How to Develop Indirect Rates Under the New Super Circular. Part 1 Webinar 1 or 2 Slide Decks Rubino & Company, Chartered May 8, 2014

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1 How to Develop Indirect Rates Under the New Super Circular Part 1 Webinar 1 or 2 Slide Decks Rubino & Company, Chartered May 8, 2014

2 Click Update to / Impact edit Master of Super Circular text styles Definitions of Direct Cost Allocations Definition o Third of level Indirect Cost Negotiation & Administration of Indirect Rates Types of Allocation Bases Simple, Multiple, Direct Allocation Methods Special Rates Problem of Double-Charging Statement of Functional Expense for Indirect Rate Development

3 Click To provide to edit participants Master text with styles both conceptual and hands-on tools for developing indirect rates for not-for-profits that receive federal rates. The session» Fifth will level cover different types of indirect rates: fringe, occupancy, and general and administrative. To provide participants with the new options available under the Super Circular given the fact of the administrative recovery restrictions under Ryan White programs.

4 Rubino o Third & level Company, CPAs & Consultants Paul H. Calabrese Senior Manager Tel: pcalabrese@rubino.com All slides copyright 2014, Rubino & Company, Chartered

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7 Federal agencies implement by 12/26/2014 Subpart F Audit Requirements become applicable with audits of fiscal years beginning on or after 12/26/2014 or effectively 1/1/15 end 12/31/15 Administrative (pre/post award) requirements and cost principles apply on new awards or additional / incremental funding on or after 12/26/14 Existing awards before 12/26/14 follow existing terms and conditions which are covered by the prior OMB Circulars A-110, A-122, A-133

8 Non-Federal entities wishing to implement entitywide system changes to comply with the uniform guidance (Super Circular) on or after 12/26/2014 will not be penalized by Federal agencies, in that they may still have older agreements covered by the prior OMB Circulars. FAQ Q III-5: Words in the uniform guidance: Must is a requirement. Should is a best practice or recommended approaches, COFAR wanted to bring to attention of non-fed entities

9 Responsible for administering Federal funds consistent with terms and conditions, program objectives of award Accounting practices must be: Consistent with cost principles Support accumulation of cost Adequate documentation to substantiate costs charged to Federal awards Cost principles are used as a guide to price fixed price contracts / subcontracts

10 Requirement to account to the Federal government for actual costs incurred (a)(5) reverse logic where principles do not apply May not earn or keep any profit (g) The Non-Federal Entity (NFE) must promptly refund any balances of unobligated cash that the Federal awarding agency or pass-through entity paid in advance or paid and that is not authorized to be retained by the non-federal entity for use in other projects (d)

11 The obligation of the Non-Federal Entity (NFE) to return Second any funds level due as a result of later refunds, corrections, or other transactions including final indirect cost Fourth rate level adjustments (a)(2) The 10% de minimis rate: per (f) free lunch? Never received a negotiated indirect rate Charge on a modified total direct cost base May use indefinitely until negotiate an indirect rate Direct and indirect costs charged consistently but not as both causing double-charging Use consistently on all Federal awards

12 Cannot spend more than 10% of Federal funds on administrative expenses in a grant year for Ryan White 10% de minimis rate per (f) NFE has existing negotiated indirect rate: One-time extension of current indirect rate For a period of up to 4 years If granted, cannot request a rate review until extension period ends At end of 4 year period, must re-apply to negotiate a new rate

13 Direct cost allocation principle (d) 1. If o cost Third benefits level two or more direct programs 2. In proportions that can be determined without undue effort or» cost Fifth level 3. Costs should be allocated to projects If 1 and 2 cannot determine proportions based on interrelation of work involved, then allocated on benefited projects on a reasonable documented basis. Purchase of equipment or capital assets for a specific award are assignable to that award only regardless of use on other projects or no longer needed as acquired.

14 Direct charging of admin staff wages may be appropriate when all items are met: (c) Administrative services are necessary to a project Individuals involved can be specifically identified to a project, such as time reports Administrative wages are included in the budget or prior written approval from agency Such costs are not recovered as indirect cost

15 Unallowable activities and donated services receive allocation of indirect costs (b) Costs allocable to a Federal award may not be charged» to Fifth cover level fund deficiencies to avoid restrictions in the regulations (c) Limitation on allowable costs o If maximum amount allowable under a limitation is less than total amount determined, the delta is not recoverable and cannot be charged to another award.

16 Payments Second made level for costs determined to be unallowable must be refunded including interest Fourth to Federal level government Unallowable by Federal awarding agency Cognizant agency for indirect cost Pass-through entity Either direct or indirect unallowable cost

17 Adjustments of previously negotiated indirect cost rates containing unallowable costs Negotiated indirect cost rates later found to have costs: 1. Unallowable specified by Federal statutes, regulations or terms and conditions of a Federal award 2. Unallowable as not allocable to Federal award(s) o Must be adjusted for a refund o Adjustments are used to correct established negotiated rates o Will not re-open for rate negotiation o Applied to all types of rates: fixed, final, predeter, prov.

18 Adjustments of previously negotiated indirect cost o Third rates level containing unallowable costs For projected rates of a future year, the costs are removed from cost pools and rates appropriated adjusted downward For historical rates of a past period, the unallowable costs will be computed by fiscal year and a cash refund including interest For current year rates, either a rate adjustment or refund per cognizant agency

19 Adjustments of previously negotiated indirect cost rates containing unallowable costs o For multiple years, the proportional amount of unallowable costs in the base year will be extrapolated to the out-year rates

20 Assure proper expenditures (a) o Certifying project budgets, annual and final fiscal reports Fourth or vouchers level requesting payments By signing this» report, Fifth level I certify to the best of my knowledge and belief that the report is true, complete, and accurate, and the expenditures, disbursements and cash receipts are for the purposes and objectives set forth in the terms and conditions of the Federal award. I am aware that any false, fictitious, or fraudulent information, or the omission of any material fact, may be subject to criminal, civil or administrative penalties for fraud, false statements, false claims or otherwise.

21 Certification of indirect rates (b) o o o An o Indirect Third level Cost Rate Proposal (ICRP) must have a Certificate of Indirect Costs signed at a level not lower» Fifth than level VP or CFO Cost are not unallowable and not inallocable If an ICRP does not include a certification The agency can unilaterally disallow all indirect costs The agency can unilaterally establish their own rate based on historical cost or other such data, to ensure that unallowable costs won t be reimbursed.

22 To summarize...

23 Account for incurred cost Documentation Second level such as time reports which supports the incurrence and allocation of cost Identify unallowable cost Unallowable» Fifth items level remain in allocation base, receive a share of indirect cost Unallowable items, items not entitled to retain, profit/excess funds must be returned to agency Unallowable expenses determined later will be returned and rates adjusted downward

24 What is direct remains direct, same for indirect, no double Second charging,e.g. level 10% de minimis Consistent allocation to avoid double-charging Direct costs» Fifth more level latitude: proration of cost or admin salaries identified/supported Statutory limitations, limits the recovery in an award, even though the rate is determined higher - 10% limitation on Ryan White administrative cost

25 Cost Accounting Definitions

26 Segregate cost for each government grant Distinguish between direct and indirect cost Consistent cost allocation of indirect cost Identify unallowable, non-recoverable cost Assign cost to the appropriate accounting period Sufficient accounting controls to ensure compliance with government grant regulations Capable of performance measurement, such as provisional vs. actuals for indirect burden rates Facilitate the development of indirect cost rates

27 Direct Cost are costs specifically identified or traceable to a Federal award, project or activity (a) Examples: o Third direct level labor and related fringe benefit cost, direct material, supplies, consultants, sub-awards, travel (b) & Appendix IV B.3.b.(4)2 nd Direct charging of salaries of administrative personnel (c) [slide 13] Direct proration of cost between 2 or more activities without undue effort (d) Unallowable direct cost remain in base (e)

28 Click Develop to edit cost Master estimates text for styles grant proposals used in the SF 424a Manage within cost measurement and performance requirements Full Cost Recovery Difficult to achieve Certain grants restrict administrative cost Certain NEA vehicles exclude indirect State and local units of gov t limit rates

29 Limitation on Indirect Costs Second Award level specific rate (predetermined) Limitation on indirect cost recovery, i.e. if awardee» Fifth did level not provide an indirect rate percentage in 6j of the SF 424-a, the awardee is barred from claiming and recovering indirect cost for this grant

30 Click Indirect to edit rates Master synonymous text styles with: Second Burdens level Loading Overhead Types Fringe G&A (Indirect, Management & General from IRS Form 990) F&A: Facilities & Administrative rates

31 Indirect Click Cost to edit are costs Master not directly text styles identified with a single final cost objective (grant), but rather relates to two Second or more final level cost objectives, or a service center, like occupancy department. Indirect costs Fourth cannot level be economically traced to each grant so they must be placed in a cost pool to be allocated on a causal-beneficial basis to the final cost objective or grant. In developing a cost pool special care that costs can first be identified direct to a program, no doublecharging Appendix IV B.3.b.(4) 2 nd (paragraph) Typical indirect expenses are: office supplies, postage, local telephone, periodicals, memberships per Appendix IV B.3.b.(4) 2 nd

32 Indirect Rate Negotiation and Administration

33 Click to edit Master text styles OMB Circular A-122, Attachment A, C and 2 CFR (b) Due to diverse characteristics and accounting practices of nonprofits, it is not possible to specify the types of cost which may be classified as indirect in all situations.

34 OMB Circular A-122, Attachment A, A.6 Under o Third any level award, the allocation and reasonableness of certain expenses may be difficult to determine Purpose is to avoid subsequent disallowance or dispute Seek a written agreement with cognizant awarding agency in advance of incurrence of cost Examples provided such as pre-award costs

35 OMB Circular A-122, Attachment A, D.1.e Appendix IV B.1.e to 2 CFR 200 Period for allocating and accumulating incurred» indirect Fifth level cost to grants Base period equals the org s fiscal year Grants cross over two fiscal years o Two different indirect rates

36 Negotiation and Approval of Indirect Rates per OMB Circular A-122, Attachment A, E Agency Fourth with level largest dollar value = cognizant agency Appendix IV C.2 Indirect rate proposal submitted 90 days after new award to an organization App. IV C.2.b May not happen if you have program restrictions, o HRSA Part B, CFDA limits adm. to 10% Issues when agency is not proactive in the negotiation and settlement of indirect rates

37 Click Negotiation to edit and Master Approval text styles of Indirect Rates Existing org s submit new rate proposals within Fourth 6 months level after the end of their fiscal year Appendix IV C.2.c Predetermined rate is based on estimate of costs to be incurred for the current or future fiscal year. The predetermined rate is not subject to adjustment. Appendix IV C.2.d

38 Fixed (ceiling) rates are similar to predetermined rates except: App. IV C.2.e The o Third difference level between the estimated and actual Fourth costs level of the period are carried forward» as Fifth an level adjustment to the subsequent period s indirect rate computation Final rate Appendix IV C.1.d & C.2.f Based on actual cost for period Once negotiated, not subject to adjustment

39 Provisional Rate Appendix IV C.1.e & C.2.f Temporary indirect cost rate pending final rate Used o Third for funding, level interim billing or cost reporting The results of any negotiation is distributed to other participating agencies Appendix IV C.2.g Negotiating rates must be accepted by ALL Federal awarding agencies (c)(1) Many clients complain they cannot find the office for negotiating indirect rate Look at conditions clauses attached to grant

40 Basic Indirect Rate Mechanics

41 For example, fringe cost includes pension, medical insurance and payroll taxes for direct personnel, working on multiple programs, that cannot be economically assigned to each of those grants.

42 Each of the fringe expenses reside in a cost pool Second to be allocated level on a causal-beneficial basis o to Third the level final cost objective or grant. Fringe expenses is the numerator and total labor dollars is the denominator to develop a % via a fraction. Total labor has a functional relationship with fringe expense where total labor is the independent variable and fringe is the dependent variable.

43 Fringe Click Pool to edit & Base Master Example: text styles Fringe Second Indirect level Cost Pool: $1,500 Pension 1,500 Medical Insurance 500 Payroll Tax $3,500 Total Fringe $2,000 Direct Labor (D/L) Grant A 8,000 D/L Grant B $10,000 Total Grant D/L* (Allocation Base) $3,500/$10,000 = 35% Fringe Indirect Burden Rate *Missing indirect labor applied to G&A.

44 Fringe Click Application to edit Master Example: text styles Grant Second A: level $2,000 D/L 700 Fringe ($2,000 D/L x 35% fringe rate) 1,400 Other Direct Costs (ODCs) $4,100 Total cost for Grant A-final cost objective Grant B: $8,000 D/L 2,800 Fringe ($8,000 D/L x 35% fringe rate) 9,600 ODC $20,400 Total cost for Grant B-final cost objective

45 General fund = administrative costs Executive director s office Finance, HR, IT, Purchasing, Facility Mgmt. Office Space, Utilities, Audits, Insurance Value =» $150,000 Fifth level (A) Programs, Value = $1,000,000 (B) $900,000 in non-federal: programs, fundraising, membership, promotion, P/R $100,000 federal grant Fractional relationship between general fund (M&G) and Programs = 15%

46 Distribution of Indirect Cost Pool Using 15% Indirect Rate $135,000, 90% $15,000, 10% Federal Award of $100,000

47 Total Cost of Grant Second $100,000 level direct costs o Third $15,000 level applied indirect (15% x $100,000) $115,000 = total value of grant Total Cost Definition The sum of direct and indirect costs allocable to an award less credits, refunds, rebates; and excluding unallowable costs. OMB Circular A-122, Attachment A, A.1 and