Allowable and Unallowable Costs

Allowable and Unallowable Costs

GPD Indirect Cost Rate Training OMB Circular A-110 (2 CFR Part 215) 2 CFR Part 230 Appendix A General Principles GPD Indirect Cost Rate Agreement Chief, Operational Oversight Division Joseph E. Baldwin Project Review: July 2015 1 Topics Review of OMB A-110 Cost Allocation What is the difference between Direct and Indirect Costs?

What is an Indirect Cost Rate Agreement and do I need one? How do I calculate Indirect Cost Rates? 2 CFR Part 200 (Super Circular) 2 OMB Circular A-110 What is OMB Circular A-110? Provides uniform administrative requirements for grants and agreements with non-profit organizations Codified in the Code of Federal Regulations at 2 CFR Part 215 3 OMB Circular A-110

(Continued) OMB Circular A-110 requires a Financial Management System that provides: Accurate, current and complete disclosure of the financial results of EACH federallysponsored project or program. Records that identify adequately the source and application of funds for federallysponsored activities. 4 OMB Circular A-110 (Continued) Accounting records including cost accounting records that are supported by source documentation Written procedures for determining the reasonableness, allocability and allowability of costs in accordance with the provisions of the

applicable Federal cost principles (OMB Circular A-122) 5 Cost Allocation Cost Allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. 6 Cost Allocation Plan A Cost Allocation Plan is the organizations written policy that discloses its accounting

practices, policies, and procedures for allocating direct and indirect costs. 7 Cost Allocation (Continued) Costs for each particular cost objective must be segregated A cost is allocable to a particular cost objective, such as a grant, contract, project, service, or other activity, in accordance with the relative benefits received. A cost is allocable to a Federal award if it is treated consistently with other costs incurred for the same purpose in like circumstances and if it: 8

Cost Allocation (Continued) (1) Is incurred specifically for the award. (2) Benefits both the award and other work and can be distributed in reasonable proportion to the benefits received, or (3) Is necessary to the overall operation of the organization, although a direct relationship to any particular cost objective cannot be shown. 9 Cost Allocation (Continued) Any cost allocable to a particular award

or other cost objective under these principles may not be shifted to other Federal awards to overcome funding deficiencies, or to avoid restrictions imposed by law or by the terms of the award. 10 Cost Allocation Plan (Continued) A Cost Allocation Plan will help the Grantee to ensure that it is recovering all *allowable costs incurred by the organization and the plan is often the only way to determine total costs of operating programs. *Allowable costs are discussed in 2 CFR 230 Appendix B Selected Items of Cost and 2 CFR 200 Subpart E Cost

Principles, General Provisions for Selected Items of Cost. 11 Direct Costs Costs identified specifically with awards are direct costs of the awards and are to be assigned directly to the award Costs identified specifically with other final cost objectives of the organization are direct costs of those cost objectives and are not to be assigned to other awards directly or indirectly 12 Indirect Costs After direct costs have been determined and

assigned directly to awards or other work as appropriate, indirect costs are those remaining to be allocated to benefiting cost objectives Indirect Costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective 13 Indirect Costs (Continued) A cost may not be allocated to an award as an indirect cost if any other cost incurred for the same purpose, in like circumstances, has been assigned to an award as a direct cost 14

Total Costs = Direct + Indirect Total costs The sum of the allowable Direct and allocable Indirect costs less any applicable credits. Direct Costs Can be identified specifically with a particular final cost objective (i.e., a particular award, service or direct activity) Indirect Costs Incurred for common or joint objectives and cannot be readily identified with a particular final cost objective 15 Indirect Cost Rate Proposal Documents the organization is required to submit in order to negotiate indirect cost rates

with their cognizant agency. The proposal is the basis for establishing an indirect cost rate agreement. The Federal agency with the largest dollar value of awards with an organization will be designated as the cognizant agency for the negotiation and approval of the indirect cost rates. 16 Indirect Cost Rate An Indirect Cost Rate is the ratio between the total indirect cost and some direct cost base. The indirect cost allocation method(s) used by each Grantee depend on its own structure, program functions, and accounting system.

17 Indirect Cost Rate An Indirect Cost Rate (ICR)is a percentage calculated as follows: ICR = Total Indirect Costs Direct Cost Base The Direct Cost Base is used to distribute indirect costs to individual Federal awards. An indirect cost rate must be applied to a direct cost base in order to determine the amount of indirect cost. 18 ICR Example Grantee John Doe administers four (4) grants Grantee John Does Indirect Costs = $100,000 Grantee John Does Direct Cost Base =

$1,000,000 Indirect Cost Rate (%) = Total Indirect Costs Direct Cost Base Indirect Rate = 10% $100,000 $1,000,000 19 Is an Indirect Cost Rate Necessary? If a Grantee would like to be reimbursed for certain types of indirect costs under Federal awards than a Federally approved ICR is required. The Super Circular, effective December 26, 2014, includes a 10% de minimus* rate for organizations that have not had an indirect cost rate. 20

Is an Indirect Cost Rate Necessary? (Continued) If a Grantee determines there is not a cost benefit in obtaining a Federally approved ICR, then it should not seek to negotiate one. A Grantee is not required to obtain an approved ICR; it is voluntary. 21 Methods of ICR Calculation There are three basic methods for calculating indirect cost rates: 1. Simplified 2. Multiple Rate 3. Direct

22 Simplified Method The Simplified Method may be used whenever the major functions of an organization benefit from its indirect costs to approximately the same degree. 23 Simplified Method (Continued) This method is accomplished by: 1.classifying the total cost for the base period (usually the organizations fiscal year)

as either direct or indirect and 2.dividing the total allowable indirect costs (net of applicable credits) by an equitable distribution base. 24 Simplified Method (Continued) This method also requires that: 1. capital expenditures and unallowable costs are excluded from both the direct and the indirect costs. 2. however, unallowable costs must be included in the direct cost base if they represent activities, such as fundraising.

25 Simplified Method (Continued) The result of the above process is an indirect cost rate which is applicable to and used to distribute indirect costs to individual Federal awards Specifically the formula is as follows: Total Allowable Indirect Costs / Allocation Base = ICR% $150,000 / 400,000 = 37.50% 26 Simplified Method Calculation Federal Projects

Non-Federal Programs Fundraising Less: Total Costs Exclusions & Example of Costs Salaries and wages Payroll taxes Fringe Benefits Legal fees Accounting Fees Other Professional Services Program supplies Janitorial Supplies Travel and transportation

Occupancy costs Stationary and office supplies Equipment rental Building and office rent Interest expense Telephone expense Conference and stafftraining Subscriptions and publications Postage and shipping Outside printing Membership dues Miscellaneous Exp Depreciation and amortization Total Costs All Funds Unallowables

2,152,742 402,115 88,035 89,048 46,467 56,150 23,987 56,922 132,758 232,053 437,887 24,568 185,008 5,316 25,390 5,967

5,765 12,125 11,680 10,080 28,517 5,159 4,037,739 Indirect Rate 234 15,203 1,387 22,490 777 353

General & Admin Total Indirect Direct Costs Costs 314,740 54,414 2,953 88,988

578 19,473 - 15,586 18,455 - 33 5,316 22 - 6,114 21,170 3,636 3,590

5,700 65 1,404 2,267 5,540 400 2,834 -

1,417 8,530 62,710 612 561,571 561,571 3,413,458 1,838,002 347,701 84,848 60 30,686

35,290 1,497 40,559 113,950 232,053 437,887 18,421 163,838 21,732 2,377 8,454 5,740 7,246 18,570 4,547 3,413,458

US HUD 925,871 168,110 43 3,932 2,150 5,578 16,369 819 10,114 1,702 1,245 1,595 1,109 17,575 459

1,156,671 US DOL 128,715 31,505 625 6,146 6,792 6,387 12,959 3,296 31,512 4,132 350 865 1,584

250 434 1,257 236,809 US VA 172,686 36,638 21,038 9,308 6,410 3,694 144,580 DOE

HHS State Contracts Homeless Chilldren 27,133 4,590 750 615 29,478 69,009 11,462 64 1,368 2,483 4,595

6,749 44,272 3,701 71 779 627 60 192 450,553 62,566 89,233

493,289 94,715 82,868 1,489 11,880 1,446 20,855 82,769 38,700 437,887 7,473 74,920 12,166 661 3,526 452 6,996

2,831 1,374,923 21,299 681 1,788 60 363 1,375 1,741 84 3,020 31 50 134 200 30,826

16.45% 27 85 3,602 3,325 51 924 258 1,629 1,834 169 11,877 Simplified Allocation Method

For an organization that receives more than $10 million in Federal funding of direct costs in a fiscal year, a breakout of the indirect costs into two components; Facilities and Administration, is required. The rate shall be stated as a percentage which the amount of Facilities and Administration is, of the applicable distribution base used for each component. In addition, specific bases may be required for allocating these categories of cost. 28 Multiple Allocation Method More appropriate where an NPOs indirect costs benefit its major functions in varying degrees indirect costs shall be accumulated into separate

cost groupings grouping shall constitute a pool of expenses that are of like character in terms of functions they benefit and in terms of the allocation base which best measures the relative benefits provided to each function 29 Multiple Allocation Method (Continued) Facilities is defined as depreciation and use allowances on buildings, equipment and capital improvements; interest on debt associated with certain buildings, and operations and maintenance expenses.

30 Multiple Allocation Method (Continued) Administration is defined as general administration and general expenses such as the director's office, accounting, personnel, library expenses and all other types of expenditures not listed specifically under one of the subcategories of "Facilities", (including cross allocations from other pools, where applicable). 31 Multiple Allocation Method (Continued) Allocation Basis When a cost grouping benefits a single

function, the costs should be allocated directly to the benefiting function Cost groupings of a general nature should be allocated using a base which produces results that are equitable to both the Federal Government and the organization 32 Multiple Allocation Method (Continued) Allocation Basis Unless it can be demonstrated that a different base would result in a more equitable allocation of costs (or a more readily available base would not increase the costs charged to awards), costs should be allocated in accordance with the methodologies described

in OMB Circular A-122 (subparagraph D.3.c. of Appendix A to 2 CFR Part 230) 33 Direct Method The Direct Allocation Method is used by organizations that treat all costs as direct costs except general administration and general expenses (G&A). These organizations generally separate their costs into three (3) basic categories: 1. general administration and general expenses, 2. fund raising, and 3. other direct functions (including projects performed under Federal awards). 34 Direct Method

(Continued) This method is acceptable provided each joint cost is prorated using a base which accurately measures the benefits provided to each final cost objective or other activity All direct allocation methods must be disclosed in a Cost Policy Statement. Indirect Cost consist exclusively of general administration and general expenses Compute indirect cost rate using Simplified Allocation Method 35 Selecting Rate Methodology The following should be considered in selecting a Rate Methodology:

Amount of Federal Funding Size of the Organization (major functions) Service Variances Types of Programs Cognizant Federal Agency 36 Types of Rates OMB Circular A-122 describes the different types of indirect costs that can be negotiated. The GPD office typically issues provisional and final rates, described below: Provisional rate or billing rate means a temporary indirect cost rate applicable to a specified period which is used for funding, interim reimbursement, and reporting indirect

costs on awards pending the establishment of a final rate for the period. 37 Types of Rates (Continued) Final rate means an indirect cost rate applicable to a specified past period which is based on the actual costs of the period. A final rate is not subject to adjustment. Note that a final indirect cost rate is established after an organization's actual costs are known, typically a fiscal year. Once established, a final indirect cost rate is used to adjust the indirect costs claimed on grants and contracts. 38

2 CFR Part 200 (Super Circular) Administrative Costs OMB added a provision that administrative costs, like salaries of administrative and clerical staff, now can be charged as direct cost in certain circumstances 1. The administrative or clerical service is integral to the project or activity 39 2 CFR Part 200 (Super Circular) (Continued) Administrative Costs 2. The administrative or clerical costs are

budgeted or have the prior written approval of the Federal awarding agency 3. The costs are not also recorded as indirect costs 40 2 CFR Part 200 (Super Circular) de minimus Indirect Cost Rates 10 Percent de minimus: The new grants guidance includes a new 10 percent de minimus rate on modified total direct costs (MTDC) for indirect costs for those that have never received a negotiated indirect cost rate in the past

No documentation needs to be maintained to support the use of this rate 41 2 CFR Part 200 (Super Circular) de minimus (Continued) Indirect Cost Rates 10 Percent de minimus: Rate may be used indefinitely, but must be applied across the board to all grants for which indirect cost rates are charged If you already have a negotiated rate and that negotiated rate is lower (or higher), you cannot choose to use the new 10 percent de minimus threshold 42

2 CFR Part 200 (Super Circular) Federal agencies are now required to accept the negotiated indirect cost rate from another Federal agency, unless an exception is required by statute or regulation Rate may be extended on a one-time basis, for a period of up to 4 years This is not automatic, approval must be obtained 43 Preparing an Indirect Cost Rate Proposal Preliminary Steps 1. Organization Review If one does not already exist, prepare a formal

organizational chart(s), or a rough draft version, and provide any information or material explaining the various services and/or functions for each unit. Determine which units are indirect (administrative) functions of the organization. Determine the services that are allowable and allocable to Federal grants and contracts per the applicable cost principles. 44 Preparing an Indirect Cost Rate Proposal (Continued) 2. Review Federal and Non-Federal Funding Prepare a list of all funding sources for all service and functions identified above. illustrate the list of funded programs on a copy of the organization chart.

45 Preparing an Indirect Cost Rate Proposal (Continued) 3. Review the Accounting Structure Obtain a chart of accounts, or some other list of accounts for your organization, in which the actual dollars expended can be related to various programs and/or organization structure. Reconcile the accounting structure to the organization chart. If necessary, determine changes to implement an indirect cost rate system of billing. 46

Preparing an Indirect Cost Rate Proposal (Continued) 4. Determine the indirect cost methodology Based on the steps completed above determine if the current indirect cost allocation methodology complies with the requirements set forth under OMB Circular A-122, or develop and implement a methodology that does comply. 5. Review/Develop/Update the Cost Policy Statement Review the CPS to ensure it is current, accurate, and complete. 47

Preparing an Indirect Cost Rate Proposal (Continued) The following types of Exhibits are common examples of what would be included as part of an ICRP: 1. Personnel Costs Exhibit A document that summarizes the total compensation costs for each employee or job position. This can be combined with the Statement of employee Benefits. 48 Preparing an Indirect Cost Rate Proposal (Continued) 2. Allocation of Personnel Costs Exhibit A document that summarizes how all

personnel costs, for each employee or job position, are charged to major functions and/or each Federal and Non-Federal cost objective. The percentage of time per position may be entered in addition to the dollar amount. All personnel costs must be allocated for each position. 49 Preparing an Indirect Cost Rate Proposal (Continued) 3. Allocation of Employee Benefits A document that calculates an Employee (Fringe) Benefit rate and identifies the cost

elements assigned to the pool and base. This document is only required if the organization allocates Employee Benefits via the indirect rate method. 50 Preparing an Indirect Cost Rate Proposal (Continued) 4. Statement of Total Costs This document should contain all line items of costs included in the entities chart of accounts, Statement of Functional Expenses, and/or the CPS, with applicable columns for direct costs (by cost center),

indirect costs, (overhead, G&A, etc.) and unallowable costs (if applicable). 51 Preparing an Indirect Cost Rate Proposal (Continued) 5. Allocation of Indirect Costs Exhibit This document should contain all line items of costs included in the indirect cost pool(s),the applicable allocation base(s), and the resulting indirect cost rate(s). 52 Preparing an Indirect Cost Rate Proposal (Continued) 6. Total Costs by Federal Award Exhibit

This document lists each Federal grant and contract and includes information such as the Federal agency, period of performance, $ amount of the award, and allocation of costs. 53 Preparing an Indirect Cost Rate Proposal (Continued) 7. Prepare other supporting documents and information A Certificate of Indirect Costs that is signed by the Executive Director, or other designated official with signature authority. Other supporting documentation as required

54 Preparing an Indirect Cost Rate Proposal (Continued) Submit to the GPD Program Office Prepare a transmittal cover letter and/or e-mail to request an ICRP, designate contact personnel, reference the checklist, and provide additional relevant information. Complete the ICRP Checklist (See Appendix E) to ensure all required information and documents are submitted. Assemble transmittal cover letter/e-mail, checklist, ICRP, and all other documents identified on the checklist. 55

Preparing an Indirect Cost Rate Proposal (Continued) Send to the GPD using of the following delivery methods: 1. Email to: [email protected] Identify name of organization and ICR Proposal in the subject line 2. Mail to: Department of Veterans Affairs GPD Field Office 10770 N 46th Street, Suite C-100 Tampa, FL 33617 56 Questions? 57

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