Securing A Negotiated Indirect Cost Rate

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Securing A Negotiated Indirect Cost Rate

• Mike Gaudette
• Southwestern Oregon Community
• College Foundation
• 1988 Newmark, Coos Bay OR 97420
• 541-888-7357 541-888-7239 (fax)
• mgaudette_at_socc.edu

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Why Negotiate an IndirectCost Rate?

• To recover your actual indirect costs on grants
  that allow it
• To use unrecovered indirect costs as
  institutional match on grants that allow it (only
  costs that are allowable can be used as match)
• To assure your institution continues to receive
  indirect costs for grants that have not
  previously monitored compliance (e.g. TRIO)

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Where Do You Apply For AnIndirect Cost Rate?

• An indirect cost rate approved by one federal
  agency is typically accepted by other agencies
• An indirect cost rate is typically negotiated
  with an institutions cognizant agency (the
  federal agency that provides it the greatest
  dollars of federal support)
• For most community colleges, the cognizant
  federal agency is the Dept. of Education (because
  of financial aid awards)

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Where Do You Apply For AnIndirect Cost Rate?

• The Dept. of Education has delegated their
  cognizant agency authority to Health and Human
  Services
• Most community colleges must apply to HHS for a
  negotiated indirect cost rate
• Most community colleges have never applied for or
  been approved for an indirect cost rate

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Where Do You Apply For AnIndirect Cost Rate?

• This wasnt a problem until recently, when the
  TRIO program announced it would require an
  approved indirect cost rate to allow the standard
  8 indirect costs. This had not been enforced
  previously.
• Due to the large anticipated increase in workload
  from community colleges applying for approved
  rates, HHS announced it will not establish a rate
  if the colleges only use is to justify the 8
  cap

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Where Do You Apply For AnIndirect Cost Rate?

• As an alternative, HHS has stated
• (3) Knowing that in this circumstance the
  college is in a bind, the college should use the
  OMB Circular A-21 short form in computing an
  indirect cost rate for each year that indirect
  costs are claimed. This calculation should
  confirm that the colleges actual indirect cost
  rate is equal to or exceeds the 8 limit.
• (4) The colleges indirect cost calculation
  should be verified by an independent account-ing
  authority and retained on file for review by
  auditors, and/or federal oversight staff.

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Calculating An Indirect CostRate

• Office of Management and Budget Circular A-21
  describes the process to apply for an indirect
  cost rate
• There are two versions short form and long form
• Short form can be used by institutions that do
  not exceed 10 million in total direct costs of
  federal awards
• Can be used if federal awards exceed 10 million
  when approved by cognizant agency
• Described in Section H of A-21

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Calculating An Indirect CostRate Short Form v.
Long Form

• Short form
• single institution-wide rate for all sponsored
  activities
• single indirect cost pool and a single base for
  the entire institution
• sponsored projects administration is part of
  general administration costs
• departmental administration costs are limited to
  20 of the salaries of deans and department heads
• No cap on administration costs
• Choice of Salary and Wages or Modified Total
  Direct Cost base

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Calculating An Indirect CostRate Short Form v.
Long Form

• Long form
• separate rates for major activities
• multiple cost pools with multiple bases
• sponsored projects administration allocated only
  to sponsored projects
• departmental administration costs allocated by
  department 3.6 faculty allowance
• 26 cap on administration costs
• Can only use Modified Total Direct Cost base

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Calculating An Indirect CostRate

• Advantages of the short form
• Easier to prepare than long form
• Costs can be collected directly from financial
  statements with minor reclassifications and
  adjustments
• Less documentation required when submitting
• No on-site reviews
• Minimal or no review if rate is reasonable and
  consistent with prior years

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Calculating An Indirect CostRate

• Disadvantages of the short form
• single institution-wide rate for all sponsored
  activities may limit the potential cost recovery
  for activities requiring more indirect support
• sponsored projects administration is part of
  general administration costs and adds to the base
• generally results in a lower facilities and
  administrative cost (F A) recovery

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Calculating An Indirect CostRate

• The short form is used by most community colleges
  and smaller four-year colleges
• Approved indirect cost rates typically vary from
  35 to 45, but some are less and some are much
  more
• There are many components that make up the
  indirect cost rate calculation and many
  institutional decisions that affect the rate
• Salary and Wages base often results in a higher
  rate than Modified Total Direct Cost

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Calculating An Indirect CostRate

• F A costs are those costs that are incurred for
  common or joint objectives and therefore cannot
  be identified readily and specifically with a
  particular sponsored project, an instructional
  activity, or any other institutional activity.

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Calculating An Indirect CostRate

• Direct costs are those costs that
• 1) can be identified specifically with a
  particular sponsored project, an instructional
  activity, or any other institutional activity or
• 2) can be directly assigned to such activities
  with a high degree of accuracy

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Calculating An Indirect CostRate

• The indirect cost rate is calculated by dividing
  the numerator (which includes those allowable
  indirect costs) by a denominator (which includes
  all required costs).
• The denominator (base) can be based on Salaries
  and Wages or Modified Total Direct Costs

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Calculating An Indirect CostRate

• The indirect cost rate is calculated by dividing
  the numerator (which includes those allowable
  indirect costs) by a denominator (which includes
  all required costs).
• The denominator (base) can be based on Salaries
  and Wages or Modified Total Direct Costs

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Calculating An Indirect CostRate

• There are two kinds of costs described in A-21
  that must be addressed in computing the numerator
  and denominator Excludable and Unallowable
• Excludable Costs are eliminated from both the F
  A calculations (numerator) AND from the
  denominator (if using MTDC)
• They include capital expenditures, rental costs,
  scholarships and fellowships, and the portion of
  any subgrant or subcontract in excess of 25,000.
  Typically, these would not be included in the F
  A pool anyway.

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Calculating An Indirect CostRate

• Unallowable Costs are eliminated from the F A
  calculations (numerator) BUT NOT from the
  denominator. These are the expenses that are
  unallowable costs in A-21. They include
• J.1.f. Advertising and public relations costs
• J.2. Alcoholic beverages
• J.3. Alumni activities
• J.4. Bad debts
• J.6. Commencement and convocation costs
• J.8.f.(2) Tuition benefits for family members
• J.9. Contingency provisions
• J.11. Defense and prosecution costs

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Calculating An Indirect CostRate

• J.12.a. Depreciation/use allowance of federally
  funded assets
• J.13.b. Donations and contributions made by the
  college
• J.17. Executive lobbying costs
• J.18. Fines and penalties
• J.19. Goods or services for personal use
• J.20. Housing and personal living expenses
• J.21.d. Uninsured actual losses
• J.21.f. Insurance against defects
• J.22.b. Organized fundraising
• J.22.c. Investment counsel and staff

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Calculating An Indirect CostRate

• J.24. Lobbying
• J.25. Losses on other sponsored agreements or
  contracts
• J.28.d e. Memberships, subscriptions, and
  professional activity costs
• J.37.b c. Recruiting costs
• J.42. Selling and marketing
• J.45. Student activity costs

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Calculating An Indirect CostRate

• The F A cost pool consists of five categories
  of expenses
• general administration and general expenses
• operation and maintenance of physical plant
• depreciation
• real property
• personal property
• library costs
• departmental administration

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Calculating An Indirect CostRate

• General administration and general expenses
• Includes 1) salaries and benefits and 2) other
  expenses of general executive and administrative
  offices (non-academic)
• Includes
• Payroll processing
• Business Office
• Human Resources
• Presidents Office
• Management information system

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Calculating An Indirect CostRate

• Must subtract 1) any unallowable salaries and
  wages, 2) unallowable other expenses, and 3)
  excludable other expenses
• The balance is the included salaries and wages
  and included other expenses
• Fringe benefits can be included in salaries and
  wages as direct costs or included in the F A
  calculation as an indirect cost

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Calculating An Indirect CostRate

• Operation and Maintenance (O M) expenses
• Includes
• repairs and maintenance
• water, sewer, electricity, garbage, fuel,
  recycling
• grounds maintenance
• custodial
• insurance
• public safety
• mail services and print services
• motor pool
• physical plant administration

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Calculating An Indirect CostRate

• Must subtract 1) any unallowable salaries and
  wages, 2) unallowable other expenses, and 3)
  excludable other expenses
• The balance is the included salaries and wages
  and included other expenses
• The totals must then be reduced by that
  percentage of campus square feet that is
  attributable to Other Institutional Activities
  (those activities that are not part of the F A
  costs)

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Calculating An Indirect CostRate

• Any activity included under General
  Administration and General Expenses or Operation
  and Maintenance as part of the F A cost CANNOT
  be charged as a direct cost to any college
  activity.
• This is true whether a sponsored project is
  allowed to collect indirect cost or not (e.g.
  Title III and Title V) or is limited in the
  indirect cost it will pay (e.g. TRIO).
• Each institution must decide whether it is better
  to include specific services in the F A
  calculation or charge them as direct costs

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Calculating An Indirect CostRate

• Activities of departments or functions CAN be
  segregated into those portions that will be
  treated as direct costs or F A costs (e.g.
  Human Resources administration can be F A while
  the cost of advertising positions can be a direct
  cost charged to sponsored projects and other
  campus departments).
• Computer centers are not allowed to be charged as
  indirect costs (F A) they are supposed to be
  charged as direct costs to sponsored projects and
  other campus departments

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Calculating An Indirect CostRate

• Internal Service Funds (campus departments that
  charge back expenses to break-even) are not
  allowed to make money. If they do, they must
  adjust their prices for the next fiscal year. In
  some cases, they have been required to adjust all
  of their charges for the current year to
  break-even.
• If the Internal Service Fund doesnt at least
  break even, the college is undercharging its
  sponsored projects and subsidizing them with
  other institutional resources.

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Calculating An Indirect CostRate

• If charge-backs for Internal Service Funds cover
  all salaries and benefits, they cannot be
  included in F A costs that would be
  double-dipping. If, however, charge-backs only
  cover materials and supplies costs, salaries and
  benefits can be included in F A costs.
• Any expenses at the statewide level or a district
  level can be included in the F A costs on a
  pro-rata basis.

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Calculating An Indirect CostRate

• Depreciation expenses
• For each building, renovation, or other capital
  project
• The original cost basis must be reduced by any
  portion that was paid with federal funds, the
  cost of land, and any portion used as a match for
  federal funds to determine the allowable cost
  basis.
• The annual depreciation is calculated based on
  straight-line over the useful life if the useful
  life is already exceeded, no depreciation allowed.

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Calculating An Indirect CostRate

• For each building, renovation or other capital
  project, the total square feet must be reduced by
  common areas that are not dedicated to a specific
  purpose.
• Exclude any Assets Under Construction (not yet
  placed into service) since they arent yet being
  depreciated.
• The net usable area must be allocated between
  those activities that are part of F A costs and
  Other Institutional Activities and Unused Assets.
  The percentage of net usable area that is NOT
  used for Other Institutional Activities or is
  Unused is the percentage of allowable
  depreciation that will be allocated to F A
  costs.

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Calculating An Indirect CostRate

• The cumulative percentage of Other Institutional
  Activities and Unused space may be used to
  calculate the F A depreciation for other
  capital projects that may not be easily based on
  square feet (e.g. fiber optic infrastructure,
  electrical vaults, parking lots).
• Buildings and other projects can be depreciated
  on a component basis (e.g. carpets, paint,
  cabinets, roofs, siding) to create greater
  depreciation (because of shorter useful lives for
  those components).
• Prior to implementation of GASB 35, colleges
  could use the use allowance calculation (which
  was 2.0 per year of the original cost basis). No
  longer allowed must use depreciation over the
  useful life.

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Calculating An Indirect CostRate

• Depreciation expenses
• For tangible personal property that is a capital
  asset
• To determine the personal property depreciation
  which can be claimed as F A costs, the
  cumulative acquisition cost of all tangible
  personal property that is currently being
  depreciated must be reduced by
• the amount the inventory exceeds the statement of
  net assets in the colleges audited financial
  statements
• the assets that are used in Other Institutional
  Activities or are Inactive
• the federal share of the acquisition cost

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Calculating An Indirect CostRate

• This reduced cost divided by the cost basis of
  all personal property is the percentage of
  personal property depreciation that can be
  claimed as F A costs.
• This percentage is applied to the current years
  total depreciation of personal property to
  determine the personal property depreciation to
  be included in F A costs.
• The threshold the college chooses for
  capitalization of personal property has an impact
  on this figure, but is moot for assets purchased
  with federal funds.
• Prior to GASB 35, could take a use allowance of 6
  and 2/3 percent per year for equipment in lieu of
  depreciation no longer allowed.

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Calculating An Indirect CostRate

• Library costs
• Include
• Salaries and fringes
• Books, periodicals, databases, binding, and all
  other operating expenses
• Exclude
• Costs of rare and museum-type books
• Adjust expenses for revenue received for lost or
  damaged books and library fines
• Media Services (because it is considered a direct
  instructional expense). 25 may be allowed the
  balance goes into the base

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Calculating An Indirect CostRate

• Must subtract 1) any unallowable salaries and
  wages, 2) unallowable other expenses, and 3)
  excludable other expenses
• The balance is the included salaries and wages
  and included other expenses
• Fringe benefits can be included in salaries and
  wages as direct costs or included in the F A
  calculation as an indirect cost

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Calculating An Indirect CostRate

• Departmental Administration costs
• These are limited to 20 of the salaries and
  expenses of deans and department heads
  (instructional administration). Since these
  titles arent used uniformly throughout academia,
  each college must decide which positions qualify
  and can be included.
• Multiply the total salaries, fringes, and other
  expenses by 20 to determine the amount to be
  included in F A costs.

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Calculating An Indirect CostRate

• Determining the Base
• Salaries and Wages base is total institutional
  salaries reduced by salaries in the F A cost
  pool.
• Modified Total Direct Cost Base includes all
  salaries, all fringe benefits, all materials and
  supplies, services, travel, and the first 25,000
  of subawards. It excludes expenditures for fixed
  assets (depreciable equipment and real property),
  tuition waivers, rental costs, scholarships, and
  the portion of subawards in excess of 25,000.