Indirect Cost Rates & What Happens Under the New Super Circular Presenter: Paul H. Calabrese Rubino & Company, CPAs & Consultants Senior Manager Tel: 301-214-4137 pcalabrese@rubino.com www.linkedin.com/pub/paul-calabrese/20/293/645/ https://twitter.com/paulcompliance 2 1
Sources 2 CFR 200 Uniform Administrative, Cost Principles & Audit Requirements for Federal Awards HHS is 45 CFR 75 Webcast Clip from our Free Webinar Series Super Circular 10 Top Items Impacting Indirect Rates http://youtu.be/dgmsu7l14wc Address: 6903 Rockledge Drive, Suite 1200, Bethesda, MD 20817 Website: www.rubino.com T: 301-564-3636 F: 301-564-2994 0817 2
5 Overview Updated COFAR FAQs / interpretations Impact of Super Circular on Indirect Rate Definitions of Direct Cost & Indirect Cost Negotiation & Administration of Rates Types of Allocation Bases Simple, Multiple, Direct & Special Rates Importance of the Statement of Functional Expense (SoFE) Bifurcated G&A & HHS model submission 3
Impact of the Super Circular The Super Circular 4
Super Circular: Structure at a Glance Subpart A: Definitions Subpart B: General Conditions Subpart C: Pre-Award Conditions Subpart D: Post-Award Requirements Subpart E: Cost Principles Subpart F: Audit Requirements Appendix IV: (4) Allocation Methods for Nonprofit Entities 9 Super Circular 2 CFR 200 When is it effective? COFAR FAQ: (8/29/14) Negotiated F&A Indirect Rates (NICRAs) and Cost Allocation Plans (CAP) for all recipients FAQ.110-1 Existing NICRAs remain in power until they are due to be renegotiated based on old OMB Circulars. For new rules to apply, the NICRA or CAP Fiscal Year has to begin as the first full FY on 12/26/14 or later. Example: Under old rules, use allowances were allowable as a part of depreciation cost principle and are still in effect post 12/26/14 until the F&A NICRA is due to be re-negotiated 10 5
Super Circular 2 CFR 200 When is it effective? COFAR FAQ: (8/29/14) Effective Date for Indirect Cost Rate Proposals (ICRP) using new rules FAQ.110-2 Applicable for the first full FYs beginning after 12/26/14 What if state / PTE* provides to a sub-recipient both Federal & non-federal funds, does the indirect rate application apply only to Federal funds or total funds? FAQ.331-1 It would only apply to the Federal funds and not to state funds per terms and conditions of the award *PTE = Pass-Through-Entity 11 Super Circular 2 CFR 200 When is it effective? COFAR FAQ: (11/26/14) FAQ.331-3 Delayed Federal funds If temporarily using state funds while waiting for Federal budget/funds to be approved, must the state reimburse sub-recipients for their indirect costs as directed in the Uniform Guidance? YES, because costs ultimately charged to a Federal award must comply with the terms & conditions of the Federal award, including the Uniform Guidance. States must use your approved indirect rate 12 6
Super Circular 2 CFR 200 COFAR FAQ Update: (8/29/14) States often blend several Federal funding streams to reimburse nonprofit service providers. Some of the funding streams may have indirect rate caps or no indirect limitations. FAQ.331-4 Each funding stream or Federal award will have its unique terms and conditions to follow. Each award has its unique limitations on indirect cost or rates, or no restrictions which states and other PTEs must follow. 13 Super Circular 2 CFR 200 COFAR FAQ Update: (11/26/14) States often blend several Federal funding streams to reimburse nonprofit service providers. Some of the funding streams may have indirect rate caps or no indirect limitations. FAQ.331-4 FAQ (11/26/14) If a NFE wishes to blend funds from multiple Federal awards, & apply only one set of terms and conditions to a Federal award: The Terms and Conditions of that arrangement must be agreed to in advance by all participating Federal agencies via a Prior Written Approval 14 7
Super Circular 2 CFR 200 COFAR FAQ Update: (8/29/14) FAQ.331-5 There is no requirement to have an indirect rate. Claiming reimbursement for indirect costs is never mandatory. However, once you submit annual ICRPs for a NICRA, they re required 6 mos after yearend. COFAR recognizes There are some entities that are able to charge 100% of their cost direct and so need for an indirect rate. A non-federal entities may conclude that the amount of indirect cost they might recover may be too immaterial to justify the effort to obtain a negotiated indirect rate. 15 Super Circular 2 CFR 200 COFAR FAQ Update: (8/29/14) FAQ.331-7 What happens if the PTE does not honor the NICRA rate of the sub? Under 200.331, the PTE must use the negotiated indirect rate of the sub. If not, there are remedies that a Federal awarding agency can sanction the PTE under 200.338 through 200.342. Report the matter to the agency IG overseeing your Federal award. Make sure the sub-award agreement stipulates the use of your NICRA currently in effect. 16 8
Subpart E Cost Principles Super Circular: 200.414(g) or 75.414(g) NFE has existing negotiated indirect rate: One-time extension of current indirect rate For a period of up to 4 years If granted, cannot request a rate review until extension period ends At end of 4 year period, must re-apply to negotiate a new rate 17 Subpart E Cost Principles Super Circular: (8/29/14) FAQ.414-2 The extension period can be 1, 2, 3, or 4 years The extension period is once for each negotiation cycle Once the extension period is over, org negotiates a new rate and then that NICRA can be extended again for up to 4 years Can only be done for predetermined and final rates not for provisional or fixed 18 9
Subpart E Cost Principles Super Circular: (11/26/14) FAQ.414-2 & 3 Is there special documentation requirements for an extension? No, the extension process is designed to reduced administrative burden What about the time of the request for an extension. No later than 60 days prior to due date for proposal of indirect costs, or if after, on a caseby-case basis the agency can accept requests 19 Super Circular 2 CFR 200 COFAR FAQ Update: (8/29/14) Indirect cost procurements FAQ.320-6 Since they are not a direct cost procurement, they do not follow the procurement standards Uniform guidance procurement rules do not apply to acquisitions in the indirect cost areas Uniform guidance procurement rules only apply to the acquisition of goods and services that are directly charged to a Federal award. 20 10
What s New with Indirects Subpart E Cost Principles Super Circular 2 CFR 200.400 Fundamental Basis of Indirect Cost Recovery Responsible for administering Federal funds consistent with terms and conditions, program objectives of award Accounting practices must be: Consistent with cost principles Support accumulation of cost Adequate documentation to substantiate costs charged to Federal awards Cost principles are used as a guide to price fixed price contracts / subcontracts 22 11
Subpart E Cost Principles Super Circular: New Optional Rate 10% de minimis rate: per 200.414(f) Never received a negotiated indirect rate Charge on a modified total direct cost base May use indefinitely until negotiate an indirect rate Direct and indirect costs charged consistently but not as both causing double-charging Use consistently on all Federal awards 23 Subpart E Cost PrinciplesFAQ.414-1 Super Circular: State, Local & Tribal Units State, Local, Tribal Governmental units can have a 10% de minimis rate per prior slide The amount of Federal awards for that unit of government has to be less than $35 Million per fiscal year They must document decision on file to select the 10% de minimis rate Never have received a NICRA indirect rate Per Appendix VII, D(1)(b) 24 12
Subpart E Cost Principles Super Circular: New NICRA Extension NFE has existing negotiated indirect rate: One-time extension of current indirect rate For a period of up to 4 years If granted, cannot request a rate review until extension period ends At end of 4 year period, must re-apply to negotiate a new rate 25 Subpart E Cost Principles Super Circular: FAQ.414-2 The extension period can be 1, 2, 3, or 4 years The extension period is once for each negotiation cycle Once the extension period is over, org negotiates a new rate and then that NICRA can be extended again for up to 4 years Can only be done for predetermined and final rates not for provisional or fixed 26 13
Subpart E Cost Principles Super Circular: New Options Direct cost allocation principle 200.405(d) 1. If cost benefits two or more direct programs 2. In proportions that can be determined without undue effort or cost 3. Costs should be allocated to projects If 1 and 2 cannot determine proportions based on interrelation of work involved, then allocated on benefited projects on a reasonable documented basis Purchase of equipment or capital assets for a specific award are assignable to that award only regardless of use on other projects or no longer needed as acquired 27 Subpart E Cost Principles Super Circular: New Options Direct charging of admin staff wages may be appropriate when all items are met: 200.413(c) Administrative services are necessary to a project Individuals involved can be specifically identified to a project, such as time reports Administrative wages are included in the budget or prior written approval from agency Such costs are not recovered as indirect cost 28 14
Subpart E Cost Principles Super Circular: New Requirements Unallowable activities and donated services receive allocation of indirect costs 200.405(b) Costs allocable to a Federal award may not be charged to cover fund deficiencies to avoid restrictions in the regulations 200.405(c) Limitation on allowable costs 200.408 If maximum amount allowable under a limitation is less than total amount determined, the delta is not recoverable and cannot be charged to another award 29 Subpart E Cost Principles Super Circular: New Requirements Payments made for costs determined to be unallowable must be refunded including interest to Federal government 200.410 Unallowable by Federal awarding agency Cognizant agency for indirect cost Pass-through entity Either direct or indirect unallowable cost 30 15
Subpart E Cost Principles Super Circular: New Requirements Adjustments of previously negotiated indirect cost rates containing unallowable costs 200.411 Negotiated indirect cost rates later found to have costs: 1. Unallowable specified by Federal statutes, regulations or terms and conditions of a Federal award 2. Unallowable as not allocable to Federal award(s) Must be adjusted for a refund Adjustments are used to correct established negotiated rates Will not re-open for rate negotiation Applied to all types of rates: fixed, final, predeter, prov. 31 Subpart E Cost Principles Super Circular: New Requirements Adjustments of previously negotiated indirect cost rates containing unallowable costs 200.411 For projected rates of a future year, the costs are removed from cost pools and rates appropriated adjusted downward For historical rates of a past period, the unallowable costs will be computed by fiscal year and a cash refund including interest For current year rates, either a rate adjustment or refund per cognizant agency 32 16
Subpart E Cost Principles Super Circular: New Requirements Adjustments of previously negotiated indirect cost rates containing unallowable costs 200.411 For multiple years, the proportional amount of unallowable costs in the base year will be extrapolated to the out-year rates 33 Subpart E Cost Principles Super Circular: New Certifications Assure proper expenditures 200.415(a) Certifying project budgets, annual and final fiscal reports or vouchers requesting payments 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 be subject to criminal, civil or administrative penalties for fraud, false statements, false claims or otherwise. 34 17
Subpart E Cost Principles Super Circular: New Certifications Certification of indirect rates 200.415(b) An Indirect Cost Rate Proposal (ICRP) must have a Certificate of Indirect Costs signed at a level not lower than VP or CFO Cost are not unallowable and not in-allocable If an ICRP does not include a certification The agency can unilaterally disallow all indirect costs The agency can unilaterally establish their own rate based on historical cost or other such data, to ensure that unallowable costs won t be reimbursed. 35 Cost Accounting Definitions 18
Direct Expenses Direct Cost are costs specifically identified or traceable to a Federal award, project or activity 200.413(a) Examples: direct labor and related fringe benefit cost, direct material, supplies, consultants, subawards, travel 200.413(b) & Appendix IV B.3.b.(4)2 nd Direct charging of salaries of administrative personnel 200.413(c) Direct proration of cost between 2 or more activities without undue effort 200.405(d) Unallowable direct cost remain in base 200.413(e) 37 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. In developing a cost pool special care that costs can first be identified direct to a program, no doublecharging Appendix IV B.3.b.(4) 2 nd (paragraph) Typical indirect expenses are: office supplies, postage, local telephone, periodicals, memberships per Appendix IV B.3.b.(4) 2 nd 38 19
Indirect Rate Negotiation and Administration No indirect rate system fits all OMB Circular A-122, Attachment A, C and 2 CFR 200.414(b) 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. 40 20
Advance Understandings Prior Written Approval 200.407 OMB Circular A-122, Attachment A, A.6 Under any award, the allocation and reasonableness 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 Examples provided such as pre-award costs 41 Indirect Cost Allocations OMB Circular A-122, Attachment A, D.1.e Appendix IV B.1.e to 2 CFR 200 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 42 21
Indirect Rate Administration Appendix IV C to 2 CFR 200 Negotiation and Approval of Indirect Rates per OMB Circular A-122, Attachment A, E Agency with largest dollar value = cognizant agency Appendix IV C.2 Indirect rate proposal submitted 90 days after new award to an organization App. IV C.2.b 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 43 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 Appendix IV C.2.c Note: Cognizant agency has the option of deciding how often a NICRA is required. Please read the first page of your NICRA. 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. Appendix IV C.2.d 44 22
Indirect Rate Administration Fixed (ceiling) rates are similar to predetermined rates except: App. IV C.2.e 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 Appendix IV C.1.d & C.2.f Based on actual cost for period Once negotiated, not subject to adjustment 45 Indirect Rate Administration Provisional Rate Appendix IV C.1.e & C.2.f 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 Appendix IV C.2.g Negotiating rates must be accepted by ALL Federal awarding agencies 200.414 (c)(1) Many clients complain they cannot find the office for negotiating indirect rate Look at conditions clauses attached to grant 46 23
(4) Allocation Methodologies Simplified Allocation Method OMB Circular A-122, Attch A, D.2.a. App. IV B.2 Single purpose entity, small or large nonprofit with small amount of awards Separate allowable indirect less credits from direct cost Divide indirect by direct cost base (w/unallowable $) Facility cost is combined with administrative pool Facility cost supports direct and indirect personnel 48 24
Construction of an F&A Rate Indirect cost classified into two broad activities: A-122, Attachment A, C.3 and Appendix IV B.3.b Facilities: buildings, equipment and capital investments, maintenance and operation expenses and interest Administration: general administration, director s office, accounting, HR, library expenses and other types of expenditures not mentioned under facility 49 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 and 200.414 (a) last sentence of, Appendix IV B.2.e 50 25
G&A Bases (denominator) General & Administrative MTDC Base App. IV B.2.c 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 Appendix IV B.2.c G&A Salary Base (per HHS indirect template) Only direct labor Results of special cost studies must not be used to determine and allocate indirect cost to Federal awards per Appendix IV B.3.c (last sentence of paragraph) 51 Distribution Basis for MTDC A-122, Attachment A, D.3.f. Appendix IV B.2.c 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 (rent removed) Participant support cost must be excluded 52 26
Direct Cost under A-122/SFE OMB Circular A-122, Attachment A, B.3 and 200.413(e) Cost of Certain Activities Direct Cost Functions Remain in MTDC base though unallowable, must be treated as direct costs to determine ind. rates Fundraising (not mentioned in super circular) Membership Promotion, lobbying, & public relations Bid & Proposal allowable per 45 CFR 74.27 B&P is not fund raising per 45 CFR 75.460 Proposal Costs new cost principle 200.460 53 Allocate occupancy direct 27
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 55 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 56 28
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 Appendix IV B.3.c(1)(c) & (d) Direct and indirect FTE positions Hours worked direct and indirect Direct and indirect labor dollars 57 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 budget 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. Appendix IV B.4 58 29
Multiple Cost Pools Step Allocations & Overhead Multiple Allocation Method Appendix IV B.3.a and 3.b 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 60 30
61 Step Allocation / Order Appendix IV B.3.d Order of Distribution Costs assigned to direct programs + adm dept s Fringe allocated to all dept s including G&A Occupancy allocated to all dept s including G&A Program Administration (PA) can be allocated PA is not G&A PA cannot be recovered under OMB Special allocation of studio 50010 G&A allocated to 10000 through 60000 62 31
Special Rates & Double-Charging Special Indirect Cost Rates A-122, Attachment A, D.5 - Appendix IV B.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 64 32
Special Indirect Cost Rates A-122, Attachment A, D.5 - Appendix IV B.5 Bifurcated G&A to avoid double-charging 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 65 66 33
Cannot Double Charge A-122, Attach. A, B.1 & C.1 2 CFR 200.412 Major problem to get first NICRA approved It is essential that each item of - Cost incurred for the same purpose - Be treated consistently in like circumstances - Either as a direct or indirect (F&A) cost - In order to avoid double-charging on Federal Awards. 200.414(f) 10% de minimis rate must be charged consistently as direct or indirect, but not be doublecharged or inconsistently charged AS 67 BOTH. Conflicting Cost Layers 68 34
Develop multiple G&A rate Administrative is 10% and Facility: Rent cost is 5% 5% facility cost recap: (facility/ rent cost) 1% facility cost for indirect personnel 1% facility cost charged as direct-purpose rent to some grants as a direct cost 3% facility cost for direct-purpose rent that could not be recovered direct 69 70 35
71 Indirect Rate Agency Models 36
Templates for ICRP U.S. Department of Labor Indirect Cost Rate Determination Guide: http://www.dol.gov/oasam/boc/dcd/np-comm-guide.htm DHHS ICRP Template https://rates.psc.gov/fms/dca/np_exall2.html 73 Statement of Functional Expense (SoFE) Used in Templates 37
Importance of SoFE Outside forces on NFPs IRS 990 SoFE (FASB 117) ASC 958 SoFE Dept. of Labor & DHHS models 75 Permission to use from client 76 38
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Any Questions 79 The materials contained herein or discussed in the webinar 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 40