multiple Rate: Provides multiple rates for difference sub-organizations (Divisions) May requires a Cost Allocation Plan to identify multiple cost pools and multiple allocation bases May also include Division-level costs in the allocation Multiple Rate Calculation – refer to Sample Agency Multiple Rate worksheet handout Prepare Departmental Cost Allocation Plan, with Final Summary of Allocated Costs by Division May include Division Administration In the ICRP summarize the allowable indirect costs for each Division, including SWCAP (statewide) costs, Departmental Indirect Costs and Division-level indirect costs Methods of Recovery: Single vs. Multiple Rate

23. Multiple Rate Calculation: Summarize the direct salary cost base - probably Total Direct Salary Provide supplementary schedules to show support calculations: reconciliation of departmental and division indirect costs and direct costs (to financial statements) adjustments for disallowed costs or exclusions additional adjustments for equipment use charge or depreciation adjustments such as SWCAP, centrally paid fringe benefits, interest on buildings, etc Narrative explanation of the costs and adjustments Calculate the Rates Separate Rate Calculation Worksheets May have carryforward calculation Methods of Recovery: Single vs. Multiple Rate

24. Multiple Rate Calculation Advantages Works well when all direct sub-organizations do not benefit relatively uniformly from Indirect Cost Avoids understatement of the true cost of high overhead programs works well if federal programs and grants have unlimited indirect budget More likely to be approvable for a large, complex agency Can include Division-level overhead in the indirect cost pool Multiple Rate Calculation Disadvantages More complex – Requires a Cost Allocation Plan

25. Methods of Recovery: Rate Adjustment Methods Provisional/Final Rate Approval Rates are approved provisionally for use in Yr 3 - based on actual costs in Yr 1 When Yr 3 costs are known, a final rate calculation is proposed Once approved, the final rate is retroactively applied to Yr 1 grants The over(under) recovery is reported as an adjustment to final grant costs - a payback may be necessary Advantages Provisional/Final Simple - do not have to calculate a complex carryforward Works well when organizational structure, programs, or costs may be somewhat changing or unstable over the three year cycle Disadvantages Provisional/Final Have to retroactively make adjustments to grants (and payback if necessary)

26. Methods of Recovery: Rate Adjustment Methods Fixed with carryforward rate approval Rates are approved as fixed for use in Yr 3 - based on actual costs in Yr 1 plus a carryforward adjustment from Year 1 for rates that were too high or low When Yr 3 costs are known, a new fixed rate is proposed for Yr 5 The proposed Year 5 fixed rate includes a carryforward adjustment from Yr 3 Advantages fixed with carryforward rate approval Works well when organizational structure, programs, or costs may be fairly stable over the three year cycle Do not have to retroactively make adjustments to grants Disadvantages Fixed-with Carryforward Rate More complex – A carryforward calculation can be tough to do!

27. The most important point is to look for all areas of potential indirect cost recovery. In some cases, legislative or regulatory rules will dictate the extent of indirect cost recovery In some cases, the cognizant federal agency may require that a fixed with carry forward rate be used because of organizational instability Does a program use higher cost resources? Multiple rates may be worth a look. Do some programs have greater potential for indirect cost recovery? Multiple rates may support a higher rate. Which method is right for you?

28. Negative carry forwards hurt. Watch out for using a rate that may be too high. The penalty that is built into the calculation is a double whammy. Example: The Year 3 fixed rate is already too high because the ratio of indirect to direct cost has been declining A negative carryforward adds to the decline in rate Indirect costs can and should be an important revenue enhancement program for your general fund Which method is right for you?

29. NSAA/NASC Joint Middle Management Conference