Texas Association of Community Action Agencies (TACAA)

2016 Conference

May 18 – 20, 2016 | San Antonio, TX | Holiday Inn Riverwalk Hotel

NONPROFIT AND GOVERNMENT PRACTICE

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Cost Allocation

Thursday, May 19, 2016 8:30 am – 10:00 am

Presented by:

Karl Eck, CPA, Senior Manager

Cost Allocation 1

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Cost Allocation

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Trainer: Karl Eck, CPA, Senior Manager

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Materials/Disclaimer

Please note that these materials are incomplete without the accompanying oral comments by the trainer(s).

These materials are informational and educational in nature and represent the speakers' own views. These materials are for the purchasing agency’s use only and not for distribution outside of the agency or publishing on a public website.

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Cost Allocation 2

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Agenda

• Direct vs. Indirect Cost Allocation

• What an indirect cost rate is

• Indirect cost distribution bases

• Types of indirect cost rates

• Negotiation and approval of indirect cost rate

• 10% De Minimis Rate

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Cost Allocation Summary

• The goal of cost allocation is fairness. Each funding source should bear its fair share of allocated costs

• Close counts – you will never get it right

• Don’t spend $2 to allocate $1

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Cost Allocation 3

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Cost Allocation and Indirect Cost Rates

Options for allocating costs:

• Direct costing

• Negotiated indirect cost rate agreement

• 10% de minimis indirect rate

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Cost Allocation and Indirect Cost Rates

Direct Costing:

• Allocates costs among multiple programs using a base that is not dollar based (not expenses, salaries, budget or revenue)

• Should be supported by current data

• Costs have to be allowable to all programs

• Can be accumulated in pools and allocated or when the expense is recorded

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Cost Allocation 4

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Direct Costing Examples

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Direct Costs

200.413(c)

The salaries of administrative and clerical staff should normally be treated as indirect (F&A) costs. Direct charging of these costs may be appropriate only if all of the following conditions are met:

(1) Administrative or clerical services are integral to a project or activity;

(2) Individuals involved can be specifically identified with the project or activity;

(3) Such costs are explicitly included in the budget or have the prior written approval of the Federal awarding agency; and

(4) The costs are not also recovered as indirect costs.

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Are Indirect Rates Required?

From COFAR FAQ:

.331-5 Indirect Cost Rates and Entities Who Do Not Have Indirect Costs

2 CFR 200.210(a)(15), 2 CFR 200.331(a)(1)(xiii) and (a)(4) all make reference to indirect cost rates as a requirement for recipients and subrecipients. Not all entities charge indirect cost rates. Will they now be forced to establish such rates?

No. Non-Federal entities that are able to allocate and charge 100% of their costs directly may continue to do so. Claiming reimbursement for indirect costs is never mandatory; a non-Federal entity may conclude that the amount it would recover thereby would be immaterial and not worth the effort needed to obtain it.

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Indirect Costs

Indirect Costs…..What are they?• Indirect costs are those that have been incurred

for common or joint objectives and cannot be readily identified with a particular final cost objective

• Examples include: Executive Director, rent for administrative space, phone, utilities, etc.

• Equipment and other capital expenditures are unallowable as indirect costs but costs can be recovered through depreciation

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Indirect Costs

Indirect Costs…..What are they? (cont.)• Any direct cost of a minor amount may be

treated as an indirect cost for reasons of practicality where the accounting treatment for such cost is consistently applied to all final cost objectives.

• Classified in two broad categories– Facilities

– Administration

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Indirect Costs

Facilities• Depreciation on buildings, equipment and capital

improvement, interest on debt associated with certain buildings, equipment and capital improvements, and operations and maintenance expenses.

NOTE: use allowances are not allowable under 2 CFR Part 200

Administration• General administration and general expenses such

as the director's office, accounting, personnel and all other types of expenditures not listed specifically under one of the subcategories of “Facilities” (including cross allocations from other pools, where applicable).

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Cost Allocation 7

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Indirect Costs

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Executive Director

Finance Director

Toner

Utilities

AP Clerk

Paper

IT Director

Maintenance

Travel

Software

Board costs

Training

Independent Auditor Funding

Sources

Division of Cost Allocation

What’s in Your Pool?

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Cost Allocation and Indirect Cost Rates

Negotiated Indirect Cost Rate Agreement:

• Three rate types:– Provisional/Final

– Fixed with carryforward

– Predetermined

• Provisional/final typically awarded to CAP agencies but we are seeing more fixed with carry-forward and predetermined rates approved – up to 4 years

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Cost Allocation 8

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Indirect Costs

Distribution bases for indirect cost recovery:• Total direct costs

• Direct salaries and wages or salaries and fringe benefits

• Other base that results in equitable distribution

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Indirect Costs

Total direct costs:• Excludes subawards over $25,000

• Equipment/capital expenditures

• Participant support costsParticipant support costs means direct costs for items such as stipends or subsistence allowances, travel allowances, and registration fees paid to or on behalf of participants or trainees (but not employees) in connection with conferences, or training projects.

NOTE: no/fewer exclusions on direct salaries.

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Cost Allocation 9

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Indirect Costs

How is in-kind treated?

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Indirect Costs

Indirect Cost Rate• A ratio, expressed as a percentage, of the

indirect costs (pool) to a direct cost “base”.

• The base is usually total direct costs (excluding capital expenditures and other distorting items) or direct salaries and wages.

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Total organization indirect costs 835,000$ ÷

Total organization direct salaries 8,000,000$

Indirect cost rate 10.4%

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Indirect Costs

What an indirect cost rate looks like in a perfect world:

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For-ProfitJob Weatheri- State Housing Fund-raising Weatheri- Indirect Cost

Head Start Training zation Grant Event zation Discretionary Total Pool

Salaries 3,257,895 1,413,978 2,804,387 640,752 18,406 9,204 205 8,144,827 783,945 Fringe benefits 1,169,248 834,801 1,604,789 248,904 8,297 3,004 94 3,869,137 337,823 Supplies 365,087 36,484 930,481 34,057 483 5,804 236 1,372,632 23,841 Occupancy 168,974 46,089 143,657 21,042 102 810 45 380,719 209,871 Travel 56,048 60,787 304,897 10,564 35 724 130 433,185 65,412 Other 190,487 100,291 841,098 18,467 209 2,105 657 1,153,314 80,741 Inkind 2,450,974 - - - - - - 2,450,974 -

Subtotal expenses 7,658,713 2,492,430 6,629,309 973,786 27,532 21,651 1,367 17,804,788 1,501,633 A

Less adjusting items: In-kind (supplies and other) (2,109,744) - - - - - - (2,109,744) Capital expenditures - - (40,000) - - - - (40,000) Subawards over $25,000 (900,000) (325,000) - - - - - (1,225,000)

Total direct expenses 4,648,969 2,167,430 6,589,309 973,786 27,532 21,651 1,367 14,430,044 BX 10.41% = X 10.41% = X 10.41% = X 10.41% = X 10.41% = X 10.41% = X 10.41% =

Indirect charge to programs 483,786 225,549 685,703 101,335 2,865 2,253 142 1,501,633

Indirect expenses 1,501,633 ATotal direct expenses 14,430,044 B

Rate 10.41%

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Indirect Costs

Applying an Indirect Cost Rate

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Grant period 07/01/14 - 06/30/15

Calendar Year Ended

12/31/2014 12/31/2015 Total

Direct cost base 400,000$ 500,000$ 900,000$ X X

Indirect cost rates 10.0% 15.0%

Indirect costs 40,000$ 75,000$ 115,000$

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Indirect Costs

What are the advantages of an indirect cost rate agreement?

• Provides for one method to allocate almost alladministrative costs

• Potentially can make budgeting easier – direct salaries might be easier to estimate than the number of transactions finance will perform

• Rate and method are federally approved

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Indirect Costs

• You still likely will have to do some cost allocation.

• Typically, the organizations we see with indirect cost rate agreements are larger organizations with many types of costs to allocate across many programs.

• Also, it is state specific, some states seem to have organizations with more indirect cost rates than others.

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Indirect Costs

What are the disadvantages of an indirect cost rate agreement?

• Rate and method are federally approved –subject to individual cost negotiator preferences

• May lose some flexibility in how you determine the manner in which programs are charged for administrative costs

• Typically need to finalize and approve the rate every year

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Indirect Costs

What is the best distribution base? Depends on your organization.

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Program A Program B

Direct Salaries 4,000 1,000 Other Direct Expenses 1,000 4,000

Indirect Expenses 1,000,000 Total Expenses 5,000 5,000 Total Direct Expenses 10,000,000

Indirect rate 10% Direct Salaries 4,000 1,000 Direct Salaries Indirect Rate 20% 20%

Indirect Expenses 1,000,000 Total Direct Salaries and Wages 5,000,000 Indirect Charged to Program 800 200

Indirect rate 20%Direct Expenses 5,000 5,000

Direct Expenses Indirect Rate 10% 10%

Indirect Charged to Program 500 500

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Indirect Costs

2 CFR 200.407 – Prior written approval (prior approval)

In order to avoid subsequent disallowance or dispute based on unreasonableness or nonallocability, the non-Federal entity may seek the prior written approval of the cognizant agency for indirect costs or the Federal awarding agency in advance of the incurrence of special or unusual costs.

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Indirect Costs

DCA FAQ:Question # 12: What should a grantee do when an award does not provide for indirect cost reimbursement or provides for indirect costs at a rate lower than the one in the negotiation agreement? How does this effect the development of the indirect cost rate?

Answer: The decision to accept an award that does not pay indirect costs or pays indirect costs using a rate lower than what has been negotiated is a grantee decision. However, when developing the indirect cost rate, all awards, regardless of whether they pay full indirect costs or not, must be included in the direct cost base.

Indirect costs that are not reimbursable under a Federal or non-Federal award due to administrative or statutory restrictions may not be shifted to another Federal award unless specifically authorized by Federal legislation or regulation. Non-Federal revenue sources must be used to pay for these un-recovered costs.

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Indirect Costs

DCA FAQ:Question # 13: Our grant with HHS totals $500,000 and includes a provisional indirect cost rate of 10%. Our final indirect cost rate is 13%. Will HHS provide us with additional grant funds due to our higher indirect cost rate?

Answer: HHS will not provide your organization with additional grant funds due to a higher final indirect cost rate than the established provisional rate. However, a grant modification may be allowed to transfer budgeted direct costs to the indirect cost category due to the increased indirect costs.

This would be subject to the terms and conditions of the grant agreement, e.g. approval of grant officer, indirect cost ceilings, and administrative cost limitations. The grants officer should be contacted for additional information.

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Indirect Costs

DCA FAQ:

Question # 14: Can our indirect cost rate proposal be developed using only Federal funds since it only represents 15% of our total revenue?

Answer: No. An indirect cost rate proposal must be based on total organization costs, regardless of funding.

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Indirect Costs

Types of indirect cost rates• Provisional Rate

– Temporary rate established for a given period of time pending the establishment of a final rate for that period

– It is very important to budget accurately with a provisional rate

• Final Rate– Permanent rate established after the organization’s

actual costs are known

– Used to adjust indirect costs initially clamed based on provisional rates

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Indirect Costs

Types of indirect cost rates (cont.)• Predetermined Rate

– A permanent rate established for a specific future period

– Not subject to adjustment except in very unusual circumstances

– Will lose money if the rate is too low

– Could generate a profit if the rate is high enough

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Indirect Costs

Types of indirect cost rates (cont.)• Fixed Rate With Carry-Forward Provision

– Permanent rate with the same characteristics of a predetermined rate, however, the difference between the estimated an actual costs is carried forward into the next year

– If the rate is too low, you will have to use unrestricted cash to cover the shortfall until the rate is revised upwards

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Indirect Costs

• Most often we see nonprofits are issued a provisional indirect cost rate

• The DHHS guide for indirect cost rates states“Organizations are encouraged to use either predetermined rates or fixed rates with carry forward provisions where feasible and permissible under law and regulation. These rates permit a more timely closing of complete awards and generally eliminate the necessity making retroactive adjustments on individual awards as would be the case when provisional and final rates are used.”

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Cost Allocation 17

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Indirect Costs

Provisional Rate Timeline• Grant end date – March 31, 2014

• Agency year-end – December 31, 2014

• Indirect proposal due date and submitted –June 30, 2015

• Final rate received – September 30, 2015??

• In this scenario, 18 months have passed since the grant ended – do you and your funding sources want to make changes?

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Indirect Costs

Provisional Rates• Budgeting is critical as the provisional rate will

be finalized later at the actual rate

• Since many grants are closed, it is not desirable to refund funds back to funding sources on closed grants

• Even more difficult to obtain more money on a closed grant

• We recommend obtaining a sufficiently high rate and adjusting to the final rate during the year

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Indirect Costs

Provisional Rates (cont.)• Some are getting provisional rates at the prior

year final rate

• Can you charge more than your provisional rate?

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Indirect Costs

Indirect Allocation Methods• Simplified – after making adjustments for

unallowable costs, a single rate is computed by dividing the indirect costs by the costs of direct functions or activities

• Multiple – where an organizations indirect costs benefit its major functions in various degrees

• Special – when a particular segment of work is performed in an environment which appears to generate a significantly different level of indirect costs, provisions should be made for a separate indirect cost pool applicable to such work

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Indirect Costs

Getting an indirect rate• Submit a proposal to your cognizant agency

– Cognizant agency is the department that provides your organization with the most direct federalfunding

– If the cognizant agency is DHHS, the proposal is submitted to the Regional Division of Cost Allocation (DCA) responsible for your geographical area

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Indirect Costs

Getting an indirect rate (cont.)• If you do not have direct federal funding, then it

is up to the agency that provides the most indirect federal funding– Most non-federal entities have been hesitant to

award indirect cost rates to their subrecipients but may change with 2 CFR Part 200

• If you already have an indirect cost rate– Due 6 months after the end of your fiscal year, you

can request an extension under extenuating circumstances

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Indirect Costs

What to submit with your proposal• Must be accompanied by and cross referenced

to your independently audited financial statements

• If a rate is based on future projected costs, the rate must be cross-referenced and reconciled to the organization’s budget for that year

• Approximate amount of direct cost base costs incurred under federal awards

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Indirect Costs

What to submit with your proposal (cont.)• Fringe benefit information

– A listing of the fringe benefits provided to the organization’s employees

– A copy of the organization’s fringe benefit policies

– A description of the method(s) used to budget and charge fringe benefit costs to programs or activities

– The funding practices of a “defined benefit” pension plan along with the treatment of prior service costs and actuarial gains and losses

– If a fringe benefit rate is used, reconciled and cross referenced to the organization’s financial statements

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Indirect Costs

What to submit with your proposal (cont.)• If there are variances from information required

on indirect cost rate proposals, this can be explained by the following from the DHHS NPO review guide– Determine whether the proposal package is

complete, in sufficient detail to permit an adequate review, and is the a format that can be readily followed by the negotiator

– Make sure that any information specifically requested by the DCA in prior correspondence is included in the proposal package

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Indirect Costs

Approval of Rates• DCA will approve an indirect cost rate(s) with

the organization

• In some cases, DCA may request an audit of the proposal before the rates are approved

• Approval will be formalized by a Rate Agreement signed by the DCA and an authorized representative of the organization

• Rate Agreement will include the type of rate, base used and other general terms and conditions

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Indirect Costs

Approval of Rates (cont.)• Expect questions, DCA’s NPO review guide

requires negotiator’s to do the following:– Perform a 3 year trend analysis of indirect costs,

rates and allocation bases

– Compare how much certain indirect costs are increasing when compared to the increases in the nonprofit organization’s direct base

• Any non-Federal entity can apply for a one-time extension of a currently negotiated rate for up to 4-years.

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Indirect Costs

Approval of indirect cost rates with subgranteesand subcontractors

• Prime contractors and grantees are responsible for approving indirect cost rates

• Approvals must be based on the federal cost principles

• The procedures followed by the grantee or contractor in evaluating the subawardee’s indirect cost proposal and approving the rate should be should be documented and are subject to review

• Upon request, DCA will provide technical assistance

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Indirect Costs

Indirect cost rates and your auditors:• 2 CFR 200.509(b)

– An auditor who prepares the indirect cost proposal or cost allocation plan may not also be selected to perform the audit required by this part when the indirect costs recovered by the auditee during the prior year exceeded $1 million.

• Keep in mind Government Auditing Standards on independence as well – no management decisions

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Indirect Costs

Other matters to keep in mind• Not all programs allow for indirect costs or

some programs limit them – you need to determine what funds will cover those costs (CSBG, discretionary funds?)

• Generally, all activities need to be included in your indirect cost allocation plan, this would include any for-profit or fundraising activities in your organization

• There also is an option to allocate fringe benefit costs using a separate indirect cost rate for fringe benefits

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10% De Minimis Option

10% of MTDC option:• Organizations that never had an indirect cost

rate agreement can implement a flat rate of 10% of modified total direct costs (MTDC)– No approval is necessary

– Required to disclose in your audit if you use or not in the notes to your federal awards schedule

– Must be consistently used once elected until the entity choses to negotiate for a rate

• Uncertainty remains on what to exclude from MTDC and is restrictive, for example it excludes rent

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10% De Minimis Option

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For-ProfitJob Weatheri- State Housing Fund-raising Weatheri- Indirect Cost

Head Start Training zation Grant Event zation Discretionary Total Pool

Salaries 3,257,895 1,413,978 2,804,387 640,752 18,406 9,204 205 8,144,827 783,945 Fringe benefits 1,169,248 834,801 1,604,789 248,904 8,297 3,004 94 3,869,137 337,823 Supplies 365,087 36,484 930,481 34,057 483 5,804 236 1,372,632 23,841 Occupancy 168,974 46,089 143,657 21,042 102 810 45 380,719 209,871 Travel 56,048 60,787 304,897 10,564 35 724 130 433,185 65,412 Other 190,487 100,291 841,098 18,467 209 2,105 657 1,153,314 80,741 Inkind 2,450,974 - - - - - - 2,450,974 -

Subtotal expenses 7,658,713 2,492,430 6,629,309 973,786 27,532 21,651 1,367 17,804,788 1,501,633 A

Less adjusting items: In-kind (supplies and other) (2,109,744) - - - - - - (2,109,744) Capital expenditures - - (40,000) - - - - (40,000) Subawards over $25,000 (900,000) (325,000) - - - - - (1,225,000)

Total direct expenses 4,648,969 2,167,430 6,589,309 973,786 27,532 21,651 1,367 14,430,044 X 10% = X 10% = X 10% = X 10% = X 10% = X 10% = X 10% =

Indirect charge to programs 464,898 216,743 658,931 97,379 2,753 2,165 137 1,443,006 B

Rate 10.00%

Indirect charged to programs 1,443,006 BActual indirect expenses 1,501,633 A

Loss on indirect cost pool (58,627)

Indirect rate using 10% de minimis

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How to Determine if a 10% Rate is for You

• For each grant and collectively, start with total expenses for each grant

• Subtract out allocated and direct charged administrative costs

• Back out excluded items based on the MTDCdefinition

• Multiply each grant by 10%

• Adjust for grants administrative cost limits if necessary

• Compare to the total estimated M&G expenses

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How to Determine if a 10% Rate is for You

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For-ProfitJob Weatheri- State Housing Fund-raising Weatheri- Indirect Cost

Head Start Training zation Grant Event zation Discretionary Total Pool

Start with total expenses 8,181,754 2,673,078 7,392,090 1,007,870 27,857 22,377 1,395 19,306,421

Back out allocated and directcharged administrative costs (523,041) (180,648) (762,781) (34,084) (325) (726) (28) (1,501,633)

Back out adjusting items: In-kind (supplies and other) (2,109,744) - - - - - - (2,109,744) Capital expenditures - - (40,000) - - - - (40,000) Subawards over $25,000 (900,000) (325,000) - - - - - (1,225,000)

Which gives you MTDC 4,648,969 2,167,430 6,589,309 973,786 27,532 21,651 1,367 14,430,044

Which you multiply by 10% 464,897 216,743 658,931 97,379 2,753 2,165 137 1,443,005 1,501,633

The look at programs that (58,628) Losslimit admin or don't payadmin/indirect (35,000) - (210,483) (97,379) - - - (342,862)

Final result (401,490) Loss

Example of what a 10% rate analysis could look like:

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Indirect Costs

Resources to help you:• Many indirect cost links are on our NGP website

• https://rates.psc.gov

• Your auditors

• Federal agency websites

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Texas Association of Community Action Agencies (TACAA) 2016 Conference

Cost Allocation

Presented by: Karl Eck, CPA SAN ANTONIO, TX May 19, 2016

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