Texas Association of Community Action Agencies (TACAA) 2016 Conference. May 18 20, 2016 San Antonio, TX Holiday Inn Riverwalk Hotel.

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Texas Association of Community Action Agencies (TACAA) 2016 Conference May 18 20, 2016 San Antonio, TX Holiday Inn Riverwalk Hotel Cost Allocation Thursday, May 19, 2016 8:30 am 10:00 am Presented

1 Texas Association of Community Action Agencies (TACAA) 2016 Conference May 18 20, 2016 San Antonio, TX Holiday Inn Riverwalk Hotel Cost Allocation Thursday, May 19, :30 am 10:00 am Presented by: Karl Eck, CPA, Senior Manager NONPROFIT AND GOVERNMENT PRACTICE Reproduction or use of any training materials in this manual, except within a participant s agency without express written permission is prohibited by copyright law.

Cost Allocation Trainer: Karl Eck, CPA, Senior Manager

are incomplete without the accompanying oral comments

These materials are informational and educational in

These materials are for the purchasing agency s use

3 Cost Allocation Trainer: Karl Eck, CPA, Senior Manager 1 Materials/Disclaimer Please note that these materials are incomplete without the accompanying oral comments by the trainer(s). These materials are informational and educational in nature and represent the speakers' own views. These materials are for the purchasing agency s use only and not for distribution outside of the agency or publishing on a public website. 2 Cost Allocation 1

4 Agenda Direct vs. Indirect Cost Allocation What an indirect cost rate is Indirect cost distribution bases Types of indirect cost rates Negotiation and approval of indirect cost rate 10% De Minimis Rate 3 Cost Allocation Summary The goal of cost allocation is fairness. Each funding source should bear its fair share of allocated costs Close counts you will never get it right Don t spend $2 to allocate $1 4 Cost Allocation 2

5 Cost Allocation and Indirect Cost Rates Options for allocating costs: Direct costing Negotiated indirect cost rate agreement 10% de minimis indirect rate 5 Cost Allocation and Indirect Cost Rates Direct Costing: Allocates costs among multiple programs using a base that is not dollar based (not expenses, salaries, budget or revenue) Should be supported by current data Costs have to be allowable to all programs Can be accumulated in pools and allocated or when the expense is recorded 6 Cost Allocation 3

6 Direct Costing Examples 7 Direct Costs (c) The salaries of administrative and clerical staff should normally be treated as indirect (F&A) costs. Direct charging of these costs may be appropriate only if all of 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. 8 Cost Allocation 4

7 Are Indirect Rates Required? From COFAR FAQ: Indirect Cost Rates and Entities Who Do Not Have 2 CFR (a)(15), 2 CFR (a)(1)(xiii) and (a)(4) all make reference to indirect cost rates as a requirement for recipients and subrecipients. Not all entities charge indirect cost rates. Will they now be forced to establish such rates? No. Non-Federal entities that are able to allocate and charge 100% of their costs directly may continue to do so. Claiming reimbursement for indirect costs is never mandatory; a non- Federal entity may conclude that the amount it would recover thereby would be immaterial and not worth the effort needed to obtain it. 9..What are they? Indirect costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective Examples include: Executive Director, rent for administrative space, phone, utilities, etc. Equipment and other capital expenditures are unallowable as indirect costs but costs can be recovered through depreciation 10 Cost Allocation 5

8 ..What are they? (cont.) Any direct cost of a minor amount may be treated as an indirect cost for reasons of practicality where the accounting treatment for such cost is consistently applied to all final cost objectives. Classified in two broad categories Facilities Administration 11 Facilities Depreciation on buildings, equipment and capital improvement, interest on debt associated with certain buildings, equipment and capital improvements, and operations and maintenance expenses. NOTE: use allowances are not allowable under 2 CFR Part 200 Administration General administration and general expenses such as the director's office, accounting, personnel and all other types of expenditures not listed specifically under one of the subcategories of Facilities (including cross allocations from other pools, where applicable). 12 Cost Allocation 6

9 Independent Auditor What s in Your Pool? Funding Sources Division of Cost Allocation Executive Director Finance Director Toner Utilities AP Clerk Paper IT Director Maintenance Travel Software Board costs Training 13 Cost Allocation and Indirect Cost Rates Negotiated Indirect Cost Rate Agreement: Three rate types: Provisional/Final Fixed with carryforward Predetermined Provisional/final typically awarded to CAP agencies but we are seeing more fixed with carry-forward and predetermined rates approved up to 4 years 14 Cost Allocation 7

10 Distribution bases for indirect cost recovery: Total direct costs Direct salaries and wages or salaries and fringe benefits Other base that results in equitable distribution 15 Total direct costs: Excludes subawards over $25,000 Equipment/capital expenditures Participant support costs Participant support costs means direct costs for items such as stipends or subsistence allowances, travel allowances, and registration fees paid to or on behalf of participants or trainees (but not employees) in connection with conferences, or training projects. NOTE: no/fewer exclusions on direct salaries. 16 Cost Allocation 8

11 How is in-kind treated? 17 Indirect Cost Rate A ratio, expressed as a percentage, of the indirect costs (pool) to a direct cost base. The base is usually total direct costs (excluding capital expenditures and other distorting items) or direct salaries and wages. Total organization indirect costs $ 835,000 Total organization direct salaries $ 8,000,000 Indirect cost rate 10.4% 18 Cost Allocation 9

12 What an indirect cost rate looks like in a perfect world: For-Profit Job Weatheri- State Housing Fund-raising Weatheri- Indirect Cost Head Start Training zation Grant Event zation Discretionary Total Pool Salaries 3,257,895 1,413,978 2,804, ,752 18,406 9, ,144, ,945 Fringe benefits 1,169, ,801 1,604, ,904 8,297 3, ,869, ,823 Supplies 365,087 36, ,481 34, , ,372,632 23,841 Occupancy 168,974 46, ,657 21, , ,871 Travel 56,048 60, ,897 10, ,185 65,412 Other 190, , ,098 18, , ,153,314 80,741 Inkind 2,450, ,450,974 - Subtotal expenses 7,658,713 2,492,430 6,629, ,786 27,532 21,651 1,367 17,804,788 1,501,633 A Less adjusting items: In-kind (supplies and other) (2,109,744) (2,109,744) Capital expenditures - - (40,000) (40,000) Subawards over $25,000 (900,000) (325,000) (1,225,000) Total direct expenses 4,648,969 2,167,430 6,589, ,786 27,532 21,651 1,367 14,430,044 B X 10.41% = X 10.41% = X 10.41% = X 10.41% = X 10.41% = X 10.41% = X 10.41% = Indirect charge to programs 483, , , ,335 2,865 2, ,501,633 Indirect expenses 1,501,633 A Total direct expenses 14,430,044 B Rate 10.41% 19 Applying an Indirect Cost Rate Grant period 07/01/14-06/30/15 Calendar Year Ended 12/31/ /31/2015 Total Direct cost base $ 400,000 $ 500,000 $ 900,000 X X Indirect cost rates 10.0% 15.0% Indirect costs $ 40,000 $ 75,000 $ 115, Cost Allocation 10

13 What are the advantages of an indirect cost rate agreement? Provides for one method to allocate almost all administrative costs Potentially can make budgeting easier direct salaries might be easier to estimate than the number of transactions finance will perform Rate and method are federally approved 21 You still likely will have to do some cost allocation. Typically, the organizations we see with indirect cost rate agreements are larger organizations with many types of costs to allocate across many programs. Also, it is state specific, some states seem to have organizations with more indirect cost rates than others. 22 Cost Allocation 11

14 What are the disadvantages of an indirect cost rate agreement? Rate and method are federally approved subject to individual cost negotiator preferences May lose some flexibility in how you determine the manner in which programs are charged for administrative costs Typically need to finalize and approve the rate every year 23 What is the best distribution base? Depends on your organization. Program A Program B Direct Salaries 4,000 1,000 Other Direct Expenses 1,000 4,000 Indirect Expenses 1,000,000 Total Expenses 5,000 5,000 Total Direct Expenses 10,000,000 Indirect rate 10% Direct Salaries 4,000 1,000 Direct Salaries Indirect Rate 20% 20% Indirect Expenses 1,000,000 Total Direct Salaries and Wages 5,000,000 Indirect Charged to Program Indirect rate 20% Direct Expenses 5,000 5,000 Direct Expenses Indirect Rate 10% 10% Indirect Charged to Program Cost Allocation 12

15 2 CFR Prior written approval (prior approval) In order to avoid subsequent disallowance or dispute based on unreasonableness or nonallocability, the non-federal entity may seek the prior written approval of the cognizant agency for indirect costs or the Federal awarding agency in advance of the incurrence of special or unusual costs. 25 DCA FAQ: Question # 12: What should a grantee do when an award does not provide for indirect cost reimbursement or provides for indirect costs at a rate lower than the one in the negotiation agreement? How does this effect the development of the indirect cost rate? Answer: The decision to accept an award that does not pay indirect costs or pays indirect costs using a rate lower than what has been negotiated is a grantee decision. However, when developing the indirect cost rate, all awards, regardless of whether they pay full indirect costs or not, must be included in the direct cost base. Indirect costs that are not reimbursable under a Federal or non- Federal award due to administrative or statutory restrictions may not be shifted to another Federal award unless specifically authorized by Federal legislation or regulation. Non-Federal revenue sources must be used to pay for these un-recovered costs. 26 Cost Allocation 13

16 DCA FAQ: Question # 13: Our grant with HHS totals $500,000 and includes a provisional indirect cost rate of 10%. Our final indirect cost rate is 13%. Will HHS provide us with additional grant funds due to our higher indirect cost rate? Answer: HHS will not provide your organization with additional grant funds due to a higher final indirect cost rate than the established provisional rate. However, a grant modification may be allowed to transfer budgeted direct costs to the indirect cost category due to the increased indirect costs. This would be subject to the terms and conditions of the grant agreement, e.g. approval of grant officer, indirect cost ceilings, and administrative cost limitations. The grants officer should be contacted for additional information. 27 DCA FAQ: Question # 14: Can our indirect cost rate proposal be developed using only Federal funds since it only represents 15% of our total revenue? Answer: No. An indirect cost rate proposal must be based on total organization costs, regardless of funding. 28 Cost Allocation 14

17 Types of indirect cost rates Provisional Rate Temporary rate established for a given period of time pending the establishment of a final rate for that period It is very important to budget accurately with a provisional rate Final Rate Permanent rate established after the organization s actual costs are known Used to adjust indirect costs initially clamed based on provisional rates 29 Types of indirect cost rates (cont.) Predetermined Rate A permanent rate established for a specific future period Not subject to adjustment except in very unusual circumstances Will lose money if the rate is too low Could generate a profit if the rate is high enough 30 Cost Allocation 15

18 Types of indirect cost rates (cont.) Fixed Rate With Carry-Forward Provision Permanent rate with the same characteristics of a predetermined rate, however, the difference between the estimated an actual costs is carried forward into the next year If the rate is too low, you will have to use unrestricted cash to cover the shortfall until the rate is revised upwards 31 Most often we see nonprofits are issued a provisional indirect cost rate The DHHS guide for indirect cost rates states Organizations are encouraged to use either predetermined rates or fixed rates with carry forward provisions where feasible and permissible under law and regulation. These rates permit a more timely closing of complete awards and generally eliminate the necessity making retroactive adjustments on individual awards as would be the case when provisional and final rates are used. 32 Cost Allocation 16

19 Provisional Rate Timeline Grant end date March 31, 2014 Agency year-end December 31, 2014 Indirect proposal due date and submitted June 30, 2015 Final rate received September 30, 2015?? In this scenario, 18 months have passed since the grant ended do you and your funding sources want to make changes? 33 Provisional Rates Budgeting is critical as the provisional rate will be finalized later at the actual rate Since many grants are closed, it is not desirable to refund funds back to funding sources on closed grants Even more difficult to obtain more money on a closed grant We recommend obtaining a sufficiently high rate and adjusting to the final rate during the year 34 Cost Allocation 17

20 Provisional Rates (cont.) Some are getting provisional rates at the prior year final rate Can you charge more than your provisional rate? 35 Indirect Allocation Methods Simplified after making adjustments for unallowable costs, a single rate is computed by dividing the indirect costs by the costs of direct functions or activities Multiple where an organizations indirect costs benefit its major functions in various degrees Special 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 cost pool applicable to such work 36 Cost Allocation 18

21 Getting an indirect rate Submit a proposal to your cognizant agency Cognizant agency is the department that provides your organization with the most direct federal funding If the cognizant agency is DHHS, the proposal is submitted to the Regional Division of Cost Allocation (DCA) responsible for your geographical area 37 Getting an indirect rate (cont.) If you do not have direct federal funding, then it is up to the agency that provides the most indirect federal funding Most non-federal entities have been hesitant to award indirect cost rates to their subrecipients but may change with 2 CFR Part 200 If you already have an indirect cost rate Due 6 months after the end of your fiscal year, you can request an extension under extenuating circumstances 38 Cost Allocation 19

22 What to submit with your proposal Must be accompanied by and cross referenced to your independently audited financial statements If a rate is based on future projected costs, the rate must be cross-referenced and reconciled to the organization s budget for that year Approximate amount of direct cost base costs incurred under federal awards 39 What to submit with your proposal (cont.) Fringe benefit information A listing of the fringe benefits provided to the organization s employees A copy of the organization s fringe benefit policies A description of the method(s) used to budget and charge fringe benefit costs to programs or activities The funding practices of a defined benefit pension plan along with the treatment of prior service costs and actuarial gains and losses If a fringe benefit rate is used, reconciled and cross referenced to the organization s financial statements 40 Cost Allocation 20

23 What to submit with your proposal (cont.) If there are variances from information required on indirect cost rate proposals, this can be explained by the following from the DHHS NPO review guide Determine whether the proposal package is complete, in sufficient detail to permit an adequate review, and is the a format that can be readily followed by the negotiator Make sure that any information specifically requested by the DCA in prior correspondence is included in the proposal package 41 Approval of Rates DCA will approve an indirect cost rate(s) with the organization In some cases, DCA may request an audit of the proposal before the rates are approved Approval will be formalized by a Rate Agreement signed by the DCA and an authorized representative of the organization Rate Agreement will include the type of rate, base used and other general terms and conditions 42 Cost Allocation 21

24 Approval of Rates (cont.) Expect questions, DCA s NPO review guide requires negotiator s to do the following: Perform a 3 year trend analysis of indirect costs, rates and allocation bases Compare how much certain indirect costs are increasing when compared to the increases in the nonprofit organization s direct base Any non-federal entity can apply for a one-time extension of a currently negotiated rate for up to 4-years. 43 Approval of indirect cost rates with subgrantees and subcontractors Prime contractors and grantees are responsible for approving indirect cost rates Approvals must be based on the federal cost principles The procedures followed by the grantee or contractor in evaluating the subawardee s indirect cost proposal and approving the rate should be should be documented and are subject to review Upon request, DCA will provide technical assistance 44 Cost Allocation 22

25 Indirect cost rates and your auditors: 2 CFR (b) An auditor who prepares the indirect cost proposal or cost allocation plan may not also be selected to perform the audit required by this part when the indirect costs recovered by the auditee during the prior year exceeded $1 million. Keep in mind Government Auditing Standards on independence as well no management decisions 45 Other matters to keep in mind Not all programs allow for indirect costs or some programs limit them you need to determine what funds will cover those costs (CSBG, discretionary funds?) Generally, all activities need to be included in your indirect cost allocation plan, this would include any for-profit or fundraising activities in your organization There also is an option to allocate fringe benefit costs using a separate indirect cost rate for fringe benefits 46 Cost Allocation 23

26 10% De Minimis Option 10% of MTDC option: Organizations that never had an indirect cost rate agreement can implement a flat rate of 10% of modified total direct costs (MTDC) No approval is necessary Required to disclose in your audit if you use or not in the notes to your federal awards schedule Must be consistently used once elected until the entity choses to negotiate for a rate Uncertainty remains on what to exclude from MTDC and is restrictive, for example it excludes rent 47 10% De Minimis Option Indirect rate using 10% de minimis For-Profit Job Weatheri- State Housing Fund-raising Weatheri- Indirect Cost Head Start Training zation Grant Event zation Discretionary Total Pool Salaries 3,257,895 1,413,978 2,804, ,752 18,406 9, ,144, ,945 Fringe benefits 1,169, ,801 1,604, ,904 8,297 3, ,869, ,823 Supplies 365,087 36, ,481 34, , ,372,632 23,841 Occupancy 168,974 46, ,657 21, , ,871 Travel 56,048 60, ,897 10, ,185 65,412 Other 190, , ,098 18, , ,153,314 80,741 Inkind 2,450, ,450,974 - Subtotal expenses 7,658,713 2,492,430 6,629, ,786 27,532 21,651 1,367 17,804,788 1,501,633 A Less adjusting items: In-kind (supplies and other) (2,109,744) (2,109,744) Capital expenditures - - (40,000) (40,000) Subawards over $25,000 (900,000) (325,000) (1,225,000) Total direct expenses 4,648,969 2,167,430 6,589, ,786 27,532 21,651 1,367 14,430,044 X 10% = X 10% = X 10% = X 10% = X 10% = X 10% = X 10% = Indirect charge to programs 464, , ,931 97,379 2,753 2, ,443,006 B Rate 10.00% Indirect charged to programs 1,443,006 B Actual indirect expenses 1,501,633 A Loss on indirect cost pool (58,627) 48 Cost Allocation 24

27 How to Determine if a 10% Rate is for You For each grant and collectively, start with total expenses for each grant Subtract out allocated and direct charged administrative costs Back out excluded items based on the MTDC definition Multiply each grant by 10% Adjust for grants administrative cost limits if necessary Compare to the total estimated M&G expenses 49 How to Determine if a 10% Rate is for You Example of what a 10% rate analysis could look like: For-Profit Job Weatheri- State Housing Fund-raising Weatheri- Indirect Cost Head Start Training zation Grant Event zation Discretionary Total Pool Start with total expenses 8,181,754 2,673,078 7,392,090 1,007,870 27,857 22,377 1,395 19,306,421 Back out allocated and direct charged administrative costs (523,041) (180,648) (762,781) (34,084) (325) (726) (28) (1,501,633) Back out adjusting items: In-kind (supplies and other) (2,109,744) (2,109,744) Capital expenditures - - (40,000) (40,000) Subawards over $25,000 (900,000) (325,000) (1,225,000) Which gives you MTDC 4,648,969 2,167,430 6,589, ,786 27,532 21,651 1,367 14,430,044 Which you multiply by 10% 464, , ,931 97,379 2,753 2, ,443,005 1,501,633 The look at programs that (58,628) Loss limit admin or don't pay admin/indirect (35,000) - (210,483) (97,379) (342,862) Final result (401,490) Loss 50 Cost Allocation 25

Resources to help you: Many indirect cost links are on our NGP website

28 Resources to help you: Many indirect cost links are on our NGP website Your auditors Federal agency websites 51 Connect with me: Bring Wipfli to You: Tammy T. Jelinek My Wipfli Access to our experts: Evaluation: Regulation questions Audit Process Human Resource Technology Leadership Thank You! 52 Cost Allocation 26

29 Texas Association of Community Action Agencies (TACAA) 2016 Conference Cost Allocation Presented by: Karl Eck, CPA SAN ANTONIO, TX May 19, 2016 Name (Optional) Title: Organization: Phone: Please Rate This Session Excellent Very Good Good Fair Poor A. Usefulness of the materials including relevance to the sessions: B. Presentation skills of presenter: C. Knowledge of the presenter: D. Overall satisfaction with this session: Please Describe How This Session Will Help You and Your Organization 1. Did the Session meet your expectations? Yes No Please elaborate on your response: 2. What one thing will you bring back from the Session that will have immediate impact on you or your organization? 3. Do you have any suggestion or comments regarding the trainer and/or the material? 4. Please provide a statement on your overall satisfaction and impression of this Session. (May we use your statement, name, title and company in our marketing materials? Yes No)

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