Indirect Cost Rates For Nonprofit Organizations Bag Lunch Webinar May 8, 2013 All slides and handouts copyright 2013, Rubino & Company, Chartered Presenter: Paul H. Calabrese Rubino & Company, CPAs & Consultants Senior Manager Tel: 301-214-4137 pcalabrese@rubino.com http://www.rubino.com/company/staff/11- paul_h_calabrese/view www.linkedin.com/in/pcalabrese We invite you to join a new discussion group on Linked-In called Federal Grant Compliance & Indirect Rate Discussion Group to continue discussing today s topic or other matters of concern. 2 1
Basic Indirect Rate Principles Goal To provide an open architecture to design and develop indirect cost rates within the framework of OMB Circular A-122 Documentation to ensure: Uniform measurement Consistency year to year comparison Cost accounting period - accrual Concept of ALLOCABILITY 4 Importance of Federal Rates Service and Not For Profit (NFP) Non-Profit org s OMB Circular A-122 Dept. of Labor & DHHS models Outside forces on NFPs IRS 990 SFE, FASB 117 SFE 5 Cost Accounting Definitions 2
Adequate project costing 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 OMB Circular A-122 for Non-Profit Organizations Capable of performance measurement, such as provisional vs. actuals for indirect burden rates Facilitate the development of indirect cost rates 7 Direct Expenses Direct Cost are costs specifically identified or traceable to a final cost objective (program service group, activity, cost center, department, grant). Examples: direct labor, direct material, supplies, consultants, sub-awards, and travel. 8 Reasons for Indirect Rates Develop cost estimates for 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 9 3
Conditions Clauses Limitation on Indirect Costs Award specific rate (predetermined) Limitation on indirect cost recovery, i.e. if awardee did 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 10 Indirect Rates Indirect rates synonymous with: Burdens Loading Overhead Types Fringe G&A (Indirect, Management & General from IRS Form 990) 11 Indirect Cost Definitions Indirect Cost are costs not directly identified with a single final cost objective (grant), but rather relates to two or more final cost objectives, or a service center, like occupancy department. Indirect costs cannot 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. 12 4
Indirect Rate Negotiation and Administration No indirect rate system fits all OMB Circular A-122, Attachment A, C. 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. 14 Advance Understandings OMB Circular A-122, Attachment A, A.6 Under any award, the allocation 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 15 5
Indirect Cost Allocations OMB Circular A-122, Attachment A, D.1.e Period for allocating and accumulating incurred indirect cost to grants Base period equals the org s fiscal year Grants cross over two fiscal years Two different indirect rates 16 Indirect Rate Administration Negotiation and Approval of Indirect Rates per OMB Circular A-122, Attachment A, E Agency with largest dollar value = cognizant agency Indirect rate proposal submitted 90 days after new award to an organization May not happen if you have program restrictions, HRSA Part B, CFDA 93.914 limits adm. to 10% Issues when agency is not proactive in the negotiation and settlement of indirect rates 17 R/W Part B Fiscal Monitoring Stds Limitations: Use of Part B Funds 10% of Federal funds spent on administrative expenses per grant year Allowable grant administrative activities: Routine grant administration & monitoring Develop / establish reimbursement and accounting systems Prep of routine program & financial reports 75% core medical related services Program evaluation limited to 15% 18 6
R/W Part B Fiscal Monitoring Stds Limitations: Use of Part B Funds Type of Adm expenses: Overhead: rent, utilities and facility costs Management oversight of specific programs funded under Part B to include: Program coordination, clerical, financial, Mgmt. staff not related to patient care, Program eval, liability insurance, audit, Computer hardware / software not related to patient care 19 Indirect Rate Administration Negotiation and Approval of Indirect Rates Existing org s submit new rate proposals within 6 months after the end of their fiscal year 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. 20 Indirect Rate Administration Fixed (ceiling) rates are similar to predetermined rates except: The difference between the estimated and actual costs of the period are carried forward as an adjustment to the subsequent period s indirect rate computation Final rate Based on actual cost for period Once negotiated, not subject to adjustment 21 7
Indirect Rate Administration Provisional Rate Temporary indirect cost rate pending final rate Used for funding, interim billing or cost reporting The results of any negotiation is distributed to other participating agencies Many clients complain they cannot find the office for negotiating indirect rate Look at conditions clauses attached to grant 22 Basic Indirect Rate Mechanics Fringe as a Service Center 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. 24 8
Fringe Cost Pool & Base Each of the fringe expenses reside in a cost pool to be allocated on a causal-beneficial basis to the 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. 25 Fringe Rate Computation Fringe Pool & Base Example: Fringe Indirect 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. 26 Fringe Applied to Grants Fringe Application Example: Grant A: $ 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 27 9
Indirect Cost Example General fund = administrative costs Executive director s office Finance, HR, IT, Purchasing, Facility Mgmt. Office Space, Utilities, Audits, Insurance Value = $150,000 (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% 28 Example of Total Cost Total Cost of Grant $100,000 direct costs $ 15,000 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 29 Analysis of Indirect Expenses 10
Indirect Rate Multiplier Indirect Rate Loading Factor: Fringe (1.35) x G&A (1.25) = 1.6875 For every D/L $1.00 spent, there will be an additional cost of 69 in burden cost. 31 Percent of Base Analysis Fringe Pool Example: FY 2011 FY 2012 Account $1,500 15% $1,500 20% Pension 1,500 15% 2,500 33% Medical 500 5% 500 7% Payroll $3,500 35% $4,500 60% Fringe Pool $10,000 $7,500 Total Labor Base 32 Simplified Allocation Method OMB Circular A-122, Attch A, D.2.a. Single purpose entity, relatively small nonprofit with small amount of awards Separate indirect from direct cost Divide indirect by direct cost base Facility cost is combined with admin Facility cost supports direct and indirect personnel 33 11
Isolate G&A (numerator) Indirect cost classified into two broad activities: A-122, Attachment A, C.3 Facilities: buildings, equipment and capital investments, maintenance and operation expenses Administration: general administration, director s office, accounting, HR, library expenses and other types of expenditures not mentioned under facility 34 Isolate Admin. From Facility If an organization has more than $10 Million in federal funding of direct costs in a fiscal year, a breakout of indirect cost into two components: facility and administration, having indirect cost rates. OMB Circular A-122, Attachment A, C.3.e 35 G&A Bases (denominator) General & Administrative MTDC Base Allocate on Modified Total Direct Cost (MTDC) Direct labor, applied fringe, non-labor direct Exclusions from MTDC base shown on next slide G&A Salaries and Fringe Base Direct labor and applied fringe only G&A Salary Base Only direct labor 36 12
Distribution Basis for MTDC A-122, Attachment A, D.3.f Salaries and wages (direct labor) Fringe benefits on direct labor Materials and supplies, services & travel Sub-grants and subcontracts up to the first $25,000 of each sub-grant or subcontract, regardless of period covered by sub-grant Amounts excluded from MTDC: Sub-grants/subcontracts > $25,000 Equipment, capital expenditures Participant support cost, generally excluded 37 Direct Cost under A-122/SFE OMB Circular A-122, Attachment A, B.3 Cost of Certain Activities Direct Functions Fundraising Membership Promotion, lobbying, & public relations Treated as direct costs for purposes of determining indirect cost rates Bid & Proposal allowable per 45 CFR 74.27 B&P is not fund raising 38 Allocate occupancy direct 13
Charge Rent Direct & Indirect Rent example of allocability: 1. Rent charged directly for a separate office devoted to one grant 2. Rent (G&A) applied via square footage (SF) to various departments/programs based on SF or some other basis (next slide) 3. Allocating rent for executive director or director of finance, no direct relationship to grant or direct activities 40 Charge Rent Direct & Indirect Rent example of allocability: 2. Rent (G&A) applied to various departments/programs based on SF or payroll dollars a. If site devoted to grant is 1,000/10,000 SF for 10% of total rental cost ($5,000 = $500) b. If $5,000 in total rent is allocated via D/L dollars over $20,000/$80,000 = 25% for this program/grant (total rent = $1,250), i.e. Direct Allocation Method 41 Direct Allocation Method Joint costs depreciation, rental cost, repair & maintenance, telephone, and the like (utility, property insurance, etc) Prorate on a base that accurately measures benefits provided to each direct award and indirect departments Direct and indirect FTE positions Hours worked direct and indirect Direct and indirect labor dollars 42 14
Direct Allocation Method Square footage for direct and G&A areas is difficult to measure and keep up to date In order to use the Direct Allocation Method, make sure the grant proposal has a line item for joint costs or occupancy Set up a separate department to track and allocate joint costs to direct and indirect cost objectives OMB Circular A-122, Attachment A, D.4. 43 Multiple Cost Pools Multiple Allocation Method Indirect costs benefit major functions in varying degrees Indirect costs accumulated into separate cost groupings Constitute a pool of expenses that are of like character as they relate to base Allocated to functions by means of a base which best measures relative benefits 45 15
College Radio Station - Functional Areas 46 Step Allocation / Order A-122, Attachment A, C.1 & D.3.d(1) Costs are assigned to programs + adm dept s Fringe allocated to all dept s including G&A Occupancy allocated to all dept s including G&A Overhead allocated to 10000 Music programs, and 50000 Studio Structure Special allocation of engineering to 10100 G&A allocated to 10000 through 60000 47 When is Overhead necessary Grouping administrative costs by department under a functional grouping, e.g. music programs Departmental executive or VP Receptionist or other admin personnel Functional work benefits local departments Governmental group w/ multiple grants Burden is necessary to recover adm. $ Can you recover local overhead? 48 16
Indirect Rate Agency Models Templates for ICRP U.S. Department of Labor Indirect Cost Rate Determination Guide http://www.dol.gov/oasam/programs/b oc/costdeterminationguide/main.htm#t oc DHHS ICRP Template http://rates.psc.gov/fms/dca/np_exall2. html 50 Special Indirect Cost Rates A-122, Attachment A, D.5 A single rate for all functions may not take into account factors that may impact a particular segment of work Factors might include: Site location: geographic or gov t site Level of administrative support required Level of facility or other resources used 51 17
Special Indirect Cost Rates A-122, Attachment A, D.5 Bifurcated G&A, see sample schedule Same administrative rate % for segments Some segments have different facility cost due to different geographic locations Some segments have no facility cost since the effort is performed at a government site 52 Conflicting Cost Layers 53 Develop multiple G&A rate Administrative is 10% and Facility: Rent & Joint cost is 5% 30 employees or FTEs FTEs are used to allocate facility cost 54 18
Develop multiple G&A rate 5% facility cost recap: (rent & joint cost) 1% facility cost for indirect personnel 1% facility cost charged direct to grants 3% facility cost for direct purpose rent and joint cost that could not be recovered direct 55 56 DHHS Indirect Template 19
Any Questions 58 The materials contained herein or discussed in the seminar or shown in the MS Powerpoint slides, are for illustrative and academic purposes only and should not be considered appropriate for your organization without careful adaptation by experts in the appropriate field of endeavor. DISCLAIMER 20