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2. INDIRECT COST RATE & COST ALLOCATION PLANS Presenter: David Steele, Chief SMPID Fiscal Unit

3. OVERVIEW • Cost Allocation Plans (CAPS) and Indirect Cost Rates (ICDRs) • Methods for Allocating Indirect Costs • Developing IDCRs and CAPs • RSA Findings • Resources

4. WHAT ARE COST ALLOCATION PLANS AND INDIRECT COST RATES? Cost Allocation Plans and Indirect Cost Rates are: The means by which costs are identified in a logical and systematic manner for reimbursement under federal grants; and They are documents that identify, accumulate, and distribute allowable direct and indirect costs to benefiting activities.

5. WHAT ARE DIRECT AND INDIRECT COSTS? Direct Costs Costs that can be identified specifically with a final cost objective. Indirect Costs Costs that are incurred for a common purpose benefiting more than one cost objective; and Not readily assignable to the cost objectives specifically benefitted.

6. WHY ARE COST ALLOCATION PLANS AND INDIRECT COST RATES NECESSARY? • Compliance with OMB Circular A-87 (relocated to 2 CFR Part 225); • Documentation for Auditors; • Management Information; and • U.S. Department of Education Requirements (EDGAR).

7. “A grantee must have a current indirect cost rate agreement to charge indirect costs to a grant. To obtain an indirect cost rate, a grantee must submit an indirect cost proposal to its cognizant agency and negotiate an indirect cost agreement.” (Emphasis added) • 34 CFR 75.560(b) (EDGAR)

8. WHAT IS AN INDIRECT COST RATE PROPOSAL (IDC RATE PROPOSAL)? 2 CFR Part 225, Appendix E defines an indirect cost rate proposal as the documentation prepared by the governmental unit or subdivision thereof to substantiate its request for the establishment of an indirect cost rate. PART 225—COST PRINCIPLES FOR STATE, LOCAL, AND INDIAN TRIBAL GOVERNMENTS (OMB CIRCULAR A–87)

9. WHAT IS A COGNIZANT AGENCY? The cognizant agency means the federal agency responsible for reviewing, negotiating, and approving cost allocation plans or indirect cost rate proposals developed under 2 CFR Part 225 on behalf of all federal agencies. The cognizant agency is determined by the greater amount of federal funding awarded from an agency to each state based on the review of each states Federal Schedule of Expenditures (except for territories).

10. DOED INDIRECT COST GROUP COORDINATION WHEN ANOTHER AGENCY IS COGNIZANT • With regard to indirect cost rate proposals, the Department coordinates with other cognizant agencies when an IDC rate proposal involves an ED award that requires a restricted indirect cost rate. VR does not currently require a restricted indirect cost rate. • In addition, ED’s Indirect Cost Group assists RSA in resolving indirect cost issues identified through program monitoring.

11. RSA COORDINATION WHEN ANOTHER AGENCY IS COGNIZANT When DHHS or DOL are the cognizant agency for the VR program, the RSA Fiscal Unit Chief receives a copy of indirect cost proposals/revisions or cost allocation plan proposals/revisions. To the extent possible, RSA financial management specialists review the documents to determine if there are any concerns. If concerns are noted, RSA contacts the DHHS or DOL representative to obtain clarification from the submitting agency and resolve any concerns.

12. COST ALLOCATION PLAN As defined in 2 CFR Part 225, a cost allocation plan includes: Central service cost allocation plan (a.k.a., state-wide-cost allocation plan (SWCAP)); Indirect cost rate proposal; Public assistance cost allocation plan (mostly HHS); Cost allocation plan (indirect cost allocations not using rates).

13. WHAT IS A CENTRAL SERVICE COST ALLOCATION PLAN? 2 CFR Part 225 Appendix C defines the central service cost allocation plan as the documentation identifying, accumulating, and allocating or developing billing rates based on the allowable costs of services provided by a governmental unit on a centralized basis to its department and agencies.

14. ENGLISH PLEASE! The process used to allocate certain services on a centralized basis (e.g., motor pools, computer centers, purchasing, accounting, etc.) that may not be performed within the scope of the individual entity receiving the award. The process must allocate these costs to the benefiting program in a reasonable and consistent manner. This process is called the central services cost allocation plan, commonly known as the state-wide-cost allocation plan (SWCAP).

15. WHAT DO I NEED TO KNOW ABOUT CENTRAL SERVICE COST ALLOCATION PLANS (SWCAPS)? • States that wish to charge the costs of central support services to federal awards must first prepare a SWCAP to allocate those costs to departments or units they benefit. • States are required to submit a SWCAP to HHS for each year in which it claims central service costs under federal awards. • Costs omitted from this plan will not be reimbursed. • Approved SWCAPs can be found on the HHS, Division of Cost Allocation website at: http://rates.psc.gov/fms/dca/dca_swcap.html

16. WHAT IS AN INDIRECT COST (IDC) RATE? An indirect cost rate is a mechanism for determining in a reasonable manner the proportion of indirect costs each program should bear. It is the ratio, expressed as a percentage, of the indirect costs to the direct costs. The IDC rate allows one to calculate the appropriate allocation of indirect costs associated with any one project by applying the negotiated indirect cost rate to the respective base used to develop the rate.

17. TYPES OF IDC RATES Three different types of indirect cost rates can be approved by the cognizant agency: Predetermined – established for current or multiple future period(s) based on current data and are not subject to adjustment, except under very unusual circumstances. Fixed – established for a current period based on current data with a carry forward adjustment to the rate computation for a subsequent period. Provisional – temporary rates used for funding and billing indirect costs, pending the establishment of a final rate for a period.

18. WHAT IS THE DIRECT COST “BASE” AND HOW IS IT DETERMINED? Base means the accumulated direct costs (normally either total direct salaries and wages or total direct costs exclusive of any extraordinary or distorting expenditures) used to distribute indirect costs to individual federal awards. The direct cost base selected should result in each award bearing a fair share of the indirect costs in reasonable relation to the benefits received from the costs.

19. WHAT IS THE DIRECT COST “BASE” AND HOW IS IT DETERMINED? (CONT.) • The distribution base may be total direct costs (excluding capital expenditures and other distorting items, such as pass-through funds, major subcontracts, etc.), direct salaries and wages, or another base which results in an equitable distribution. • Both the direct costs and the indirect costs shall exclude capital expenditures and unallowable costs.

20. WHAT IS MEANT BY OTHER DISTORTING ITEMS? • Agencies should exclude distorting items like payments for consumer services to CRPs, vendors and consumers. • Subcontract amounts in excess of the first $25,000.

21. INDIRECT COST RATE An indirect cost rate is: Indirect cost pool divided by direct cost base equals indirect cost rate

22. INDIRECT COST POOL An indirect cost pool is: Departmental cost plus SWCAP equals indirect cost pool

23. WHAT ARE THE SUBMISSION REQUIREMENTS FOR COST ALLOCATION PLANS AND INDIRECT COST RATE PLANS? • Cost Allocation Plans and Indirect Cost Rates must be: • Developed and submitted within six months after the close of the entity’s fiscal year; • Submitted as required by the cognizant agency; • Inclusive of all units desiring to claim indirect costs; and • Maintained on file if submission is not required.

24. GRANTEE RESPONSIBILITIES • Grantees are responsible for ensuring that costs are: • Allowable; • Reasonable; • Treated consistently; • In compliance with GAAP; • Allocable to the federal program; • Proportional to benefit received; and • Adequately documented.

25. HEADS-UP: ABNORMAL/MASS SEVERANCE PAY Severance payments, but not accruals, associated with normal turnover are allowable. Such payments shall be allocated to all activities of the governmental unit as an indirect cost.  Abnormal or mass severance pay will be considered on a case-by-case basis and is allowable only if approved by the cognizant federal agency.

26. MASS SEVERANCE: DEFINITION Mass severance or termination benefits would include all expenses associated with the event. This would include: lump sum payments that may be linked to years of service, increased pension benefits such as granting additional years or eliminating penalties for early retirement, payments of unused leave, and the cost of any other incentive offered to employees as an incentive to leave government service, such as buy-outs. (ASMB C-10)

27. MASS SEVERANCE: PRIOR APPROVAL The costs of these special termination benefits must be determined and prior approval of such costs must be obtained from the federal cognizant office prior to claiming these costs directly or indirectly against federal programs. The requests for prior approval, at a minimum, must demonstrate the reasonableness and allocability of such costs to federal programs.

28. MASS SEVERANCE: PRIOR APPROVAL REVIEW • Ability to demonstrate costs are allowable to federal award; • Buy-out should be government-wide; • Plan should address estimated savings, total and federal, in both dollars and number of employees; • Governmental unit should analyze the effect the downsizing will have on the operation, continuity, and effectiveness of programs; • Governmental unit and the cognizant agency must establish an agreement providing for compensation to the Federal Government should the terms and conditions of the buy-out/severance plan not be met. (ASMB C-10)

29. HEADS-UP: TERMINATION LEAVE When a governmental unit uses the cash basis of accounting, the cost of leave is recognized in the period that the leave is taken and for which leave is paid. Payments for unused leave when an employee retires or terminates employment are allowable in the year of payment provided they are allocated as a general administrative expense to all activities of the governmental unit or component. (2 CFR Part 225, Appendix B)

30. HEADS-UP: COST SHIFTING Costs cannot be shifted to different awards to avoid funding deficiencies or to circumvent restrictions.

31. WHAT FINDINGS HAS RSA IDENTIFIED RELATED TO SWCAPS? Agencies paying duplicate costs. SWCAP expenses not being allocated to the required programs/awards. Agency being charged through SWCAP for expenses not allocable to the award.

32. WHAT FINDINGS HAS RSA IDENTIFIED RELATED TOINDIRECT COSTS? Not having a current, approved Cost Allocation Plans or Indirect Cost Rates. Costs/salaries included in plan/proposal not being allocated to appropriate programs (VR, IL, IL-OIB, state programs, etc.). Inconsistency in charging costs as direct or indirect between federal awards. Costs that do not benefit the award are inappropriately allocated via the ICR.

33. Are the costs of significant software projects allowable as charges to federal awards? Programs benefitting from such projects should be charged only for amortization of the capitalized costs once the projects are implemented and in use by federal programs. The costs should be amortized over the useful life of the intangible asset.

34. Is it permissible to allocate costs (either directly or indirectly) on the basis of revenue or on the basis of funds available under federal grants or contracts? No. The allocation of costs by either of these methods is unacceptable. Cost must be allocated on the basis of cost/expenditures incurred.

35. How do IDC rates get applied to sub-contractors? For example, a grantee has a 15 percent indirect rate, the grantee has two subcontractors that do not have indirect cost rate agreements with an agency of the federal government. Should the two subcontractors charge the 15 percent rate being utilized by the grantee or should they charge everything directly?

36. ANSWER NO, the two subcontractors cannot use the prime grantee's 15% rate, and NO they shouldn't direct charge everything unless they have a direct cost allocation plan approved by the cognizant federal agency. If the subcontractors have direct federal awards, they should already have an indirect cost rate approved by the cognizant federal agency. If they only receive federal funds in flow-through fashion, or via subawards, the organization will not have a cognizant federal agency. Why? The Government has privity only with the prime recipient, who has the fiduciary responsibility for the subcontractor's actions. In that scenario, the prime recipient is also responsible for indirect cost oversight.

37. ANSWER (CONT.) To determine allowability, allocability and reasonableness of the indirect costs charged by the two subcontractors, the prime grantee should consider the relevant program regulations, OMB circulars, and supplemental guidance.

38. References Education Department General Administrative Regulations (EDGAR) - http://www.ed.gov/policy/fund/reg/edgarReg/edgar.html HHS –ASMB C-10 & Other Reference Information - http://rates.psc.gov/ OMB Circulars - http://www.whitehouse.gov/omb/circulars/ ED’s Indirect Cost Group Website - http://www.ed.gov/about/offices/list/ocfo/fipao/icgindex.html

39. QUESTIONS?