Introduction to Indirect Costs

Transcription

1 Introduction to Indirect Costs GMS Summit St. Petersburg, FL June 12 16, 2016 Presented by: Jason D. Brooks, CPA 1

2 About the Author Jason D. Brooks, CPA is a partner with Watkins, Ward and Stafford, PLLC in Houston, Mississippi. He graduated with a Bachelor of Accountancy degree from Mississippi State University. He is a certified public accountant. He is a member of the Mississippi Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Mr. Brooks specializes in providing auditing, accounting, cost allocation, tax and consulting services to grant funded nonprofit and governmental organizations that are subject to requirements of Governmental Auditing Standards and OMB Circular A-133, Audits of States, Local Governments, and Nonprofit Organizations. Watkins, Ward and Stafford, PLLC has been providing services to grant funded organizations for over 40 years. Watkins, Ward and Stafford, PLLC is a full-service CPA firm with offices in Northeast and Central Mississippi. WWS was founded by John T. Watkins, CPA, in West Point, Mississippi, in The firm has enjoyed solid growth for over half a century. For more than 60 years, Watkins, Ward and Stafford, PLLC has served individuals and the business community of Mississippi and the southeastern United States. In a recent Mississippi Business Journal article, WWS was once again the second largest accounting firm in the State of Mississippi. WWS is committed to helping our clients reach their financial goals. The firm serves a broad array of individual and corporate clients in the commercial, governmental, non-profit, manufacturing, health care, and family-owned business sectors. WWS is an active member of the American Institute of Certified Public Accountants and the Mississippi Society of Certified Public Accountants. WWS is also affiliated with the Private Companies Practice Section, the Technology Division, the Tax Division of the American Institute of Certified Public Accountants and a member of the AICPA's Personal Financial Planning Section. Additionally, all consulting personnel in the firm are actively involved in many other professional organizations related to their specialties, including the Healthcare Financial Management Association. Our firm provides outstanding service to our clients because of our dedication to the three underlying principles of professionalism, responsiveness and quality. Contact Information: Jason D. Brooks, CPA, Partner Watkins, Ward and Stafford, PLLC 109 North Jackson St Post Office Box 391 Houston, MS Phone: (662) jbrooks@wwscpa.com Website: 2

3 What are indirect costs? Indirect costs are those costs that are not classified as direct. Direct costs can be identified specifically with particular cost objectives such as a grant, contract, project, function or activity. Direct Costs Direct costs generally include: 1. Salaries and wages (including vacations, holidays, sick leave, and other excused absences of employees working specifically on objectives of a grant or contract i.e, direct labor costs). 2. Other employee fringe benefits allocable on direct labor employees. 3. Consultant services contracted to accomplish specific grant/contract objectives. 4. Travel of (direct labor) employees. 5. Materials, supplies and equipment purchased directly for use on a specific grant or contract. 6. Communication costs such as long distance telephone calls identifiable with a specific award or activity. Salaries of administrative and clerical staff should normally be treated as indirect costs. Direct charging of these costs may be appropriate only if all the following conditions are met: 1. Administrative or clerical services are integral to a project or activity; 2. Individuals involved can be specifically identified with the project or activity; 3. Such costs are explicitly included in the budget or have the prior written approval of the Federal awarding agency; and 4. The costs are not also recovered as indirect costs. Minor items Any direct costs of minor amount may be treated as an indirect cost for reasons of practicality where such accounting treatment for that item of cost is consistently applied to all Federal and non-federal cost objectives. The costs of certain activities are not allowable as charges to Federal awards. However, even though these costs are unallowable for purposes of computing charges to Federal awards, they nonetheless must be treated as direct costs for purposes of determining indirect cost rates and be allocated their equitable share of the non-federal entity s indirect costs if they represent activities which: 1. Include the salaries of personnel, 2. Occupy space, and 3. Benefit from the non-federal entity s indirect costs. For nonprofit organizations, the costs of activities performed by the non-federal entity primarily as a service to members, clients, or the general public when significant and necessary to the non-federal entity s mission must be treated as direct costs whether or not allowable, and be allocated an equitable share of indirect costs. Some examples of these types of activities include: 3

4 1. Maintenance of membership rolls, subscriptions, publications, and related functions. 2. Providing services and information to members, legislative or administrative bodies, or the public. 3. Promotion, lobbying, and other forms of public relations. 4. Conferences except those held to conduct the general administration of the non- Federal entity. 5. Maintenance, protection, and investment of special funds not used in operation of the non-federal entity. 6. Administration of group benefits on behalf of members or clients, including life and hospital insurance, annuity or retirement plans, and financial aid. Indirect Costs Indirect costs are cost incurred for a common or joint purpose benefitting more than one cost objective and are not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved. To facilitate equitable distribution of indirect expenses, it may be necessary to establish a number of pools of indirect costs. Indirect costs pools should be distributed to benefitted cost objectives on bases that will produce equitable results. There is no universal rule for classifying certain costs as either direct or indirect under every accounting system. A cost may be direct with respect to some specific service or function, but indirect with respect to the Federal award or other final cost objective. Therefore, it is essential that each item of cost incurred for the same purpose be treated consistently in like circumstances either as direct or an indirect cost in order to avoid possible double-charging of Federal awards. Facilities and Administration Classification For major IHE s (Institutions of Higher Learning) and major nonprofit organizations (receive more than $10M in direct Federal funding) costs must be classified within two broad categories: 1. Facilities 2. Administration Facilities is defined as depreciation on buildings, equipment and capital improvements, interest on debt associated with certain buildings, equipment and capital improvements, and operations and maintenance expenses. Administration is defined as general administration and general expenses such as the director s office, accounting, personnel and all other types of expenditures not listed specifically under of the subcategories of Facilities (including cross allocations from other pools, where applicable). For nonprofit organizations, library expenses are included in the Administration category. For IHE s, library expenses are included in the Facilities category. Diversity of Nonprofit Organizations Because of the diverse characteristics and accounting practices of nonprofit organizations, it is not possible to specify the types of cost which may be classified as indirect cost in all situations. Identification with a Federal award rather than the nature of the goods and services involved is the determining factor in distinguishing direct from 4

5 indirect costs of Federal awards. However, typical examples of indirect cost for many nonprofit organizations may include: 1. Depreciation on building and equipment, 2. Costs of operating and maintaining facilities, 3. General and administrative expenses, such as the salaries and expenses of executive officers, personnel administration, and accounting. Allocation of Indirect Costs and Determination of Indirect Cost Rates Allocation Methods Three types of indirect allocation methods: 1. Simplified Allocation Method 2. Multiple Allocation Base Method 3. Direct Allocation Method Simplified Allocation Method If a nonprofit organization has only one major function, or where all its major functions benefit from its indirect costs to approximately the same degree, the allocation of indirect costs and the computation of an indirect cost rate may be accomplished through simplified allocation procedures. 1. Separate the organization s total costs for the base period as either direct or indirect, and, 2. Divide the total allowable indirect costs by an equitable distribution base. The result of this process is an indirect cost rate which is used to distribute indirect costs to individual Federal awards. The rate should be expressed as a percentage which the total amount of allowable indirect costs bears to the base selected. This method should also be used where an organization has only one major function encompassing a number of individual projects or activities, and may be used where the level of Federal awards to an organization are relatively small. Allocation base The distribution base may be: 1. Total direct costs excluding capital expenditures, other distorting items, and contracts and subawards of $25,000 or more. 2. Direct salaries and wages, or 3. Some other base which results in an equitable distribution. The distribution base must exclude participant support costs. Except where a special rate(s) is required, the indirect cost rate developed under the simplified allocation method is applicable to all Federal awards of the organization. If a special rate is required, appropriate modifications must be made in order to develop the special rate(s). Multiple Allocation Base Method Where an organization s indirect costs benefit its major functions in varying degrees, indirect costs must be accumulated into separate cost groupings. 5

6 Each grouping must then be allocated individually to benefitting functions by means of a base which best measures the relative benefits. Cost groupings must be established so as to permit the allocation of each grouping on the basis of benefits provided to the major functions. Each grouping must constitute a pool of expenses that are of like character in terms of functions they benefit and in terms of the allocation base which best measures the relative benefits provided to each function. The groupings are classified within the two broad categories: 1. Facilities 2. Administration Allocation bases Actual conditions must be taken into account in selecting the base to be used in allocating the expenses in each grouping to benefitting functions. The essential consideration in selecting a method or a base is that it is the one best suited for assigning the pool of costs to cost objectives in accordance with benefits derived; a traceable cause and effect relationship; or logic and reason, where neither the cause nor the effect of the relationship is determinable. When an allocation can be made by assignment of cost grouping directly to the function benefited, the allocation must be made in that manner. When the expenses in a cost grouping are more general in nature, the allocation must be made through the use of a selected base which produces results that are equitable to both the Federal government and the organization. The distribution must be made in accordance with the bases described herein unless it can be demonstrated that the use of a different base would result in a more equitable allocation of the costs, or that a more readily available base would not increase the costs charged to Federal awards. The results of special cost studies (such as an engineering utility study) must not be used to determine and allocate the indirect costs to Federal awards. Depreciation Depreciation expenses must be allocated in the following manner: 1. Depreciation on buildings used exclusively in the conduct of a single function, and on capital improvements and equipment used in such buildings, must be assigned to that function. 2. Depreciation on buildings used for more than one function, and on capital improvements and equipment used in such buildings, must be allocated to the individual functions performed in each building on the basis of usable square feet of space, excluding common areas, such as hallways, stairwells, and restrooms. 3. Depreciation on buildings, capital improvements and equipment related space used jointly by more than one function must be treated as follows. The cost of each jointly used unit of space must be allocated to the benefitting functions on the basis of: a. The employees and other users on a full-time equivalent (FTE) basis or salaries and wages of those individual functions benefitting from the use of that space; or b. Organization-wide employee FTEs or salaries and wages applicable to the benefitting functions of the organization. 6

7 4. Depreciation on certain capital improvements to land, such as paved parking areas, fences, sidewalks, and the like, not included in the cost of buildings, must be allocated to user categories on a FTE basis and distributed to major functions in proportion to the salaries and wages of all employees applicable to the functions. Interest Interest costs must be allocated in the same manner as the depreciation on the building, equipment and capital improvements to which the interest relates. Operation and maintenance expenses Operation and maintenance expenses must be allocated in the same manner as the depreciation. General administration and general expenses General administration and general expenses must be allocated to benefiting functions based on modified total costs (MTC). The MTC is the modified total direct costs (MTDC) plus the allocated indirect costs proportion. Modified Total Direct Costs All direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and subawards and subcontracts up to the first $25,000 of each subaward or subcontract (regardless of the period of performance of the subawards and subcontracts under the award). MTDC excludes equipment, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs and the portion of each subaward and subcontract in excess of $25,000. 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. Order of distribution Indirect categories consisting of depreciation, interest, operation and maintenance, and general administration and general expenses must be allocated in that order to the remaining indirect cost categories as well as to the major functions of the organization. Other cost categories should be allocated in the order determined to be most appropriate by the organization. This order of allocation does not apply if cross allocation of costs is made. Normally, an indirect cost category will be considered closed once it has been allocated to other cost objectives, and costs must not be subsequently allocated to it. However, a cross allocation of costs between two or more indirect costs categories could be used if such allocation will result in a more equitable allocation of costs. If a cross allocation is used, an appropriate modification to the composition of the indirect cost categories is required. Application of indirect cost rate or rates Except where a special indirect cost rate(s) is required, the separate grouping of indirect costs allocated to each major function must be aggregated and treated as a common pool for that function. The costs in the common pool must then be distributed to individual Federal awards included in that function by use of a single indirect cost rate. Distribution basis Indirect costs must be distributed to applicable Federal awards and other benefitting activities within each major function on the basis of MTDC. Individual rate computations An indirect cost rate must be determined for each separate indirect cost pool developed. The rate in each case much be stated as the percentage which 7

8 the amount of the particular indirect cost pool is of the distribution base identified with that pool. Each indirect cost rate negotiation or determination agreement must include development of the rate for each indirect cost pool as well as the overall indirect cost rate. Direct Allocation Method Some nonprofit organizations treat all costs direct costs except general administration and general expense. These organizations generally separate their costs into three basic categories: 1. General administration and general expenses 2. Fundraising 3. Other direct functions (including projects performed under Federal awards) Joint costs, such as depreciation, rental costs, operation and maintenance of facilities, telephone expenses, and the like are prorated individually as direct costs to each category and to each Federal award or other activity using a base most appropriate to the particular cost being prorated. This method is acceptable, provided each joint cost is prorated using a base which accurately measures the benefits provided to each Federal award or other activity. The bases must be established in accordance with reasonable criteria, and be supported by current data. Under this method, indirect costs consist exclusively of general administration and general expenses. In all other respects, the organization s indirect cost rates must be computed in the same manner as the Simplified Allocation Method. Special Indirect Cost Rates In some instances, a single indirect cost rate for all activities of an organization or for each major function of the organization, since it would not take into account those different factors which may substantially affect the indirect costs applicable to a particular segment of work. For this purpose, a particular segment of work may be performed under a single Federal award or it may consist of work under a group of Federal awards performed in a common environment. These factors may include the physical location of the work, the level of administrative support required, the nature of the facilities or other resources employed, the scientific disciplines or technical skills involved, the organizational arrangements used, or any combination thereof. When a particular segment of work is performed in an environment which appears to generate a significantly different level of indirect costs, provisions should be made for a separate indirect pool applicable to such work. The separate indirect pool should be developed during the course of the regular allocation process, and the separate indirect cost rate resulting therefrom should be used, provided it is determined that (1) the rate differs significantly from that which would have been using the simplified, multiple or direct allocation methods, and (2) the volume of work to which the rate would apply is material. Negotiation and Approval of Indirect Cost Rates Definitions Cognizant agency for indirect costs the Federal agency responsible for negotiating and approving indirect costs rates for a nonprofit organization on behalf of all Federal agencies. 8

9 Predetermined rate means an indirect cost rate, applicable to a specified current or future period, usually the organization s fiscal year. The rate is based on an estimate of the costs to be incurred during the period. A predetermined rate is not subject to adjustment. Fixed rate means 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. Final rate means an indirect cost rate applicable to a specified past period which is based on the actual costs of the period. A final rate is not subject to adjustment. Provisional rate or billing rate means a temporary indirect cost rate applicable to a specified period which is used for funding, interim reimbursement, and reporting indirect costs on Federal awards pending the establishment of a final rate for the period. Indirect cost proposal means the documentation prepared by an organization to substantiate its claim for the reimbursement of indirect costs. This proposal provides the basis for the review and negotiation leading to the establishment of an organization s indirect cost rate. Cost objective means a function, organizational subdivision, contract, Federal award, or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost of processes, projects, jobs and capitalized projects. Negotiation and Approval of Rates Unless different arrangements are agreed to by the Federal agencies concerned, the Federal agency with the largest dollar value of Federal awards with the organization will be designated as the cognizant agency for indirect costs for the negotiation and approval of the indirect cost rates and, where necessary, other rates such as fringe benefit and computer charge-out rates. Once an agency is assigned cognizance for a particular nonprofit organization, the assignment will not be changed unless there is a shift in the dollar volume of Federal awards to the organization for a least three years. All concerned Federal agencies must be given the opportunity to participate in the negotiation process but, after a rate has been agree upon, it will be accepted by all Federal agencies. When a Federal agency has reason to believe that special operating factors affecting its Federal awards necessitate special indirect cost rates, it will, prior to the time the rates are negotiated, notify the cognizant agency for indirect costs. Any nonprofit organization that has never received a negotiated indirect costs rate may elect to charge a de minimis rate of 10% of modified total direct costs (MTDC) which may be used indefinitely. If chosen, this methodology once elected must be used consistently for all Federal awards until such time as a non-federal entity chooses to negotiate for a rate, which the non- Federal entity may apply to do at any time. Except as described in the preceding paragraph, a nonprofit organization which has not previously established an indirect cost rate with a Federal agency must submit its initial indirect 9

10 cost proposal immediately after the organization is advised that a Federal award will be made and, in no event, later than three months after the effective date of the Federal award. Unless approved by the cognizant agency for indirect costs, organizations that have previously established indirect cost rates must submit a new proposal to the cognizant agency for indirect costs within six months after the close of each fiscal year. A predetermined rate may be negotiated for use on Federal awards where there is reasonable assurance, based on past experience and reliable projection of the organization s costs, that the rate is not likely to exceed a rate based on the organization s actual costs. Fixed rates may be negotiated where predetermined rates are not considered appropriate. A fixed rate, however, must not be negotiated if: 1. All or a substantial portion of the organization s Federal awards are expected to expire before the carry-forward adjustment can be made; 2. The mix of Federal and non-federal work at the organization is too erratic to permit an equitable carry-forward adjustment; or 3. The organization s operations fluctuate significantly from year to year. Provisional and final rates must be negotiated where neither predetermined nor fixed rates are appropriate. Predetermined or fixed rates may replace provisional rates at any time prior to the close of the organization s fiscal year. If that event does not occur, a final rate will be established and upward or downward adjustments will be made based on the actual allowable costs incurred for the period involved. The results of each negotiation must be formalized in a written agreement between the cognizant agency for indirect costs and the nonprofit organization. The cognizant agency for indirect costs must make available copies of the agreement to all concerned Federal agencies. The negotiated rates must be accepted by all Federal awarding agencies. A Federal awarding agency may use a different rate from the negotiated rate for a class of Federal awards or a single Federal award only when required by Federal statute or regulation, or when approved by a Federal awarding agency head or delegate. The Federal awarding agency must implement, and make publicly available, the policies, procedures and general decision making criteria that their programs will follow to seek and justify deviations from negotiated rates. If a dispute arises in a negotiation of an indirect cost rate between the cognizant agency for indirect cost and the nonprofit organization, the dispute must be resolved in accordance with the appeals procedures of the cognizant agency for indirect costs. To the extent that problems are encountered among the Federal agencies in connection with the negotiation and approval process, OMB will lend assistance as required to resolve such problems in a timely manner. 10

11 Certification of Indirect Costs Required certifications include: 1. To assure that expenditures are proper and in accordance with the terms and conditions of the Federal award and approved project budgets, the annual and final fiscal reports or vouchers requesting payment under the agreements must include a certification, signed by an official who is authorized to legally bind the non-federal entity, which reads as follows: By signing this report, 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 subject me to criminal, civil, or administrative penalties for fraud, false statements, false claims or otherwise. 2. Certification of cost allocation plan or indirect cost rate proposal each cost allocation plan or indirect cost rate proposal must comply with the following: a. A proposal to establish a cost allocation plan or an indirect cost rate, whether submitted to a Federal cognizant agency for indirect costs or maintained on file by the non-federal entity, must be certified by the non-federal entity using the Certificate of Cost Allocation Plan or Certificate of Indirect Costs. The certificate must be signed on behalf of the non-federal entity by an individual at a level no lower than vice president or chief financial officer of the non-federal entity that submits the proposal. An example of a Certificate of Cost Allocation Plan or Certificate of Indirect Costs follows: 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 (identify date) to establish billing or final indirect costs rate for (identify period covered by rate) are allowable in accordance with the requirements of the Federal awards to which they apply and with Subpart E Cost Principles of Part This proposal does not include any costs which are unallowable under Subpart E Cost Principles of Part 200 such as (without limitation); public relations costs, contributions and donations, entertainment costs, fines and penalties, lobbying costs, and defense of fraud proceedings; and 4. All costs included in this proposal are properly allocable to Federal awards on the basis of beneficial or causal relationship between the expenses incurred and the Federal wards to which they are allocated in accordance with applicable requirements. 11

12 I declare that the foregoing is true and correct. Nonprofit Organization: Signature: Name of Official: Title: Date of Execution: b. Unless the non-federal entity has elected the de minimis rate of 10%, the Federal government may either disallow all indirect costs or unilaterally establish such a plan or rate when the non-federal entity fails to submit a certified proposal for establishing such a plan or rate in accordance with the requirements. Such a plan or rate may be based upon audited historical data or such other data that have been furnished to the cognizant agency for indirect costs and for which it can be demonstrated that all unallowable costs have been excluded. When a cost allocation plan or indirect cost rate is unilaterally establish by the Federal government because the non-federal entity failed to submit a certified proposal, the plan or rate established will be set to ensure that potentially unallowable costs will not be reimbursed. 3. The nonprofit entity must submit as part of its annual indirect cost rate proposal a certification that the requirements and standards of Lobbying have been complied with. 12

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