Presenting a live 110 minute teleconference with interactive Q&A Developing Indirect Cost Rates for Non Profits: Practical Approaches WEDNESDAY, JUNE 6, 2012 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Paul Calabrese, Senior Manager, Rubino & McGeehin,, Bethesda, Md. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10.
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Developing Indirect Cost Rates for Non Profits: Practical Approaches Seminar June 6, 2012 Paul Calabrese, Rubino & McGeehin pcalab@rubino.com
Today s Program Overview Slide 7 Slide 10 Cost Accounting Definitions Indirect Rate Negotiation And Administration Basic Indirect Rate Mechanics Analysis Of Indirect Expenses Allocate Occupancy Direct Multiple Cost Pools Developing An Indirect Rate Cost Accounting Matrix Indirect Rate Agency Models DHHS Indirect Template Slide 11 Slide 16 Slide 17 Slide 26 Slide 27 Slide 33 Slide 34 Slide 42 Slide 43 Slide 47 Slide 48 Slide 55 Slide 56 Slide 63 Slide 64 Slide 67 Slide 68 Slide 71 Slide 72 And Exhibit
Developing Indirect Rates: Overview Usefulness of indirect rates Essential indirect rate mechanics Components of a compliance project cost system Administration and negotiation of indirect rates under A-122 Update on new rules regarding the negotiation of indirect rates Special indirect rates and cost allocations Steps to develop an indirect cost rate Preparation of an indirect cost rate using the DHHS model 7
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Basic Indirect Rate Principles i 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 year to year comparison Cost accounting period - accrual Concept of ALLOCABILITY 9
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 10
Cost Accounting Definitions
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. 12
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 13
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 14
Indirect Rates Indirect rates synonymous with: Burdens Loading Overhead Types Fringe G&A (Indirect, Management & General from IRS Form 990) 15
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. 16
Indirect Rate Negotiation And Administration
Proposed Changes To Cost Principles Changes to the Cost Principles Consolidating all cost principles into a single document with limited variations by entity Use of flat rates discounted below negotiated rates Option of accepting a flat or negotiated rate Flat rates maintained up to 4 years with minimal documentation Negotiated rates require full documentation DHHS DCA develop discount factors 18
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. 19
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 20
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 21
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 22
Indirect Rate Administration (Cont.) 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. 23
Indirect Rate Administration (Cont.) Fixed (ceiling) rates are similar il to pre- determined 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, t not subject to adjustment t 24
Indirect Rate Administration Provisional Rate (Cont.) Temporary indirect cost rate pending final rate Used for funding, interim billing or cost reporting If future rate in FY 2012 is substantially higher than historical rate in FY 2011, consider preparing a separate budgeted rate for FY 2012 to negotiate the provisional rate in addition to the FY 2011 historical indirect rate proposal 25
Indirect Rate Administration (Cont.) The results of any negotiation is distributed to other participating agencies Many clients complain they cannot find the office for negotiating g indirect rate Look at conditions clauses attached to grant 26
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. 28
Fringe Cost Pool And 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. 29
Fringe Rate Computation Fi Fringe Pool l&b 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. 30
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 31
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% 32
Example Of Total Cost Total Cost of Grant $100,000 direct costs $ 15,000 applied indirect (15% x $100,000) 000) $115,000 = total value of grant Total Cost Definition iti 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 33
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. 35
Percent Of Base Analysis Fringe Pool Example: FY 2010 FY 2011 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 36
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 37
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 38
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? 39
G&A Bases (Denominator) General & Administrative MTDC Base Allocate on Modified d Total Direct Cost (MTDC) Direct labor, applied fringe, non-labor direct Exclusions from MTDC base shown on next slide ld G&A Salaries and Fringe Base Direct labor and applied fringe only G&A Salary Base Only direct labor 40
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 41
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 p of determining indirect cost rates And allocated their share of the org s indirect costs agency interpretation 42
Allocate Occupancy Direct
Charge Rent Direct And 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 44
Charge Rent Direct And Indirect (Cont.) 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 t 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 45
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 46
Direct Allocation Method (Cont.) 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. 47
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 h best measures relative benefits 49
College Radio Station: Functional Areas 50
College Radio: Applied Burdens 51
Service Center: Technical Production 52
College Radio: Allocated Tech. Prod. 53
Step Allocation/Order A-122, Attachment A, C.1 & D.3.d(1) First, direct costs are assigned to awards Fringe allocated to all cost centers including G&A Occupancy allocated to all cost centers including G&A Overhead allocated to 10000 Music programs, and 50000 Studio Structure Special allocation of engineering to 10000 G&A allocated to 10000 through 60000 54
When Is Overhead Necessary? Grouping administrative costs for cost centers under a department or functional area Departmental t 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. $ 55
Developing An Indirect Rate
Utilize Existing Documents
Requested Item List Last FY & current YTD Trial Balance Current Chart of Accounts Last FY audit/financials Statement of Functional Expenses Annual Budget Grant documents cost limitations Previous negotiated rates w/ an agency 58
Trial Balances (T/B) Last year and current YTD T/B Need historical data for 12 month period 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 59
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 60
Financial i Audit Schedule of Functional Expenses Detailed expenses from Statement of Activities Greater detail than IRS Form 990 Rows represent expense accounts Columns represent departments Programs summarized under functions Support Services including fundraising and Management and General 61
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 62
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 63
Cost Accounting Matrix
Cost Accounting Matrix Framework for cost accounting system & indirect rate computations Facilitate t 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 65
Cost Accounting Matrix (Cont.) G/L Expenses Salaries Fringe line Sub-awards: Supplies Communication Occupancy line Equipment maintenance & repair Travel Depreciation/amortization awards: 2 accts < $25k + > $25K 66
Sample Natural Accounts Revenue & Expense Structure t 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 67
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 69
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 i ti support required Level of facility or other resources used 70
Special Indirect Cost Rates A-122, Attachment A, D.5 (Cont.) Bifurcated G&A: Same G&A rate % for segments Some segments have different facility cost tdue to different geographic locations Some segments have no facility cost since the effort is performed at a government site 71
DHHS Indirect Template