Identifying and Classifying Costs for Indirect Cost Rates

Identifying and Classifying Costs for Indirect Cost Rates North Carolina Department of Health and Human Services Office of the Controller Cost Analysis/Federal Financial Reporting/Administrative Services October 2016

Objectives q Background q Purpose of Cost Principles q Identifying allowable and unallowable costs q Determining q Types whether cost is direct or indirect of indirect cost rates q Examples of indirect cost rates

Background Prior to 12/26/2013, cost principles for nonprofits fell under OMB Circular A-122; state and local government cost principles were contained in OMB Circular A-87 o Effective 12/26/2013, federal circulars were collapsed to one super circular, the OMB 2 CFR Uniform Administrative Requirements, Cost Principles, and Audit requirements for Federal Awards o Basic cost principles remained largely unchanged o

Purpose of Cost Principles • To determine the allowable cost of work performed by the non-Federal entity • To provide framework for consistent treatment of costs across grants • Emphasis on identifying types of cost

Cost Principles Nonprofit organization means any corporation, trust, association, cooperative, or other organization, not including IHEs, that: (1) Is operated primarily for scientific, educational, service, charitable, or similar purposes in public interest (2) Is not organized primarily for profit (3) Uses net proceeds to maintain, improve, and/or expand its operations. (Major nonprofit organizations receive more than $10 million dollars in Federal funding of direct costs)

What is an “allowable” cost? Expenditures that are specifically permitted under grant agreement Costs that are Eligible Reasonable Necessary Allocable

Examples of Allowable Costs Employee health and welfare – documented policies for improvement of working condition, employee health Advertising—for recruitment of personnel, procurement of goods and services, etc. Maintenance and repair costs Professional service costs Employee compensation—when reasonable, with time worked on grant documented

Allowable Costs Requiring Prior Approval Fundraising activities that meet program objectives Goods and services for personal use in relation to housing and rent Organization costs for establishing or reorganizing an organization Participant support costs for trainees in the form of stipends, travel and subsistence allowances Advisory councils

Unallowable costs Not reasonable Not allocable to the award Not necessary Not allowed by grant agreement

Examples of Unallowable Costs Alcoholic beverages - for any purpose Bad debts Entertainment Contributions and donations Lobbying – attempts to influence government officials Fines and penalties Defense and prosecution of criminal proceedings

Allocable Cost is incurred for benefit of one grant Cost benefits more than one grant but can be proportioned to each through use of reasonable methods (direct cost) Each receives appropriate allocation If applicable, have approved cost allocation plan Necessary for overall operation of organization (indirect costs) If difficult to determine, seek prior, written approval for the expenditure

Composition of Costs Ø Total costs = allowable direct costs + allocable indirect costs – applicable credits Ø May not exceed actual costs incurred Ø No universal rule for classifying costs as direct or indirect Ø Must be treated consistently in like circumstances

Direct costs Can be identified specifically with a particular program or objective, such as Compensation Cost of materials Equipment Travel Can to employees / capital expenditures expenses be assigned to activity with high degree of accuracy

Examples of direct costs May or may not be allowable Maintenance of membership rolls, subscriptions, publications, and related functions Providing services and information to members, legislative or administrative bodies, or public Advertising, promotion and other forms of public relations Meetings and conferences except those held to conduct general administration of the organization Maintenance, protection, and investment of special funds not used in operation of organization Administration of group benefits on behalf of members or clients, including life and hospital insurance, annuity or retirement plans, financial aid, etc.

Indirect costs—Categories Facilities Depreciation and use allowances on buildings, equipment and capital improvement Interest on debt associated with certain buildings, equipment and capital improvements Operations and maintenance expenses Administration General administration (director’s office, clerical support General expenses (human resources, accounting, personnel, library expenses and all other types of expenditures not listed under facilities)

Examples of indirect costs Rent Square footage used by each program Utilities Building maintenance / minor renovation Accounting or payroll functions Human Resources Director and administrative staff Telephone and postage

Direct or Indirect—Rules for use Direct costs based on Nature of costs Meeting cost principle guidelines Group indirect costs Logically Distribute equitably to all programs Based on benefits Not on funds available or revenues received Cannot duplicate any direct costs

When can indirect costs be treated as direct costs? Grant project has special need for service or item beyond normal Can be specifically identified to grant Costs are specified and justified in budget and narrative—accepted by funding agency Funding agency does not specifically disapprove in grant agreement

Indirect Cost Rates Creation of a 10% de minimis rate of modified total direct costs (MTDC) for any Non-Federal entity that does not have a Federally negotiated Indirect Cost Rate. MTDC Include: All direct wages, fringe benefits, materials and supplies, services, travel and sub-awards and sub-contracts up to the first $25, 000 of each sub-award or contract. MTDC Exclude: Equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarship and participant support costs.

Indirect Cost Rates Appendix IV to Part 200 – Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Nonprofit Organizations Allocation of Indirect Costs and Determination of Indirect Cost Rates Negotiation Certificate and Approval of Indirect Cost Rates of Indirect (F&A) Costs

Simplified Allocation Method Organization’s major functions benefit from its indirect cost to the same degree Separate total costs into direct and indirect categories Eliminate applicable credits, unallowable costs and capital expenditures Include adjustments such as depreciation expense. Divide allowable indirect costs by the direct cost base The equitable distribution base can be the total direct cost base (less subawards of $25, 000 or greater), direct salaries and wages or other base providing equitable distribution The indirect cost rate is applied is applicable to all awards of the organization

Other Allocation Methods Multiple Allocation Base Method indirect cost pools developed in the Facilities and Administration categories Each cost pool has its unique indirect Cost Rate Indirect Costs distributed to Federal awards based on Modified Total Direct Cost

Other Allocation Methods Direct Allocation Method All costs, with the exception of general administration, are classified as direct costs Three categories of cost: General Administration Fundraising Other Direct Functions (projects) Joint costs, such as depreciation, rent, operation/maintenance of facilities, telephone, are allocated (prorated) as direct costs

Types of Rates Fixed Rate – Most common rate used – rate is based on an estimate of costs. The difference between the estimated costs and the actual costs of the period covered by the rate, is carried forward as an adjustment in the subsequent rate Predetermined Rate – Like the fixed rate, the predetermined rate is based upon an estimate of costs for the period covered. No adjustment is made. Final Rate – this rate is applicable to a past period based upon that period’s expenses. Not subject to adjustment Provisional Rate – A temporary rate used until the final rate is established at the end of the period Rates are commonly set for the entity’s fiscal year

Submitting the Indirect Cost Rate Proposal Introduction stating the purpose of the organization and the programs administered by the entity Narrative of the Cost Allocation Methodology including explanations of how different categories of costs are treated, (i. e. “Supplies and Materials”: General office supplies are charged according to the number of staff per program in that facility. ) Chart of cost allocation methods used – type of service and basis for direct allocation Schedules depicting summary of cost components (direct costs, indirect costs and summary of all costs with the rate calculation Agreed Upon Procedures – an independent accountant’s report attesting to the validity of the procedures performed in calculating the rates.

Certification All rate proposals should include the following form: Certificate of Indirect (F&A) Costs This is to certify that to the best of my knowledge and belief; (1) I have reviewed the indirect cost proposal submitted herewith; (2) All costs included in this proposal [date] to establish indirect cost rates for [date of period covered] are allowable in accordance with the requirement of the Federal awards to which they apply and with Subpart E-Cost Principles of Part 200. (3) This proposal does not include any costs which are unallowable under Subpart E – Cost Principles of Part 200 such as (without limitation); contributions and donations, entertainment costs, fines and penalties, lobbying costs and defense of fraud proceedings; and

Certificate Continued…. (4) All costs included in this proposal are properly allocable to Federal awards on the basis of ta beneficial or causal relationship between the expenses incurred and the Federal awards to which they are allocated in accordance with applicable requirements. I declare that the foregoing is true and correct. Nonprofit Organization : ___________________ Signature: __________________________ Name of Official: ______________________ Title: _____________________________ Date of Execution: ______________________

Final Steps Submit the indirect Cost Proposal to the Grantor submits the proposal to the DHHS Office of the Controller (Oo. C) The Oo. C performs the review and contacts the nonprofit, if needed, to resolve questions or ask for additional information Once approved, the Oo. C sends an approval letter to the Grantor

Questions? Helpful Link OMB Super Circular: http: //www. ecfr. gov/cgi-bin/textidx? tpl=/ecfrbrowse/Title 02/2 cfr 200_main_02. tpl