T-203 F&A Cost Rates and the Uniform Guidance, A Non-Profit Perspective

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1 T-203 F&A Cost Rates and the Uniform Guidance, A Non-Profit Perspective Alex Weekes Principal ML Weekes & Company, PC alex.weekes@mlweekes.com

2 Agenda Regulations (Current and New) Rate Types Rate Agreements Rate Calculation Example Negotiations

3 Survey - How many have a rate agreement with DHHS/DCA? Any rate agreements from another agency? How many have a rate agreement longer than a year? How many people representing NFP s?

4 What Are the Rules? Federal Rules & Cost Principles Not-For-Profits (OMB A-122 now 2 CFR Part 230) Hospitals (OASC-3) Colleges and Universities (OMB A-21 now 2 CFR Part 220) State and Local Governments (OMB A-87 now 2 CFR Part 225) Commercial Entities (Federal Acquisition Regulations FAR Part 31) Administrative Requirement (OMB Circular A-110 now 2 CFR Part 215) Applies to All Entities (except commercial) OMB Circular A-133 Audit Requirements Agency-Specific Requirements

5 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards 2 CFR Replaces OMB Circulars: A-21 Cost Principles for Educational Institutions A-122 Cost Principles for Non-Profit Organizations A-87 Cost Principles for State, Local and Indian Tribal Governments A-110 Uniform Administrative Requirements for Awards and Other Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations A-102 Awards and Cooperative Agreements with State and Local Governments A-133 Audits of States, Local Governments, and Non-Profit Organizations A-89 Federal Domestic Assistance Program Information A-50 Sections Related to Audits Performed Under the Single Audit Act 5

6 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards 2 CFR Organization Subparts A - F ( ) plus Appendices Non-Profit Cost Principles Subpart E Cost Principles ( ) Apendix IV Indirect Nonprofit Organizations Effective Date For new and incremental funding awarded after 12/26/14 6

7 Determining Chargeable Costs REASONABLE Ordinary and necessary Support operation Contribute to performance ALLOCABLE Tied to cost objective, contract, service Proportional to benefits ALLOWABLE Allowability determined by OMB Guidelines & grant provisions 7

8 Why Important Indirect Cost Rates Lack of attention could make or break financial goals of an organization Important to understand different types of rates Rates need to be in budgets in order to get recovery

9 Indirect Costs / Facilities and Admistrative Cost (F&A) Indirect Costs are costs that are incurred for common or joint objectives, and therefore cannot be readily and specifically identified with a particular project or activity. Indirect costs generally include: Operations and Maintenance Depreciation Sponsored Project Administration Costs Legal, HR, IT Accounting, Finance

10 What is a Facilities & Administrative A percentage Cost Rate? Ratio between indirect (F&A) and direct costs Simply stated if the F&A rate is 40%: For every $1.00 spent on research or sponsored projects 40 cents of cost is incurred by the university/nfp Why don t we charge the sponsor 40 cents directly? F&A, because it is not directly associated with a project, is difficult to estimate project-by-project

11 How to get an Approved Rate Must have a notice of grant, contract or other award Direct Federal Must submit notice as part of rate proposal Need to submit rate proposal to Cognizant Agency

12 F&A Rate Preparation and Submission Treat the process as you would any important project or proposal Key dates, timelines, and project work plan are essential Involve highest levels of the organization Proposal process Must follow method prescribed for your organization Must be cross-referenced and reconciled to Financial Statements Begin prior to completion of base year Proposal due six months after completion of FYE Typically takes six months (or more) to obtain data, complete and submit Extensions routinely granted but not advisable Government review and negotiation may require an additional 6 mos. Start using new rate one year after end of base year

13 F&A Rate Preparation and Submission Perform a detailed financial and strategy review prior to submission Make sure signatories understand proposal in order to execute certifications Review any negotiation and rate agreement strategies Prepare a comprehensive package with all required data and support Follow up with government timely to determine status and any intended site visits or supplemental data requests

14 Negotiating an F&A Rate First Find a cognizant agency Predominant funding HHS Division of Cost Allocation Office of Naval Research Department of Interior Department of Labor Department of Education Department of Agriculture

15 F&A Rate Changes Indirect (F&A) costs (f) Optional use of a de minimis F&A rate of 10% MTDC by organizations that have never negotiated F&A rates with the Government. The de minimis rate may be used indefinitely if the organization elects not to submit F&A proposals and negotiate rates. The same rule applies to subrecipients that have never negotiated F&A rates. 15

16 F&A Rate Changes Indirect (F&A) costs (c) Federal agencies are required to accept negotiated F&A rates, unless a different rate is Required by federal statute or regulation, or Approved by the agency head based on documented justification. Agencies must notify OMB of any exceptions approved by the agency head. 16

17 Allocation Methods Simple Method Used when Major Functions Benefit for indirect costs in the same degree One pool / One Base / One rate Multiple Allocation Base Method When organization has several major functions which benefit from its indirect costs in varying degrees (e.g. Clinical vs Research, instruction, other sponsored activity) More Than One Rate Direct Allocation Method When programs are charged for all costs directly (except A&G)

18 Rate Agreements, cont d

19 Types of Rate Bases Modified Total Direct Cost Salary & Wage Pro s & Con s to both S&W (higher rate, but not recovery) MTDC (most organizations use this base)

21 Types of Rate Bases Modified Total Direct Cost Salary & Wage Pro s & Con s to both S&W (higher rate, but not recovery) MTDC (most organizations use this base)

22 MTDC Defined (A-122) S&W, Benefits, Materials, Supplies, Services, Travel, Subawards up to first $25k, Exclusions consist of; Subcontract Expenses (in excess of $25K) Capital Expenditures Patient Care Participant Support Costs Rental costs, tuition remission, scholarships and fellowships

23 MTDC Example Simple example of one project s MTDC: Total Direct Costs in our budget: $155,000 Salaries/benefits: $ 95,000 Supplies: $ 5,000 Subs under $25k $ 25,000 Subs over $25k: $ 20,000 Capital Equipment: $ 10,000 Modified Total Direct Costs: = $155,000 - $10,000 - $20,000 = $125,000 MTDC

24 MTDC Defined Part II Other items may only be excluded when necessary to avoid a serious inequity in the distribution of indirect costs and with the approval of the cognizant agency for indirect costs

25 Unallowable Costs Entertainment Fundraising must be in base if material Advertising (except for employment) Donations & Contributions Investment Management Fees Lobbying Bad Debt Expense

26 Unallowable Costs Treatment Unallowable costs nonetheless must be treated as direct costs for purposes of determining indirect cost rates and be allocated their share of the organization's indirect costs if they represent activities which (1) include the salaries of personnel, (2) occupy space, and (3) benefit from the organization's indirect costs.

27 ABC NFP Fringe Benefits Rate Calculation Description Fringe Benefits Costs Per Audited F/S FICA (full and part-time) $ 71,038 Medical Insurance 114,245 Dental Insurance 12,373 Workers Compensation 5,700 Unemployment Insurance 2, K 34,298 Other Retirement 5,371 Tuition 2,734 Total Expenses $ 248,214 Total Salary $ 979,932 Fringe Rate 25.33%

28 Budgeting Indirect Cost Indirect costs must be in budget to get recovery Rates one & two years forward (2015 & 2016) Rate Caps See if indirect costs can be charged direct Facilities, HR, Acct g, etc. Cost Allocation Plan may be necessary

29 Types of Indirect Rates Types of Rates Provisional Fixed Rates with Carry-Forward Predetermined

30 Rate Types Provisional Rate A provisional indirect cost rate is a temporary rate established for a given period of time to permit funding and reporting of indirect costs pending establishment of a final rate for that period.

31 Rate Types Predetermined Rate a predetermined indirect cost rate is a permanent rate established for a specific future period based on an estimate of the costs for that period. Except under very unusual circumstances, this type of rate is not subject to adjustment

32 Rate Types Predetermined Rates - Continued Predetermined rates are established when there is a reasonable assurance, based on experience and a reliable estimate of the organizations costs, that the predetermined rate will approximate the organizations actual rate.

33 Rate Types Predetermined Rates - Continued Predetermined rates can be used only when an organization conducts activities solely under grants. It cannot be used if an organization performs work only on contracts or performs under both grants and contracts. This applies to direct federal contracts only.

34 Rate Types Fixed Rates an indirect cost rate which has the same characteristics as a predetermined rate, except that the difference between the estimated costs and the actual costs of the period covered by the rate is carried forward as an adjustment to the rate computation of a subsequent period.

35 Carry-Forward See it often in Fringe benefits What is it and why is it used?

36 Carry-Forward Carry-forward provision Part II Negotiated Fixed Rate % Direct Cost Base 2014 $10,000,000 Actual indirect Costs $ 4,200,000 Indirect Cost Recovery $ 4,000,000 Actual Rate % Under-recovery $ 200,000* *Carry-forward is 2 years forward (2016 in this scenario).

37 Carry-forward Carry-Forward Actual Indirect Costs $4,500,000 Carry-Forward from $ 200,000 Indirect Costs $4,700,000 Direct Cost Base $10,000,000 Rate With Carry-forward 47% Rate without Carry-forward 45%

38 Rate Agreements

39 F&A Rate Changes Indirect (F&A) costs (g) Allows a one-time extension of Federally negotiated F&A rates for up to four years Subject to the review and approval of the cognizant agency for indirect costs. If an extension is granted the non-federal entity may not request a rate review until the extension period ends. At the end of the 4-year extension, the non-federal entity must negotiate a new rate. 39

40 Rate Agreements, cont d

41 Rate Agreements, cont d

42 Rate Agreements, cont d

43 Rate Agreements, cont d

44 Rate Agreements Understand Before You Sign What does my agreement mean? Does it match my organizational goals? What type of rate do I have? When is my next submission (does that make sense)? Does it reflect future increases/decreases if changes in organization expected?

45 Negotiating an F&A Rate Next Steps - HHS Wait Desk Review Questions Site Visit Questions Negotiations

46 Negotiating an F&A Rate Next Steps DOD/ONR Audit by Defense Contract Audit Agency DCAA Review by ONR Negotiations

47 Cognizant Agencies Cognizant agency can be different for audit and rates Agencies have their own guidelines (not regulations) IG reports have recently challenged agencies Not always easy to compare rates between different agencies and regions

The Basics of F&A and How the Uniform Guidance Impacts Indirect Costs

The Basics of F&A and How the Uniform Guidance Impacts Indirect Costs Alex Weekes Principal ML Weekes & Company, PC 203-458-0872 alex.weekes@mlweekes.com Indirect Costs / Facilities and Admistrative Cost