Indirect Cost Allocation. August 22 nd, 2013

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1 Indirect Cost Allocation August 22 nd, 2013

2 Why is Cost Allocation Important? What are some of the Federal requirements governing indirect cost allocation plans? Allowable and unallowable costs? What is the difference between Direct and Indirect Costs? What is an Indirect Cost Allocation Plan? Calculating an Indirect Cost Rate How does cost allocation impact my organization? Page 2

3 Federal Regulations Per 2 Code of Federal Regulation (CFR) Part 225 (formerly OMB Circular A-87): Cost principals for State, Local, and Indian Tribal Governments. Implementation guide for Office of Management & Budget Circular A-87 (ASMB C-10) Contents of this circular includes: Attachment A - Principals for determining allowable costs. Attachment B - Selected items of cost Attachment C - Scope of a Central Service Cost Allocation Plan Page 3

4 Allowable and Unallowable Items Factors affecting allowability of costs Necessary and reasonable Allocable to Federal awards under the provision of Circular A-87 Be determined in accordance with GAAP Was not used to meet cost sharing Unallowable Items usually includes items that are unnecessary or could have been avoided. Lobbying Alcoholic beverages, Entertainment Board of Commissioners, City Council Capital Expenditures Page 4

5 Support of Salaries and Wages Appendix B to Part 225, Selected Items of Costs 8.h. Support of salaries and wages. These standards regarding time distribution are in addition to the standards for payroll documentation. 8.h.(1) Charges to Federal awards for salaries and wages, whether treated as direct or indirect costs, will be based on payrolls documented in accordance with generally accepted practice of the governmental unit and approved by a responsible official(s) of the governmental unit. Page 5

6 Support of Salaries and Wages (Continued) 8.h.(3) Where employees are expected to work solely on a single Federal award or cost objective, charges for their salaries and wages will be supported by periodic certifications that the employees worked solely on that program for the period covered by the certification. These certifications will be prepared at least semi-annually and will be signed by the employee or supervisory official having first hand knowledge of the work performed by the employee. Page 6

7 Support of Salaries and Wages (Continued) 8.h.(4) Where employees work on multiple activities or cost objectives, a distribution of their salaries or wages will be supported by personnel activity reports or equivalent documentation which meets the standards in subsection 8.h.(5) of this appendix unless a statistical sampling system (see subsection) 8.h.(6) of this appendix) or other substitute system has been approved by the cognizant Federal agency. Page 7

8 Total Costs = Direct + Indirect Direct Costs Can be identified specifically with a particular final cost objective (i.e., a particular award, service or direct activity). Indirect Costs Incurred for common or joint purpose benefiting more than one cost objective and not readily identified with a particular cost objective. Billed Central Services -vs- Allocated Central Services. Page 8

9 Indirect Costs Billed Central Services central services billed on an individual fee-for-service or similar basis. Typical examples include computer services, motor pool, insurance, and fringe benefits. These services are usually accounted for in the Internal Service Fund (ISF) group of accounts. Page 9

10 Indirect Costs Allocated Central Services central services that benefit multiple programs but are not billed on a fee-for-service or similar basis. These costs are allocated on some reasonable basis and may include Accounting Services, Purchasing, Human Resources, Building & Equipment Depreciation Insurance and Facilities Management. These services are included in a Cost Allocation Plan (CAP). Page 10

11 What is a Cost Allocation Plan? A Cost Allocation Plan is a document that describes the process whereby central services costs can be identified and assigned to benefited activities on a reasonable and consistent basis. The Purposes of a Cost Allocation Plan: They are often the only way to determine the total cost of operating programs. They allow an organization to ensure that it is recovering all allowable costs incurred by the organization. They can provide valuable management data to an organization regarding funding levels and time spent on activities (when time and effort reporting is also employed). Page 11

12 Types of Cost Allocation Plans OMB Circular A-87 is based on audited financial statements and the provisions established in this Circular. Used for reimbursement from Federal and State grants/programs. Full Costs includes all the same information in a A-87 cost plan, plus other necessary county wide support that is not eligible under the Federal guidelines. (BOC, lobbying, accelerated depreciation) Typically used for Enterprise Funds and establishing user fee services. Budget Cost Plan this is based on budgeted financials instead of audited financials and may be based on either A-87 or the Full Costs concepts depending on the intended purpose. Page 12

13 Preparing a Cost Allocation Plan Identify Allocated Central Service Departments. Identify support services performed. Quantify the total cost of each service. Select the statistic measure used to allocate each service. Allocate the support services of each central service department to benefiting cost objective. Summarize allocated costs by cost objective. Page 13

14 Indirect Cost Rate An Indirect Cost Rate is a percentage calculated as follows: Indirect Cost Rate (%) = Total Indirect Costs ($) Direct Costs Base ($) The Direct Cost Base is used to distribute Indirect Costs to individual Federal awards. An indirect cost rate must be applied to a direct cost base in order to determine the amount of indirect cost Page 14

15 Types of Indirect Cost Rates Provisional Rate is a temporary rate, agreed to in advance, based on anticipated future costs. It is subject to retroactive adjustment at a future date after costs are known (pending a Final Rate). Final Rate is established after costs are known. It adjusts the Provisional Rate but is administratively burdensome. Fixed Rate is agreed to in advance but is not retroactively adjusted. Difference between estimated and actual costs is carried forward as an adjustment to the rate computation of a subsequent period. Predetermined Rate is agreed to in advance but is generally not subject to adjustment. Intended to be permanent. Page 15

16 Carry Forward Is the process of reconciling the difference between the amount charged to a cost objective in a particular period and the actual costs for that same period after it is known. This procedure is used if a grant is approved on a fixed with carry-forward basis. Page 16

17 Cost Allocation Impact Uncapped Grants Allows all eligible indirect costs Capped Grants Limit the amount of indirect costs as a percentage of direct costs. Fixed amount for both Direct Costs and Indirect Costs. Page 17

18 Questions and Answers Questions/Discussion Please Direct Additional Questions, Comments and/or Suggestions to Janet Luplow, MAXIMUS Thank You for Your Participation Page 18

Mark W. Stout, MBA DOI Interior Business Center Indirect Cost Services - Sacramento April 2017

Mark W. Stout, MBA DOI Interior Business Center Indirect Cost Services - Sacramento April 2017 About ICS General Principles Uniform Guidance Direct, Indirect, Unallowable, Exclusions Distribution Base