Indirect Costs, Cost Allocation, and Resource Sharing

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1 November 30 December 2, 2016 Indirect Costs, Cost Allocation, and Resource Sharing Bonnie L. Graham, Esq. Michael Brustein, Esq. 1 Why Indirect Costs? Major element of the reform OMB Top 10 Brustein & Manasevit, PLLC All rights reserved. 2 Why Indirect Costs? GAO Report 2010 Executive directive to reduce administrative burden 2011 Stakeholder input: Overwhelming admin burden for indirect rates Inconsistent rates Uneven allowances Brustein & Manasevit, PLLC All rights reserved. 3 1

2 Why Indirect Costs? July 2016: $9.5 Million False Claims Settlement btwn Columbia University and DOJ Brustein & Manasevit, PLLC All rights reserved. 4 Indirect 10% Total Cost of Federal Awards Direct Indirect Direct 90% Brustein & Manasevit, PLLC All rights reserved. 5 Background Purpose of 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 All rights reserved. 6 2

3 What s new? 1. Consistent application of negotiated rates 2. De minimis rate 3. Extension of negotiated rate 4. Classification of administrative and clerical staff 5. Pass through responsibilities Brustein & Manasevit, PLLC All rights reserved. 7 Consistent application of negotiated rates Brustein & Manasevit, PLLC All rights reserved. 8 Consistent application (c) Federal agencies must accept a nonfederal entity s negotiated rate Exceptions: Rate set by statute or regulation Approval of Federal agency head, documented justification OMB approval Public notice Brustein & Manasevit, PLLC All rights reserved. 9 3

4 Consistent application (c) State and local governments, and their subgrantees, must use a restricted rate for programs with a nonsupplanting provision 34 CFR Brustein & Manasevit, PLLC All rights reserved. 10 Consistent application (c) Question: Voluntary undercharging or choosing to waive indirect cost recovery? Allowed, but must not be encouraged or coerced in any way by the federal agency or pass through entity. Brustein & Manasevit, PLLC All rights reserved. 11 De minimis rate Brustein & Manasevit, PLLC All rights reserved. 12 4

5 De minimis rate (f) Non federal entities may receive a de minimis indirect cost rate of 10% of MTDC if the non federal entity never had a negotiated indirect cost rate Received without any review of actual costs De minimis rate is allowable for use indefinitely Brustein & Manasevit, PLLC All rights reserved. 13 De minimis rate (f) But: State or Local Government and Indian Tribe receiving over $35M Not eligible (Appendix VII) Some federal agencies argue all states/leas are ineligible Brustein & Manasevit, PLLC All rights reserved. 14 De minimis rate (f) FAQ If the non federal entity previously had a negotiated rate, but then there was a break in its relationship with the federal government, the non federal entity is not eligible to receive the 10 percent de minimis rate upon receipt of a new award. If organization uses de minimis rate at the beginning of an award, it is not necessarily applicable to the entire period of performance. If a rate is negotiated, the organization would switch to that rate for any continuation or future installments of the award. A non federal entity conducting a single function predominantly funded by federal awards cannot elect to charge the de minimis rate if it currently charges all costs as direct costs Brustein & Manasevit, PLLC All rights reserved. 15 5

6 De minimis rate (f) Ineligible for de minimis rates: State and local governments EDGAR and requires States to negotiate rates with LEAs; accordingly, these entities have a negotiated rate. What about new LEAs/charters? What if a State only negotiated restricted rates, and an LEA has never negotiated an unrestricted rate? Restricted rate programs De minimis rate is an unrestricted rate. Cannot be used for programs with supplement not supplant provisions. Training rate programs, as defined under EDGAR Brustein & Manasevit, PLLC All rights reserved. 16 So who can use this rate? De minimis rate (f) For example, if an SEA administers Child Care and Development Block grant and subgrants to a non LEA that has never negotiated an indirect cost rate before Brustein & Manasevit, PLLC All rights reserved. 17 Rate extensions Brustein & Manasevit, PLLC All rights reserved. 18 6

7 Rate extension (g) Entities with an approved federally negotiated indirect cost rate may apply for a one time extension, without further negotiation subject to the approval of the negotiating federal agency Extension for up to 4 years (may be fewer) Must renegotiate after extension to ensure rates continue to be based on actual costs Brustein & Manasevit, PLLC All rights reserved. 19 What s the catch? Rate extension (g) Only applicable with predetermined or final rates Brustein & Manasevit, PLLC All rights reserved. 20 Rate extension (g) Remind me: There are four types of indirect cost rates: (1) Provisional (2) Final (3) Fixed with carry forward (4) Predetermined Most SEAs/LEAs use fixed with carry forward But grantees can convert to predetermined before making the extension request Brustein & Manasevit, PLLC All rights reserved. 21 7

8 Requests for extensions must be submitted 60 days prior to the due date for indirect cost proposals Rate extension (g) What documentation must be included? ED has not said. COFAR FAQs: Documentation requirements should be kept to a minimum. HHS: submit a request along with the most current audited financial statements and a listing of the federal funding (awards) for the last 3 years. HHS will decide if a 4 year extension, or less, is warranted. Brustein & Manasevit, PLLC All rights reserved. 22 Rate extension (g) If the entity seeks an extension of its final rate, must wait until the final rate is based on the latest applicable audit and completed fiscal year under 2 CFR 200. Assuming a July June fiscal year, then the earliest rate extension would likely not be until July 2017 (once you have audited data from 14 15). Brustein & Manasevit, PLLC All rights reserved. 23 Classification of administrative staff Brustein & Manasevit, PLLC All rights reserved. 24 8

9 Classification of admin staff (c) Salaries of administrative and clerical staff should be treated as indirect unless all of following are met: 1. Such services are integral to the activity 2. Individuals can be specifically identified with the activity 3. Such costs are explicitly included in the budget 4. Costs not also recovered as indirect Brustein & Manasevit, PLLC All rights reserved. 25 No Double Dipping! Classification of admin staff (c) Brustein & Manasevit, PLLC All rights reserved. 26 Classification of admin staff (c) If you charge costs directly to your federal grants, you cannot include the same type of costs in your indirect cost pool, as this will result in doublecharging of federal grants. 2 CFR (d) Brustein & Manasevit, PLLC All rights reserved. 27 9

10 Pass through requirements Brustein & Manasevit, PLLC All rights reserved. 28 Pass through requirements (a)(4) Pass through entities must provide an indirect cost rate to subrecipients, which may be the de minimis rate. Brustein & Manasevit, PLLC All rights reserved. 29 Pass through requirements (a)(4) COFAR FAQs: Not required for nonfederal subawards No limit on number of layers of subrecipients Pass through required to reimburse indirect costs even if temporarily using state funds while waiting for federal funds Brustein & Manasevit, PLLC All rights reserved

11 Pass through requirements (a)(4) COFAR FAQs: Advance agreement to determine single indirect cost rate for blended subawards Subrecipients are not required to establish ICR may direct charge all costs If pass through refuses to honor federally negotiated ICR, remind them of obligation under UGG Brustein & Manasevit, PLLC All rights reserved. 31 November 30 December 2, 2016 Pass through Responsibilities and Allocation of Shared Costs 32 Query My organization does not have an Indirect Cost Rate!!?? Brustein & Manasevit, PLLC All rights reserved

12 Step One: Determining Cognizance For Direct Awards (e.g. Gear Up, TRIO), normally depends on which Agency provides most funds Brustein & Manasevit, PLLC All rights reserved CFR 200, Appendix III, C. 11 For IHEs, cognizance assigned to HHS or DOD which agency provided more funds for most recent 3 years Brustein & Manasevit, PLLC All rights reserved CFR 200, Appendix IV, C. 2 Non profits agency providing the largest amount of direct federal funding Brustein & Manasevit, PLLC All rights reserved

13 2 CFR 200, Appendix V, F. 1 SEAs/LEAs cognizance assigned to ED Brustein & Manasevit, PLLC All rights reserved. 37 Step Two Does the nonfederal entity (NFE) receive the award from the pass through? ESEA IDEA Perkins AEFLA WIOA Title I Brustein & Manasevit, PLLC All rights reserved. 38 Step Three: Is the award subject to a non supplant provision? Restricted vs. Unrestricted Brustein & Manasevit, PLLC All rights reserved

14 For LEAs Each SEA, on the basis of a plan approved by the Secretary, shall approve indirect cost rate for each LEA that requests it to do so. 34 CFR (b) Brustein & Manasevit, PLLC All rights reserved. 40 For IHEs and Non Profits Pass through entity may negotiate rate (if no federal rate) or use 8% flat rate 34 CFR (c) 2 CFR (a)(4) Brustein & Manasevit, PLLC All rights reserved. 41 Must ED or HHS approve the plan used by pass through for IHE/Non Profits? OCFO No! May conduct informal review Recommend consult with internal auditors Brustein & Manasevit, PLLC All rights reserved

15 Step Four: What about statutory administrative caps?? (Perkins & AEFLA 5%) Statutory caps always govern!!! Brustein & Manasevit, PLLC All rights reserved. 43 Illustration LEA/IHE/Non Profit receive $1 million award subject to non supplant & 5% Admin cap Pass through assigns 8% flat rate The 5% cap governs Brustein & Manasevit, PLLC All rights reserved. 44 Illustration (cont.) Does not mean passthrough limits indirect cost rate to 5% Rather, the cap limits the recovery of indirect costs to 5% of award amount Brustein & Manasevit, PLLC All rights reserved

16 May NFE opt to direct charge all administrative costs? COFAR yes Still subject to caps Brustein & Manasevit, PLLC All rights reserved. 46 Is pass through entity obligated to negotiate rate if requested by NFE? COFAR yes Brustein & Manasevit, PLLC All rights reserved. 47 New Policies??? Brustein & Manasevit, PLLC All rights reserved

17 North Carolina Community College Illustration 1. Informed by ED, if no HHS rate, IHE had no authority to negotiate with pass through on restricted rate for Perkins/AEFLA Brustein & Manasevit, PLLC All rights reserved OCFO If colleges have direct federal awards, should contact HHS, and request both unrestricted & restricted rate Brustein & Manasevit, PLLC All rights reserved Alternatively, passthrough could assign 8% rate under 34 CFR (c), if college has no rate from HHS and passthrough determines 8% rate is reasonable 6/24/2016 OCFO Brustein & Manasevit, PLLC All rights reserved

18 4. If no rate agreement with HHS, and no direct awards, pass through entity can negotiate both restricted and unrestricted rate 6/24/2016 OCFO Brustein & Manasevit, PLLC All rights reserved Does the pass through entity have the capacity to perform necessary analysis? Brustein & Manasevit, PLLC All rights reserved. 53 ALLOCATION OF SHARED COSTS Brustein & Manasevit, PLLC All rights reserved

19 Blending, Braiding, Commingling, Consolidating Funds How do I allocate costs to benefitted programs? Brustein & Manasevit, PLLC All rights reserved. 55 One Stop Concept One stop center is not direct recipient of federal awards (think consortium arrangement ) Location where several w/f programs (CTE, AEFLA, WIOA) operate, and make services available to program beneficiaries Brustein & Manasevit, PLLC All rights reserved. 56 Each one stop partner program must comply with financial management regs. under 2 CFR Brustein & Manasevit, PLLC All rights reserved

20 Costs of one stop may be: 1) Direct costs that benefit one program 2) Indirect costs incurred for common purposes, but not readily assignable to one program 3) Shared direct costs that can be readily allocated to the different one stop programs Brustein & Manasevit, PLLC All rights reserved. 58 Strange saga of infrastructure costs and developing MOU Brustein & Manasevit, PLLC All rights reserved. 59 Some costs of one stop environment benefit multiple w/f programs: Utilities Common supplies/equipment Telephone systems Common reception area Informational services Data input on consumers Maintenance of space Brustein & Manasevit, PLLC All rights reserved

21 These costs must be allocated to the benefitting programs, based on benefits received, not availability of funds. Cannot shift costs that are not allowable. Brustein & Manasevit, PLLC All rights reserved. 61 PERKINS P/S WIOA (Title I) Perkins P/S AEFLA Unshaded center are shared costs that benefit WIOA, CTE, & AEFLA participants Brustein & Manasevit, PLLC All rights reserved. 62 What is the best basis for equitable distribution of shared costs w/o incurring unnecessary additional burden? Brustein & Manasevit, PLLC All rights reserved

22 3 Approaches: 1. Aggregate partners cover all of the one stop s shared costs 2. Activity basis partners pay allocable share of total costs of one activity or function (e.g., common intake) 3. Item of cost partners pay allocable share of each item computers (or any combination) Brustein & Manasevit, PLLC All rights reserved. 64 But methodology used 1. Must result in equitable distribution (no one partner paying disproportionate share) 2. Be efficient to use 3. Be consistent over time Brustein & Manasevit, PLLC All rights reserved. 65 Legal Disclaimer 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 attorneyclient 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 All rights reserved