How to Develop Indirect Cost Rates For Nonprofit Organizations

How to Develop Indirect Cost Rates For Nonprofit Organizations 2010 Government and Not-For-Profit Conference UMD University College Adelphi, Maryland April 30, 2010 Presenter: Paul H. Calabrese Rubino & McGeehin, CPAs & Consultants Senior Manager Tel: 301-214-4137 pcalab@rubino.com http://www.rubino.com/about/bios/calabrese.htm 2

Basic Indirect Rate Principles Documentation to ensure: Uniform measurement Consistency year to year comparison Cost accounting period - accrual Concept of ALLOCABILITY 3 Importance of Federal Rates Example of service firms Government contractors FAR Pt. 31 Cost Accounting Standards Board 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 4

Cost Accounting Definitions 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 federal 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 6

Direct Expenses Direct Cost are costs specifically identified or traceable to a final cost objective (program service group, activity, cost center, department, or grant). Examples: direct labor, direct material, supplies, consultants, sub-awards, and travel. 7 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 Comply with government regulations, i.e. OMB Circular A-122 8

Indirect Rates Indirect rates synonymous with: Burdens Loading Overhead Types Fringe G&A (Indirect, Management & General from IRS Form 990) 9 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. 10

Indirect Cost Allocations 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 11 Indirect Rate Administration Negotiation and Approval of Indirect Rates per OMB Circular A-122 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 earmarked funds, HRSA Part B, CFDA 93.914 limits adm. to 10% Issues when agency is not proactive in the negotiation and settlement of indirect rates 12

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 Pre-determined (forecasted) rate is established when the org. is not expected to exceed the rate based on actual cost 13 Indirect Rate Administration Fixed (ceiling) rates negotiated when predetermined are not appropriate Fixed rate is not subject to adjustment Final rate Based on actual cost for period Once negotiated, not subject to adjustment 14

Indirect Rate Administration Provisional or Billing Rate Forecasted indirect cost 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 15 Designing a Cost Accounting System to Compute Indirect Rates

Rate System Mechanisms Use service centers: fringe, occupancy Isolate administration for G&A (w/o facility) Identify direct functional areas Allocate as much direct (DAL method) Large enough to have administration built into functional areas for Overhead 17 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. 18

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 (including PTO) 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. 19 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. 20

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 21 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% 22

Indirect Cost Example Total Cost of Grant $100,000 direct costs $ 15,000 applied indirect (15% x $100,000) $115,000 = total value of grant 23 Analysis of Indirect Expenses

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. 25 Percent of Base Analysis Fringe Pool Example: FY 2009 FY 2010 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 26

Fringe as a Percent of the Base 27 Isolate G&A (numerator) Indirect cost classified into two broad activities 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 28

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. Private grants limit indirect rate to 9% 29 Is there an ideal indirect rate? 15% Total G&A includes: 10% Administrative Functions 5% Occupancy Private Foundation Grant permits: 9% Total G&A Limitation Occupancy is a direct line item cost What is the best allocation base? What is the best rate, low or high?

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 31 Distribution Basis for MTDC 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 32

Direct Cost under A-122/SFE Cost of Certain Activities Direct Programs Fundraising Salaries, fringes and space cost In direct cost base because these items receive a benefit from the indirect infrastructure Treated as unallowable on federal awards Membership Promotion, lobbying, & public relations Some agencies interpret that some indirect unallowables should be treated as direct 33 Allocate occupancy direct

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 35 Charge Rent Direct & Indirect Rent example of allocability: 2. Rent (G&A) applied via square footage (SF) to various departments/programs based on SF or P/R $ 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 36

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 37 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. 38

When is Overhead necessary Grouping administrative costs for cost centers under a department or functional area Departmental executive or VP Receptionist or other admin personnel Functional work benefits local cost centers Governmental group w/ multiple grants Burden is necessary to recover adm. 39 Overhead Service Centers Functional Groupings (slide 41) Example of Intermediate Cost Pool Rock n roll college radio worksheet (42) Intermediate functions Technical Production Cost Pool (slide 43) Intermediate cost pool receives applied fringe, overhead and G&A (slide 43) Allocated to Rock n Roll cost center (44) 40

College Radio Station - Functional Areas 41 College Radio: Applied Burdens 42

Service Center: Technical Production 43 College Radio: Allocated Tech. Prod. 44

Designing a NFP Rate System 1. Utilize existing reference materials 2. Develop Cost Accounting Matrix 3. Specialized cost accounting reports 4. ICRP document rate to DHHS 45 Utilize Existing Documents

Requested Item List Last FY & current YTD Trial Balance Current Chart of Accounts IRS Form 990 Last FY audit/financials Statement of Functional Expenses Annual Budget Grant documents cost limitations Previous negotiated rates w/ an agency 47 Trial Balances (T/B) Last year and current YTD T/B Need historical data for full accounting period/year Need YTD if at least 6 months More relevant at 9 month intervals Actual cost data can be combined with budget to provide full year forecast Prior account structure may not be too useful for rate development 48

Chart of Accounts (COA) Goal of new COA S-I-M-P-L-I-F-Y Reduce work for accounting staff Develop a matrix of G/L and Departments Standardize for consistency - ease of use Basis for new cost accounting system Integrate with annual budget updates Fit report data on ONE page 49 IRS Form 990 Part II Statement of Functional Expenses See how organization currently views their overall (matrix) structure Columnar approach Program Services Management and General Fundraising Rows represent expense accounts 50

51 Exhibit 2.4 from Not-For-Profit Accounting Made Easy by Warren Ruppel, Published John Wiley & Sons, Inc. New York 2002

Annual Budget Format Should be similar to schedule of functional expenses for integration Budget used for this year s projected indirect cost rate Budget may be modified to include impact of management and general on each program s bottom line 53 Prior Rate Agreements Prior agency indirect cost rate agreements provide the basis for: How the rate is computed, i.e. allocation base Cognizant agency and contacts Any special limitations Applicable historical fiscal year(s) New provisional rate How long ago may be out of date 54

Cost Accounting Matrix Cost Accounting Matrix Framework for cost accounting system & indirect rate computations Facilitate an adequate job cost system Separate cost/funds between grants, or programs services Distinguish between direct and indirect cost Identify and segregate unallowable cost, direct or indirect 56

Cost Accounting Matrix G/L Expenses Salaries Fringe line Sub-awards: 2 accts < $25k + > $25K Supplies Communication Occupancy line Equipment maintenance & repair Travel Depreciation/amortization 57 Sample Natural Accounts Revenue & Expense Structure 4000 Revenue (Income) 5000 Direct cost (COGS) 6000 Fringe benefits (Expense) 7000 Overhead (Reserved) 8000 G&A (Expense) 9000 Unallowable expenses (Expense) Facilitates indirect rate development 58

Specialized Reports Grant Cost Report / Multi-Year Beyond fiscal year Inception-To-Date Prior fiscal years Current month Performance period Budget funding Burn rate, backlog, months left 60

61 Labor Distribution by Project Sorts first by grant Shows all employees charging to a grant/job/program Shows hours and cost, usually their pay rate is suppressed Used to validate time charged to grant by program manager 62

Project Time Report from SYMPAQ SQL software, Aldebaron Financial Solutions 63 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/np1.html 64

Components of Agency Indirect Cost Rate Submission DHHS

Any Questions 78