Transmittal No.20 |
Date: April 23,1997 |
TO:
State Community Services Block Grant Directors, State Comptrollers, U.S. Territories, Community Action Agencies, Native American Tribes and Tribal Organizations, Community Development Corporations and other Nonprofit Organizations receiving Community Services Block Grant (CSBG) funds.
SUBJECT:
A discussion of Indirect Cost Rate Principles
RELATED REFERENCES:
Public Law 97-35, Omnibus Budget Reconciliation Act of 1981; as amended; P.L. 103-252, Human Services Amendments of 1994; P.L. 104.134, the FY 1996 CSBG Appropriation Legislation; C.F.R. Title 45, Part 96, Department of Health and Human Services Block Grant Regulations, OMB Circular A-128 and A-133.
PURPOSE:
This Information Memorandum is to inform States, U.S. Territories, Community Action Agencies (CAAs), Native American Tribes and Tribal organizations, Community Development Corporations and other Nonprofit Organizations of the need to establish an indirect cost rate for all eligible entities.
APPLICATION REQUIREMENTS:
Many agencies operating programs funded directly by Federal agencies or with flow-through funds from State agencies do not use an indirect cost rate for recovering eligible costs. As a result, these organizations recover such costs, i.e., executive director, accounting staff, purchasing, space, etc., through direct charges to grants and contracts. Unfortunately, these charges tend to be based on budget estimates or arbitrary allocations based on the availability of funds. This procedure is not in compliance with Federal cost principles and places the grantee at serious audit risk under new audit guidelines being developed. The application of an indirect cost rate results in a much more equitable distribution of indirect costs.
An indirect cost rate should be established by grantees who administer a variety of programs funded by Federal, State and local agencies. Agencies receiving direct Federal grant funds should establish an indirect cost rate for their programs with the cognizant Federal agency. Agencies receiving funds from State agencies only should initiate negotiations with the appropriate State agency to establish an indirect cost rate for their programs.
POLICY:
Cost principles for Nonprofit Organizations contained in OMB Circular A-122.
This Memorandum discusses direct costs versus indirect costs and encourages all eligible entities to establish an indirect cost rate for local agencies.
PURPOSE OF THE INDIRECT COST RATE:
(A) Indirect cost principles, as provided in OMB Circular A-122, are used by all Federal and State agencies in determining the costs of work performed by nonprofit organizations under grants, cooperative agreements, or other contracts where costs are used in administration, pricing or for contractual settlements.
(B) The "Audit Compliance Supplement" is being revised for OMB Circular A-133 which will require auditors to examine closely a multi-program agency's cost allocation procedures. If an agency does not have an indirect cost rate, auditors will have to determine the basis for sharing costs among the programs. Where indirect cost rates have not been established, auditors may question an agency's cost allocation procedures, resulting in disallowed expenditures in the various programs.
(C) Improved accounting and assignment of costs is essential in assessing "performance and results" in state and local agencies as required in Section 675(c)(9) of the CSBG Reauthorization Act of 1994, Public Law 97-35 as amended and Public Law 103-62, Government Performance and Results Act of 1993.
WHAT DOES THE
RATE ACCOMPLISH?
(A) An indirect cost rate (ICR) in an agency that receives multiple funding sources will provide for systematic and accurate charges and result in an equitable distribution of indirect costs.
(B) Agencies utilizing indirect cost rates have found it to be a positive move and a better system for cost accounting among local multiple programs.
(C) An ICR eases accounting burdens through cost pooling and eliminates arbitrary direct charging of management and administrative costs.
(D) An ICR improves the agency's ability to use CSBG funding to cover shortfalls in recovery.
(E) An ICR encourages all funding sources to pay their fair share as determined by the established cost rate.
(F) An ICR develops actual costs, which are essential for assessing results and performance under Results Oriented Management.
(G) Note that in many situations, an indirect cost rate will not eliminate the need to develop cost allocation methodologies for common or joint costs that are not indirect in nature. For example, a cafeteria might provide meals to Head Start children, offer a congregate meals program for the elderly, as well as prepare food for an elderly meals-on-wheels programs. While the cafeteria activity receives a distribution of indirect costs from all programs (such as staff salaries), other actual costs must be further allocated/targeted to the Head Start and elderly programs, such as the actual cost of a meal or transportation costs for the congregate meals and/or meals delivered to the home.
(H) However, a cost allocation plan is not a substitute for an indirect cost rate. Cost allocation deals with other kinds of costs that are allocated as a direct charge on a line-by-line basis. These costs could be grouped into a common pool like the cafeteria.
WHAT ARE
DIRECT COSTS?
(A) Direct costs are those that can be identified specifically with a final or intermediate cost objective: i.e., a project, a service or other direct activity of an organization.
(B) Salaries, including associated fringe benefits of personnel whose work or effort can be directly identified or charged to a particular program or activity:
WHAT ARE
INDIRECT COSTS?
(A) Indirect costs are those that have been incurred for common objectives benefiting all programs and cannot be readily identified or assignable to a particular final cost in a program (A-122). Indirect costs relate to central management and administrative functions that are necessary and beneficial to all programs administered by the grantee organization.
(B) Salaries and wages related to the:
(C) Fringe benefits associated with above personnel:
(D) Operations and maintenance costs (common costs) allocable in part to central management and administrative functions such as:
(E) General legal costs
(F) Organization-wide single audits (financial and compliance)
(G) Travel related to central management and administrative functions
WHO NEGOTIATES
AND APPROVES
INDIRECT COST
RATES?
(A) The Federal agency with the largest amount of direct grant dollars with the grantee organization will be designated as the cognizant agency for the negotiation and approval of the indirect cost rates and, where necessary, other rates such as fringe benefits or other common costs.
(B) All concerned Federal agencies shall be given the opportunity to participate in the negotiation process, but after a rate has been established it will be accepted by all Federal agencies.
(C) The grantee organization prepares an indirect cost proposal and submits the proposal to the appropriate Federal agency. Proposals are based on previous actual costs. All proposals should be submitted six months prior to the agency's beginning fiscal year.
(D) Community Action Agencies that do not have direct Federally-funded programs should negotiate with their State CSBG agency and the State Comptroller's Office to establish indirect cost rates for their agency. Appropriate indirect cost rates will: 1) minimize future audit risk and put the agency in readiness for assessing results and performance, based on actual costs; 2) put the agency in a proactive posture when responding to questioned costs and audit disallowances; and 3) ensure that an agency will meet OMB Circular A-133 requirements and avoid disallowed expenditures resulting from an inappropriate cost allocation plan.
(E) Grantees interested in establishing indirect cost rates should contact their regional Health and Human Services (HHS) Division of Cost Allocation Field Office (see last attachment). The HHS Division of Cost Allocation will refer grantees to other Federal cognizant agencies as appropriate.
HOW ARE
INDIRECT COSTS
IMPLEMENTED?
(A) The grantee organization implements indirect costs in its accounting and financial reporting system at the beginning of the organization's fiscal year. However, to allow time for the review and negotiation process, the initial proposal should be submitted well in advance of the organization's fiscal year to allow time for the review and negotiation process.
(B) An indirect cost proposal's compliance is verified by the agency's annual audit, where actual year end rates are confirmed.
(C) Rates are implemented for budgeting costs in all programs, thereby assuring that each program recognizes its full share, regardless of cost limitations.
(D) Attached is an example of a Nonprofit Indirect Cost Proposal that outlines the steps to be completed in applying for an indirect cost rate.
NOTE:
This Memorandum has been cleared by the HHS Office of Grants and Acquisition Management and the HHS Division of Cost Allocation.
INQUIRIES:
Comments and inquiries may be sent to: Bryant Tudor, U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services, 370 L'Enfant Promenade S.W., Washington, DC 20447. Telephone (202) 401-5615.
Donald Sykes
Director
Office of Community Services