940 INDIRECT COST POLICY

941 Purpose and Applicability

a. Purpose. To provide policy and assign responsibilities for negotiating indirect cost rates with State and local governments, business entities, and other organizations with which the Department of Labor (DOL) conducts business.

b. Applicability. The material in this section is applicable to all DOL Agencies that award acquisition and assistance instruments. DOL Agencies that issue acquisition and assistance instruments may further tailor the policies contained in this section to comply with any statutory or regulatory requirements.

942 Authority. The following regulations and circulars establish principles and standards for determining costs applicable to Federal acquisition and assistance instruments. They require that an indirect cost rate proposal be prepared by grantees and contractors and be approved by the cognizant Federal agency (unless specifically required local units of government plans do not require prior approval), before any indirect costs are charged against a Federal acquisition or assistance instrument. This section is issued pursuant to the requirements of:

a. Federal Acquisition Regulation (FAR), Part 31, Contract Cost Principles and Procedures;

b. FAR, Part 42, Contract Administration;

c. Department of Labor Acquisition Regulation (DOLAR), Part 2931, Contract Cost Principles and Procedures;

d. DOLAR, Subpart 2942.7, Indirect Cost Rates;

e. Office of Management and Budget (OMB) Circular A-21, Cost Principles for Educational Institutions;

f. OMB Circular A-88, Indirect Cost Rates, Audit, and Audit Follow-up at Educational Institutions;

g. OMB Circular A-87, Cost Principles Applicable to Grants and Contracts with State and Local Governments;

h. OMB Circular A-128, Audits of State and Local Governments;

i. OMB Circular A-122, Cost Principles for Non-Profit Organizations; and,

j. OMB Circular A-133, Audits of Institutions of Higher Education and Other Nonprofit Institutions.

943 Definitions

a. Acquisition or Assistance Instrument is any contract, grant or cooperative agreement.

b. Acquisition or Assistance Official is any DOL grant or contracting officer.

c. Cognizant Federal Agency refers to the Federal agency or department responsible for negotiation, review, approval, and audit of a grantee's or contractor's indirect cost rate proposal. Normally, the Federal agency with the predominant financial interest is the cognizant agency. Designations of cognizant Federal agencies are made by OMB when State and local government agencies or colleges and universities are involved. OMB maintains and publishes a list of these cognizant agencies in the Federal Register.

d. Cost Allocation Plan is a written plan that identifies, accumulates, and distributes allowable direct and/or indirect costs under acquisition and assistance instruments and identifies allocation methods used for distribution. It includes both the cost allocation plan (which allocates the costs of central services to benefiting organizations) and the individual indirect cost rate proposals submitted by operating departments performing under acquisition and assistance instruments (which allocate the costs of services incurred within the Department). Individual plans usually are referred to as "indirect cost rate proposals." The term "cost allocation plan" refers to a variety of situations, and includes, but is not limited to:

(1) Consolidated state-wide cost allocation plans and local government-wide cost allocation plans for central support services;

(2) Plans for distribution of State and local governments' departmental indirect costs;

(3) Indirect cost proposals for non-governmental organizations; and,

(4) Plans for assigning joint direct costs to benefiting cost categories within acquisition or assistance instruments or to cost objectives of the organization.

e. Cost Negotiators serve as the exclusive negotiators and experts on cost allocation plans and indirect cost rate proposals with state and local governments, non-profit institutions and other organizations receiving acquisition and assistance instruments from the DOL where DOL is the cognizant agency. They recommend the final, provisional or billing rate. In addition, cost negotiators provide technical assistance to program managers and acquisition and assistance officials on matters of costs.

f. Direct Costs are costs which can be identified specifically with particular cost objectives, such as an acquisition or assistance instrument, project, function, or activity. Direct costs generally include, but are not limited to:

(1) Salaries and wages (including vacations, holidays, sick leave, and other excused absences) of employees working specifically on objectives of an acquisition or assistance instrument (direct labor costs);

(2) Other employee fringe benefits allocable to direct labor employees;

(3) Services contracted to accomplish specific acquisition or assistance instrument objectives;

(4) Travel of employees (direct labor);

(5) Materials, supplies, and equipment purchased directly for use on a specific acquisition or assistance instrument; and,

(6) Communication costs such as long distance telephone calls or telegrams identifiable with a specific award or activity.

g. Division of Cost Determination (DCD), within the Office of Acquisition Integrity, is the organization designated by the Procurement Executive to implement all indirect cost policies. The Director, Division of Cost Determination (DCD), is the technical authoritative source for indirect cost determinations within DOL and approves all indirect cost rates and cost allocation plans, where DOL is the cognizant Federal agency.

h. Indirect Costs are costs of a grantee or contractor organization not readily identifiable with a particular acquisition or assistance instrument, project, function, or activity but necessary to the general operation of an organization and the conduct of the activities it performs. For example, the cost of operating and maintaining buildings and equipment, depreciation, administrative salaries, general telephone expenses, general travel, and supplies are usually expenses considered to be indirect costs.

i. Indirect Cost Rate is the ratio between the total indirect expenses of the grantee or contractor and a direct cost base (usually direct salaries and wages or total direct costs) and is based on an indirect cost proposal prepared by the grantee or contractor.

j. Billing Rate is a temporary percentage or dollar factor established by an acquisition or assistance official for interim reimbursement purposes and normally used when the rates are provisional or have not been negotiated. It is not incorporated into formal negotiation agreements and is generally established for no more than 90 days.

k. Provisional Rate is a temporary indirect cost rate established to allow the obligation and payment of funds until the actual indirect cost can be determined and a final indirect cost rate established. Provisional indirect cost rates are subject to adjustment. Within DOL, provisional rates are incorporated into formal negotiation agreements and are generally established for a two year period.

l. Final Rate is a final indirect cost rate established after an organization's actual costs for a given accounting period (normally its fiscal year) are known. Once established, the rate is used to adjust the reports of expenditures and contract vouchers and to settle any over or under-recovery of indirect costs.

m. Predetermined Rate is a fixed rate agreed upon for a specified future period, usually one year, and established when there is reasonable assurance that the grantee or contractor will not over recover indirect costs. This rate is not subject to adjustment except in rare circumstances (e.g., a change in the method of accounting).

n. Fixed Rate With Carry-Forward has characteristics of both the provisional and predetermined rate. A nonadjustable rate is established and fixed for a specified future period. If, at the end of the specified period, a variation between the actual rate and fixed rate results in an over or under-recovery of indirect costs, the over or under-recovery is carried forward as an adjustment to a subsequent period for which a rate is established.

944 Responsibilities

a. The Procurement Executive is the Director, Directorate of Administrative and Procurement Programs.

(1) Policy Formulation. The Procurement Executive, or designee, is responsible for the formulation of indirect cost policy by:

(a) Monitoring DOL agency acquisition functions to determine the effectiveness and adherence to Federal and DOL regulatory requirements;

(b) Prescribing policies, procedures and standards regarding indirect cost activities and oversight; and,

(c) Issuing final decisions on the establishment of final indirect cost rates based on appeals by acquisition and assistance officials of final determinations in accordance with procedures set forth in section 949.

(2) Policy Implementation. The specified designee of the Procurement Executive (see paragraph 943g) is responsible for implementing indirect cost policy by:

(a) Reviewing proposals, negotiating and establishing indirect cost rates for use in funding indirect costs for DOL acquisition and assistance instruments, when DOL is the cognizant agency;

(b) Coordinating audit support for the indirect cost function;

(c) Being the primary DOL coordinator with the Defense Contract Audit Agency on all DOL indirect cost issues;

(d) Processing indirect cost final determination appeals in accordance with paragraph 949b of this section;

(e) Providing copies of negotiation agreements to the Office of Inspector General (OIG) where indirect cost audits have been requested by the Procurement Executive;

(f) Incorporating audit recommendations into indirect cost determinations where indirect cost audits are OIG-initiated; and

(g) Coordinating with other Federal agencies to ensure DOL cost concerns are considered, when those agencies are cognizant.

b. The Inspector General. In addition to its independent function as delineated in 5 U.S.C. App. 3, 29 CFR Part 96, the FAR, and applicable OMB Circulars and Department of Labor Manual Series Chapters, the OIG, or designee, is responsible for:

(1) Performing audits of indirect costs, rates, agreements, and functions either as requested or as selected by the Office of Audit; and,

(2) Providing appropriate offices with copies of audit reports of indirect cost functions.

c. DOL Acquisition and Assistance Officials. Acquisition and assistance officials are responsible for ensuring that indirect costs claimed by grantees and contractors are in accordance with indirect cost negotiation agreements. Such responsibilities include:

(1) Coordinating work plans at least annually with DCD to ensure a timely and adequate indirect negotiation cost function;

(2) Coordinating with the appropriate cost negotiator at the beginning of grant/contract negotiations with a new organization to determine cognizance and cost determination requirements;

(3) Ensuring that grantees and contractors are aware of their obligation to prepare and submit annual indirect cost rate proposals in accordance with the applicable cost principles;

(4) Maintaining procedures to ensure indirect cost rate considerations are complied with, and applicable cost principles are followed in the award and administration of acquisition and assistance instruments;

(5) Disallowing indirect costs charged to DOL agreements by recipients who do not have an approved indirect cost rate or an approved cost allocation plan;

(6) Appealing DCD final determinations to the Procurement Executive when conditions meet the criteria listed in paragraph 949a of this section;

(7) Maintaining documentation showing that the Procurement Executive's decision on final determination appeals is implemented in accordance with the decision, the FAR, and other applicable procurement provisions; and,

(8) Incorporating the appropriate negotiated final, provisional or billing rate as communicated by the DCD cost negotiator.

945 Policy, Submissions and Procedures For Indirect Cost Determinations

a. Policy. OMB Circulars A-21, A-87, A-122 and the FAR establish the policy to have one Federal agency responsible for the review, negotiation and approval of indirect cost rates for use on Federal awards. Normally, the Federal agency with the predominant financial interest is the cognizant agency. When a DOL grantee or contractor is a recipient of other Federal, State and/or local funds, and intends to charge indirect costs to DOL acquisition or assistance instruments, the recipient must annually prepare an indirect cost rate proposal or a cost allocation plan in accordance with applicable Federal cost principles, unless specifically excluded by statute or Federal regulations (e.g., Job Training Partnership Act (JTPA), Titles IA, IIB, and III).

b. Submissions. Organizations are required to prepare and submit their initial indirect cost rate proposals and supporting documentation when requested to support the distribution of any indirect costs claimed. Although Appendix A-945 lists the documentation common to most organizations, certain organizations require additional documentation. After the initial submission, commercial organizations are required to submit a final indirect cost rate proposal and/or cost allocation plan to the cognizant Federal agency within 90 days after expiration of their fiscal year. State and local government units, educational institutions, and non-profit organizations have up to six months after close of their fiscal year to submit their final indirect cost rate proposal or cost allocation plan. Grantees and contractors which are local government units are only required to submit their indirect cost rate proposals or cost allocation plans when requested by the cognizant Federal agency. Inquiries relating to the preparation and submission of indirect cost rate proposals should be referred to the appropriate regional cost negotiator listed at Appendix B-945.

c. Technical Procedures. DOL's "Cost Negotiators Handbook" and "A Guide For Nonprofit Organizations" contain the technical procedures for review, negotiation and approval of indirect cost rates. Appendix C-945 contains an example of the "Application of Indirect Cost Rates."

946 Review of Indirect Cost

a. Levels of Review. The designee of the Procurement Executive (see paragraph 943g) has the option of performing one or more levels of review of an organization's indirect cost and reserves the right to elevate the review process from a lower (e.g., a desk review) to a higher level (e.g., an audit) if deemed appropriate. The three levels of review used are:

(1) Desk Reviews consist of an assessment of an organization's indirect cost rate proposal without making an on-site visit. Using the organization's indirect cost proposal submission, telephonic inquiries are made and the submission of additional information is requested as required by cost negotiators to verify information.

(2) On-Site Reviews consist of an assessment of an organization's indirect cost rate proposal by making on-site verification at the organization's facilities. The focus of the review will be on select accounting and financial documentation to determine reasonableness, allowability, and the allocability of indirect cost.

(3) Audits consist of the performance of a formal on-site methodological examination, review and assessment of all of an organization's accounts and related financial documentation for a specific period for purposes of determining a final indirect cost rate. Audits are performed by the Defense Contract Audit Agency, the DOL/OIG or independent public accountants.

b. Factors Used To Determine Level of Review. A determination to conduct a particular level of review shall be based on one or more of the following factors:

(1) dollar value of the acquisition or assistance instrument;

(2) whether a contractor or grantee is a new organization to DOL and DOL is the cognizant agency;

(3) substantial reorganization of a contractor or grantee;

(4) whether the contractor or grantee has a new staff which is unfamiliar with DOL indirect cost procedures;

(5) whether a previous audit has resulted in substantial findings;

(6) if there are previous recurring indirect cost problems with a contractor or grantee;

(7) if the contractor or grantee's indirect cost proposal shows significant increases in indirect cost;

(8) whether rent versus purchase issues are involved;

(9) rent abatement as a result of new office space;

(10) requests from program management;

(11) whenever technical assistance is requested; and,

(12) changes in a contractor's or grantee's accounting system.

c. Scope of Review. In coordination with DOL program agencies, other non-DOL cognizant agencies, and notwithstanding the various levels of review cited in 946a above, a review analyzes indirect cost rate proposals and cost allocation plans for the purpose of ascertaining, at a minimum, that:

(1) indirect costs have been distributed to all benefiting activities;

(2) allocation is based on a method which is reasonably representative of the amount of services provided;

(3) services provided are necessary to the successful conduct of Federal programs;

(4) the level of costs incurred is reasonable; and

(5) costs claimed are allowable under applicable cost principles in 48 CFR 31 and OMB Circulars, A-21, A-87 and A-122.

947 Negotiation Agreements. Indirect cost rate awards are published through the issuance of negotiation agreements signed by the Director, Division of Cost Determination, or designee, and a representative of the grantee or contractor. Copies of the agreements will be distributed to DOL Agencies providing direct funding.

a. Basis of Indirect Cost Rates in Agreements. Any of several means to approve indirect costs may be used. For example:

(1) approval of one of several different kinds of indirect cost rates (e.g., provisional, final, fixed, etc.);

(2) approval of an award of dollars without relating them to any direct cost base (a lump sum paid in lieu of negotiated indirect cost rate);

(3) approval of dollars for distribution by the grantee's or contractor's accounting system, as in the case of some State Employment Security Agencies; or,

(4) approval of a central services cost allocation plan prepared by local units of government.

b. Contents of Agreements. Each agreement shall include, at a minimum:

(1) the approved indirect cost rate(s) and information directly related to the use of indirect cost rates (e.g., type, effective period, and distribution base);

(2) treatment of some fringe benefits as either direct, indirect or both, or an approved fringe benefit rate;

(3) general terms and conditions of the Agreement, to include applicable statutory and administrative limitations; and,

(4) special remarks (e.g., composition of the indirect cost pool).

948 Approval of Special Cost Allocation Plans or Indirect Cost Proposals

a. Cost Allocation Plans Not Requiring Submission. Cost allocation plans not requiring submission are subject to audit under the Single Audit Act of 1984 to determine that:

(1) indirect costs are reasonable, allocable, and allowable;

(2) allocation factors equitably distribute costs to DOL programs on the basis of benefits derived; and,

(3) there is no duplication of costs between direct and indirect costs.

b. Approval of Plans Prepared by Sub-grantees or Sub-contractors. DOL funds awarded to grantees and contractors frequently are sub-granted or subcontracted to other organizations such as local units of governments, colleges and universities, and other nonprofit institutions. However, the prime grantee or contractor remains responsible for approving cost allocation plans or indirect cost agreements in accordance with applicable Federal cost principles. In some instances, the sub-grantee or subcontractor may be the direct recipient of Federal acquisition or assistance instruments, and will have had its cost allocation plan and/or indirect cost proposal approved by that cognizant Federal agency. The prime grantee or contractor generally should rely on the determination made by the Federal Government. Such grantee or contractor-approved plans or agreements are subject to review as deemed appropriate.

c. Approval of State Employment Security Agencies' (SESA's) Plans. Indirect cost procedures for SESAs are as follows:

(1) Each SESA annually submits a cost allocation plan which clearly identifies joint direct and indirect costs, methods of allocating costs by the SESA's accounting system, and certification by each SESA that it adheres to principles delineated in OMB Circular A-87.

(2) The plan is approved and, if requested, the SESA is provided a budgetary rate for use in its acquisition and assistance instruments (e.g., JTPA Service Delivery Areas).

(3) Thus, SESAs do not use an indirect cost rate for reimbursement purposes on their DOL assistance instruments. Assistance instruments are charged actual indirect costs on a monthly basis by using the approved cost allocation methodology.

949 Appeals By Acquisition and Assistance Officials

a. Basis of Appeals. The Procurement Executive shall accept from acquisition and assistance officials only those appeals of DCD final determinations meeting the following criteria:

(1) the total estimated indirect cost in dispute exceeds $1 million; and,

(2) the indirect cost issue(s) involve questions of allowability or allocability as listed in the provisions of FAR Subpart 31.2 and OMB Circulars A-21, A-87, and A-122.

b. Processing Appeals

(1) The Director, Office of Acquisition Integrity (OAI), shall be responsible for receiving and processing all final indirect cost determination appeals submitted to the Procurement Executive from acquisition and assistance officials.

(2) OAI shall develop an opinion paper for the Procurement Executive, based on issues raised in the appeal documentation within 30 days of receipt.

(3) The opinion paper shall:

(a) address all issues raised by the appeal; and,

(b) provide reasoning (to include strengths and weaknesses) supported by applicable regulatory requirement(s) for each issue appealed.

950 Appeals By Grantees and Contractors. When a contractor or grantee and a cost negotiator cannot reach agreement on an acceptable final indirect cost rate, the cost negotiator shall refer the matter to the appropriate acquisition or assistance official. Based on the cost negotiator's determination, the acquisition or assistance official shall provide notification to the grantee or contractor of the indirect cost rate to be used. Acquisition or assistance officials shall also advise grantees and contractors that they may appeal final indirect cost rate determinations of acquisition and assistance officials in the following manner:

(1) Acquisition instruments. Final determinations are appealed to the DOL Board of Contract Appeals, pursuant to 41 CFR 29-60 and 48 CFR 2933, or pursue other remedies as may be available under the Contract Disputes Act.

(2) Assistance instruments. Final determinations are appealed either to the head of the grantor agency, or designee or to the DOL Office of Administrative Law Judges in accordance with 29 CFR 96.603.

Requirements For Submission of Indirect Cost Proposals

In accordance with OMB Circulars A-21, A-87, A-122 and FAR Subpart 31.2, the following information is required on an annual basis from contractors and grantees having cost reimbursable acquisition and assistance instruments with DOL.

a. Organizational chart (only changes to organizational structure need be submitted after the first year).

b. Financial reports (certified, if required) or approved budget(s) for the applicable fiscal year(s).

c. Indirect cost rate proposal(s) detailing indirect expenses by function and cost category and reconciled with the financial report or budget for the applicable fiscal years. Such proposals should include a supporting schedule of direct costs incurred by expense category, identified by specific Government acquisition or assistance instrument, or other non-Government activities. Nonprofit organizations are required to include a Cost Policy Statement with their proposals.

d. Certification that the indirect cost rate proposal was prepared in a manner consistent with the applicable cost principles.

e. A listing of acquisition and assistance instruments by Federal agency, total dollar amount(s), period(s) of performance(s), and the indirect cost limitations (if any) applicable to each, such as ceiling rates or amounts restricted by administrative or statutory regulations.

f. A copy of each approved acquisition or assistance instrument budget, by line item, with DOL and any applicable clauses on indirect costs.

Depending on the type of organization, other information may be requested (e.g., cost policy statement prepared by non-profit organizations).

Listing of Division of Cost Determination Offices

Indirect cost rate proposals and supporting documentation should be submitted to the: Regional Administrator for OASAM, U.S. Department of Labor, ATTN: Regional Cost Negotiator, Division of Cost Determination (in the Region in which the contractor or grantee is located). The following is a by-region listing of addresses, telephone and facsimile numbers for the Regional Cost Negotiators:

Application of Indirect Cost Rates

The dollar amount of indirect costs of an acquisition or assistance instrument will be determined by multiplying the indirect cost rate by the direct cost base of the acquisition or assistance instrument. If the direct cost used in computing the project's or program's direct cost base is borne entirely by the acquisition or assistance instrument, the full amount of applicable indirect costs may be charged to Federal funds subject to any administrative cost limitations and/or subject to fund availability of the acquisition or assistance instrument. If the grantee or contractor provides a matching or cost-sharing contribution in a direct cost category used in computing the direct cost base, the indirect costs applicable to the contributed direct costs may not be charged to the acquisition or assistance instrument, but they may be counted as part of the grantee's total contribution. If the matching or cost-sharing arrangement requires the grantee/contractor to pay a pro rata part of the total cost of the project or program, the percentage of Federal participation in the indirect cost will be the same as the percentage of Federal participation in the direct cost.

a. The typical direct cost bases are:

(1) Direct salaries and wages including vacation, holiday, and sick pay, but excluding other fringe benefits;

(2) Direct salaries and wages including or excluding applicable fringe benefits;

(3) Total direct cost excluding capital equipment, major subcontracts, alterations/renovations, flow-through money, or any other direct cost which may distort the distributions of indirect cost benefiting activities; and,

b. The direct cost base (distribution base) selected should be the one best suited for assigning the indirect costs to all cost objectives in accordance with the relative benefits received.

c. For purposes of illustrating the application of indirect cost rates, assume a DOL grantee has incurred the following direct costs:

The applicable indirect costs are computed on the basis of the following assumptions:

(1) Base is direct salaries and wages including vacation, holiday, and sick pay, but excluding other fringe benefits; the indirect cost rate is 45%.

(2) Base is direct salaries and wages including all applicable fringe benefits; the rate is 40%.

(3) Base is total direct costs less major subcontracts in excess of $25,000 and capital equipment; the indirect cost rate is 35%.

d. When an acquisition or assistance instrument budget period does not coincide with the grantee/contractor's fiscal year, the rates established for each of the fiscal years during which the acquisition or assistance instrument was performed must be used to compute the amount of applicable indirect costs.

EXAMPLE: (Assuming an allocation base of "Total Direct Costs")

Final rate for fiscal year ending December 31, 1992 - 20%

Final rate for fiscal year ending December 31, 1993 - 22%

Grant period - July 1, 1992 to June 30, 1993

Total direct costs incurred under the acquisition or assistance instrument:

July 1, 1992 to December 31, 1992 - $425,000

January 1, 1993 to June 30, 1993 - $520,000

Application of Rates:

e. The recovery of indirect costs are also subject to administrative cost ceilings established by some programs. Assuming a 15% administrative cost limitation, the application of the approved indirect cost rate and related recovery is shown in the following example:

EXAMPLE:

COMPUTATION OF INDIRECT COST REIMBURSEMENT:

(1) Limited to reimbursement of $37,500 due to overall administrative cost limitation of $150,000 of which $112,500 was expended for direct program administrative costs.

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