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INDIRECT COST BASICS Presented by Gene Fornecker, CPA DPI School Finance Auditor

INDIRECT COST BASICS Presented by Gene Fornecker, CPA DPI School Finance Auditor. OVERVIEW. The discussion will include a review of common definitions related to indirect cost area

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INDIRECT COST BASICS Presented by Gene Fornecker, CPA DPI School Finance Auditor

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  1. INDIRECT COST BASICS Presented byGene Fornecker, CPA DPI School Finance Auditor

  2. OVERVIEW • The discussion will include a review of common definitions related to indirect cost area • You will be more familiar with indirect cost rate calculations, application for rates for your district and requirements for reimbursement • Determine the applicability of ICR rates for your district

  3. AUTHORITY • OMB Circular A-87, “Cost Principles for State, Local and Indian Tribal Governments” establishes policy that ONE federal agency is responsible for the review, negotiation and approval of indirect cost rate proposals prepared by government agencies • U.S. Department of Education is the cognizant agency for the State of WI

  4. INTRODUCTION • Topic of indirect costs is one of most highly misunderstood federal concepts • Misunderstood by: • Grantee program staff • Awarding agency staff • Government officials • The media

  5. IMPORTANT DEFINITIONS • Indirect cost rate: a device for determining in a reasonable manner the proportion of indirect costs each program should bear • It is a method for allocating indirect costs to projects • The ratio between indirect costs (pool) and an equitable base

  6. DEFINITIONS (cont’d) • Direct costs: those costs that can be specifically identified with a particular final cost objective (for example a particular award) • Indirect costs: those costs that have been incurred for common or joint objectives and cannot be readily identified with a particular cost objective (overhead, G & A)

  7. TYPES OF INDIRECT COSTS • Administrative and clerical salaries and benefits • Membership and subscriptions • Office supplies • Local telephone and line charges • Postage • General purpose software and supplies

  8. UNALLOWABLE COSTS • OMB Circular A-87, Unallowable Activities: • Organized fund raising • Lobbying • Lawsuits against the government • Bad debts • Contributions and donations • Fines and penalties • Entertainment • Equipment and other capital expenditures

  9. WHY ARE INDIRECT COST RATES NEEDED? • To provide a uniform method • Funding indirect costs • Charging indirect costs • To provide an equitable allocation of indirect costs across all projects

  10. RESTRICTED VS. UNRESTRICTED • Why the distinction? • Certain Dept of ED grant programs have a statutory requirement prohibiting the use of federal funds to supplant non-federal funds • Supplanting? Ambiguous concept that does not allow the use of federal funds to ‘replace’ otherwise local funds for certain expenditures • Very difficult to prove this quantifiably

  11. RESTRICTED VS. UNRESTRICTED • Restricted rate is calculated by taking the unrestricted rate and modifying it so as to exclude certain maintenance and operation expenditures • Both rates are calculated by DPI • Most grants only allow restricted rate to be used due to non-supplanting regulations

  12. INDIRECT COST PROPOSAL • Formal plan and methodology for calculating rates on a consistent basis • Organizational review • Tying costs to functions • Submission of plan to Cognizant Agency • Federal Review • Negotiation • Issuance of Rate Agreement

  13. INDIRECT COST PROPOSAL • What does this mean for WI schools? • DPI establishes ICR plan for all districts • DPI negotiates with Dept of ED • Every 5 years the plan is resubmitted and new agreement is reached • Available on DPI website: • http://www.dpi.state.wi.us/sfs/indirect.html

  14. TYPES OF RATES • Provisional/Final • Predetermined • Fixed-Rate with Carry-forward** • Temporary ‘billing’ rate **Used by WI school districts

  15. What is a Fixed Rate with Carry-Forward Provision? • The predetermined rate is an ICR applicable to a specified year (current fiscal year) based upon an ESTIMATE of current year costs • Fixed Rate with Carry-Forward ICR is the same as a predetermined rate except the differences between actual and estimated costs are ‘carried forward’ and become part of the rate calculation currently

  16. CALCULATIONS • ICR = Allowable indirect costs divided by Direct Cost Base • Direct Cost Base generally includes direct wages, benefits, and other direct costs excluding capital equipment purchases

  17. CALCULATIONS (cont’d) • DPI calculates rates for all districts • For 2008-09, rates based upon audited 2006-07 Annual Report data • Carry-forward provision is determined • Form PI-1161 is submitted if adjustment to DPI calculations are requested • November 1 is deadline for submitting adjustments • DPI notifies districts of adjusted rates and posts to website in December

  18. REPORTING FOR DPI ADMINISTERED FEDERAL AWARDS • Budget Request • Must identify indirect costs on original request or submit budget amendment • Program Fiscal Report (PI-1086) • Claim form • Can request reimbursement for indirect costs throughout the year

  19. WILL APPLYING FOR INDIRECT COSTS EQUAL MORE FUNDING? • Maybe • Entitlement awards will not generate additional funding due to indirect costs • Only so much total funding is available • If you apply indirect cost to the award it will reduce the amount of the grant award allocable to direct cost • Discretionary grant awards may lead to more funding • Competition with other districts for funding so must include indirect in budget request to be considered

  20. GENERAL RULE • You have to include an estimate for indirect cost in each budget request in order to qualify for reimbursement and have the potential of receiving greater grant awards

  21. Example • Grant award = $10,000 • All costs on budget are direct costs • Can not charge any indirect costs unless a budget revision is approved • Budget Revision approved: • $9,500 direct cost • $500 indirect cost • Had the effect of reducing direct costs reimbursable by the grant award—no additional funding generated

  22. What if direct program costs exceed original budget? • You can over expend major budgeted line items by 10% and elect not to claim any indirect cost on your claims • Effect: you still receive no more than the original grant award!

  23. Why bother with indirect costs? • Applying for grants including indirect costs may result in higher overall grant awards • When grant funds are unspent, the allocation of indirect costs against the grant reduce the grant carryover to the next year and helps subsidize overhead costs normally paid for in the district’s operating budget

  24. RESOURCES • DPI Management Services Website • http://www.dpi.state.wi.us/sms/index.html • DPI Financial Services Website • http://www.dpi.state.wi.us/sfs/index.html • Circular A-102 and A-133 • http://www.whitehouse.gov/omb/circulars/index.html

  25. QUESTIONS • Gene Fornecker, 608/267-7882 • Eugene.fornecker@dpi.wi.gov

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