Understanding Indirect Costs in Government Contracts

2. Indirect Costs Mark W. Stout, MBABranch ChiefIndirect Cost Services Division (ICSD) Interior Business Center (IBC) U.S. Department of Interior (DOI)

3. Agenda • General Principles • Uniform Guidance • Direct, Indirect, Unallowable, Exclusions • Distribution Base • Types of Rates • Indirect Cost Rate Computation • Fixed Carryforward Rates • Indirect Cost Rate Proposal Submission • Web Site References

4. Criteria – Code of Federal Regulations (CFR) Title 2: Grants and Agreements • Part 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards • Subparts- • Subpart A – Acronyms and Definitions • Subpart B – General Provisions • Subpart C – Pre-Federal Award Requirements and Contents of Federal Awards • Subpart D – Post Federal Award Requirements • Subpart E – Cost Principles • Subpart F – Audit Requirements • Appendix VII – States and Local Governments and Indian Tribes

5. Indirect Cost Determination • A means to identify general and administrative overhead • Recovery is limited by Federal law and regulation • Costs are grouped into: • Costs that directly benefit individual programs or activities (direct) • Other Costs (unallowable and exclusions) • Costs that support all programs or activities (indirect)

6. Direct Costs • Costs that can be identified specifically with a final cost objective such as a specific activity, program or grant (direct program costs) • Can benefit more than one program but can also easily be allocated to the funding sources that benefit (direct allocation costs) • Are approved for payment by the Federal grants officer, awarding official, or their representative

7. Unallowable Costs • A cost is unallowable if it: • Does not meet the criteria listed in the Uniform Guidance (2 CFR Part 200) to be allowable • Is specifically identified in the Uniform Guidance or the grant/contract as being unallowable

8. Examples of Unallowable Costs • Entertainment • Alcoholic beverages • General Costs of Government • Lobbying* • Fundraising* • Public relations*/ advertising • Interest and financing • Losses on other contracts • Contributions and donations • Bad debts • Fines and penalties • Defense of fraud proceedings

9. Unallowable Costs in the Base • “Unallowable costs must be included in the direct costs if they represent activities which indirect costs are properly allocable.” {Ref: 2 CFR Part 200 Appendix VII Subsection C.2.b} • Includes salaries of personnel who occupy space and benefit from the services provided by the pool. • *Examples: fundraising, lobbying, public relations when performed by the non-Federal entity’s own employees; 50% Tribal Council costs, etc.

10. Exclusions from Direct Costs • Extraordinary or distorting expenditures: • Passthrough funds • Capital expenditures • Major subawards – Typically, only the first $25,000 of each subaward may be included in the direct cost base.

11. Distribution (Direct Cost) Bases • Total direct costs, less capital expenditures and major passthrough funds (TDC) • Total direct salaries excluding fringe benefits (S&W) • Total direct salaries including fringe benefits (SWF)

12. Indirect Costs • Incurred for common or joint objectives and cannot be readily identified with a particular final cost objective or funding source • Necessary to the general operation of the non-Federal entity • Approved by the cognizant agency’s indirect cost rate negotiator through the negotiation of an indirect cost rate

13. Examples of Indirect Costs • Accounting • Audit • Human Resources • Executive Director • Admin Assistant/Receptionist • Payroll • Communications • Rent • Utilities • Bank Charges • Salaries • Fringe Benefits • Office Supplies • Purchases • Travel • Depreciation • Printing/Copying • Equipment—Lease/Repair • Minor Equipment • Insurance—General Liability, Fidelity Bond, etc.

14. Indirect Cost Rate Calculation • Costs are classified by placing them into categories such as administration, program or some other category as prescribed by statute • Identify the Indirect Cost Pool • Determine the Direct Cost Base (TDC, S&W, SWF) • Calculate the Indirect Cost Rate • Indirect Cost Pool = Indirect Cost Rate • Direct Cost Base

15. Rate Type Used by Most Tribes - FCF • A (F)ixed rate – will not change for the year. • Includes a carryforward (CF) amount, which increases or decreases the future indirect cost pool to reflect an under-recovery or over-recovery of indirect costs. • Factors affecting the carryforward amount: • Poor budgeting • New programs added • Additional, unplanned indirect costs

16. Other Computed Amounts (FCF Rate) • Carryforward computation includes underfunded and overfunded amounts. • These do not affect the indirect cost rate computation. • Underfunded amounts should be reported to the respective granting agencies. • The presence of an underfunded or overfunded amount does not constitute a determination or admission that either the government or the Tribe is liable to the other for any amount.

17. Indirect Cost Proposal Submission • Indirect Cost Proposals are due within six months after the end of the fiscal year. • Indirect Cost Proposals are due within six months prior to the start of the fiscal year. • Single Audits are due within nine months after the end of the fiscal year. • Transitioning to a three-year carryforward cycle.

18. Resources - Websites • Uniform Guidance • Council on Financial Assistance Reform (COFAR) FAQs • Indirect Cost Services Division

19. Questions? Mark W. Stout, MBA, Branch Chief Indirect Cost Services Division Tel: (916) 930-3830 Email: Mark_W_Stout@ibc.doi.gov