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General
1. What is an indirect cost rate?
An indirect cost rate is a device for determining in a reasonable manner the proportion of indirect costs each program should bear. It is the
ratio (expressed as a percentage) of the indirect costs to a direct cost base.
2. What is an indirect cost pool?
The indirect cost pool is the accumulated costs that jointly benefit two or more programs or other cost objectives. Indirect cost pool
expenditures typically include:
- administrative salaries and fringe benefits associated with overall financial and organizational administration,
- operation and maintenance costs for facilities and equipment, and
- payroll and procurement services
By their very nature, indirect costs are incurred for common objectives and cannot be readily identified with a particular activity.
3. What is an indirect cost rate proposal?
An indirect cost rate proposal is the documentation prepared by an organization to substantiate its request for the establishment of an
indirect cost rate.
4. What is a base or direct cost base?
Base means the accumulated direct costs (normally either total direct salaries and wages or total direct costs exclusive of any extraordinary
or distorting expenditures) used to distribute indirect costs to individual federal awards. The direct cost base selected should result in
each award bearing a fair share of the indirect costs in reasonable relation to the benefits received from the costs.
5. What is an indirect cost negotiation agreement?
An indirect cost negotiation agreement is a document that formalizes the indirect cost rate negotiation process. This document contains the
type of rate(s) negotiated, the effective period (s) of the rate(s), the location(s) to which the rate(s) is (are) applicable and the program(s)
to which the rate(s) is (are) applicable. It also provides information on the base(s) used to distribute indirect costs, and the treatment of
fringe benefits and paid absences.
The indirect cost negotiation agreement must be signed by both the organization‘s authorized representative and the DOI Indirect Cost Coordinator
or authorized representative.
6. Is there a standard format that should be followed to compile an indirect cost proposal?
Indirect Cost Services (ICS) has created sample proposal formats, checklists, and templates to assist you in completing the proposal package.
Please select the sample proposal for your type of organization (i.e., Nonprofit, Tribal Government, etc). Although it is not required that
you follow our proposal format, doing so will expedite the review process because our format contains the information needed to process the proposal.
7. In order to initiate the negotiation process, may we send in our Financial Statement Audit Report without the indirect
cost proposal and follow-up with the proposal at a later date?
ICS will not initiate the negotiation process without the indirect cost proposal and supporting documentation (including the Financial
Statement Audit Report). Please do not submit the audit report by itself, as we have limited storage space and will not keep the document
on file unless accompanied by an indirect cost proposal.
8. What are the different types of rates that can be negotiated?
There are four types of rates that can be requested in your proposal: (1) Provisional, (2) Final, (3) Predetermined and
(4) Fixed (Fixed carryforward).
Provisional
A provisional rate is a temporary indirect cost rate applicable to a specified period which is used for funding, interim reimbursement, and
reporting indirect costs on federal awards pending the establishment of a "final" rate for that period. Provisional rates must be finalized
by submitting an Indirect Cost Rate Proposal for a Final Rate for the same period once actual costs are known and verifiable through audited
financial statements.
Final Rate
Final rate is an indirect cost rate applicable to a specified past period which is based on actual allowable costs of the period.
A final audited rate is not subject to adjustment.
Predetermined Rate
Predetermined rate is an indirect cost rate applicable to a specified current or future period, usually the organization‘s fiscal year.
Except under very unusual circumstances, a predetermined rate is not subject to adjustment. Predetermined rates may be used with cooperative
agreements and grants only. They may not be used for federal contracts because of legal constraints. Predetermined indirect cost rates
may be negotiated for periods of 2 to 4 years with organizations meeting the above criteria.
Fixed (Fixed Carryforward) Rate
A fixed rate (also known as a fixed carryforward rate) is an indirect cost rate applicable to a specific or future period, usually the
organization‘s fiscal year. Initially, the fixed rate is based on estimated costs for a future period. The rate includes a "carryforward"
adjustment. When actual costs for the period are known, the amount required to reconcile the difference between the estimated costs and the
actual costs is the carryforward adjustment. The carryforward adjustment computation increases or decreases the future indirect cost pool and
rate calculation in order to reflect the under-recovery or over-recovery of indirect costs from the prior period.
For nonprofit entities, according to 2 CFR 230, Appendix A, Section E.2.e, "A fixed rate, however, shall not be negotiated if all or a substantial
portion of the organization‘s awards are expected to expire before the carry-forward adjustment can be made; the mix of Federal and non-Federal
work at the organization is too erratic to permit an equitable carry-forward adjustment; or the organization‘s operations fluctuate significantly
from year to year."
9. What if my organization needs a restricted rate?
Restricted rates are applicable only to certain Department of Education (DOE) programs and are reviewed and approved by the Department of
Education. Please contact the Department of Education regarding the format and submission of the restricted rate:
Ms. Mary Gougisha, Deputy Director
Indirect Cost Group
Office of the Chief Financial Office
Department of Education
400 Maryland Avenue, S.W., Room 4W100, FOB#6
Washington, DC 20202
Phone: 202.377.3835
Fax: 202.275.3462
Department of Education has an interagency agreement with ICS in which ICS will issue the approved restricted rate on DOE‘s behalf.
DOE will forward the approved restricted rate to ICS. ICS will incorporate the approved restricted rate along with the ICS approved
indirect cost rate on the same negotiation agreement.
10. What typical types of distribution base are available to calculate the indirect cost rate?
There are basically three types of distribution bases:
- Modified Total Direct Costs (MTDC)
- Total Direct Salaries and Wages including Fringe Benefits (SWF)
- Total Direct Salaries and Wages excluding Fringe Benefits (S&W)
Modified Total Direct Costs (MTDC) excludes capital expenditures, distorting items such as passthrough funds, major subcontractors, etc.
For nonprofit entities, MTDC includes the first $25,000 of subgrants/subcontracts, while the remaining portion of subgrants/subcontracts
over $25,000 is excluded.
11. What type of distribution (direct cost) base should my organization select?
The distribution base that is chosen should result in each award bearing a fair share of the indirect costs in reasonable relationship
to the benefits received from the costs. For example, if several of your programs and grants do not pay salaries, then it might not be
reasonable to use total salaries and wages as the direct cost base because those programs paying most of the salaries and wages would bear
a larger share of the indirect costs. In this situation it might be more appropriate to use modified total direct costs
(exclusive of extraordinary or distorting expenditures). Please consult the ICS office if you need more guidance.
12. What is considered adequate documentation to support the salaries and wages of personnel included in the indirect
cost pool?
2 CFRs 225 and 230 (A-87 and A-122) require employee salaries and wages to be properly documented and approved. Proper documentation includes:
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Salary and Wage Certifications--for use when employees are expected to work solely on a single federal award or cost objective.
You must certify that employees are assigned to a single award or cost objective and work only on that award or cost objective during
the period being certified. The certifications should be:
i. prepared at least semi-annually and
ii. signed by the employee or supervisory official with first-hand knowledge of the employees' work.
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Personnel Activity Reports or equivalent documentation* is required for employees who work on multiple activities, that is
i. more than one federal award or
ii. a federal and a non-federal award or
iii. an indirect and a direct cost activity or
iv. two or more indirect activities with different cost allocation bases or
v. an unallowable activity and a direct or indirect cost activity.
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Personnel Activity Reports or equivalent documentation* must meet the following criteria:
i. prepared at least monthly,
ii. signed by the employee,
iii. account for the total activity for which each employee is being compensated, and
iv. reflect an after-the-fact distribution of the work that has actually been completed by each employee.
*As the cognizant agency, we have the right to approve substitute systems for allocating salaries and wages in place of activity reports.
Substitute systems may include random sampling that meets acceptable statistical sampling standards, case counts, or other quantifiable
measures of employee effort. We may accept sampling that does not fully comply with sampling standards provided that the amounts involved
are minimal or would result in a lower cost to the government than sampling that complied with accepted statistical sampling standards.
13. Should fringe benefits be allocated between direct & indirect costs?
According to 2 CFR 230 (A-122), Appendix B, Section 8.g.(1), fringe benefits are allowable, "provided such costs are absorbed by all
organization activities in proportion to the relative amount of time or effort actually devoted to each."
Also Section 8.g.(2) states that "whether treated as indirect or direct costs, [fringe benefits] shall be distributed to particular
awards and other activities in a manner consistent with the pattern of benefits accruing to the individual or group of employees whose
salaries and wages are chargeable to such awards and other activities."
ICS interprets the above to mean that if the position is classified as a direct position, then the salary along with applicable fringe benefits
should also be treated as direct costs. If the position is classified as an indirect position, then the related fringe benefits are to be
treated as indirect costs.
14. Are fundraising and lobbying costs allowable?
2 CFRs 225 and 230 both specifically list fundraising and lobbying costs as unallowable costs. However, 2 CFR 230 (A-122), Appendix A,
Section B.3 states, "even though these costs are unallowable for purposes of computing charges to Federal awards, they nonetheless must
be treated as direct costs for purposes of determining indirect cost rates and be allocated their share of the organization‘s indirect costs
if they represent activities which include the salaries of personnel, occupy space, and benefit from the organization‘s indirect costs."
Also, according to 2 CFR 225 (A-87), Appendix A, Section C.3.b, "all activities which benefit from the governmental unit‘s indirect costs,
including unallowable activities and services donated to the government unit by third parties, will receive an appropriate allocation of
indirect costs."
15. Can we include all depreciation expenses in the indirect cost pool?
Only the portion of depreciation that can be included as an indirect cost should be related to assets utilized by indirect related
personnel (i.e., accounting, human resources, etc.). Depreciation related to assets used by direct personnel should be direct charged.
Additionally, only depreciation related to assets purchased with non-federal dollars may be included in the indirect cost pool.
16. We submitted the proposal to ICS and the funding agency wants a confirmation, what should we do?
Please have the awarding official contact Maria Nua, ICS Program Analyst, by telephone at 916- 566-7103 or by email at ics@nbc.gov.
We will confirm with the awarding official the receipt of the proposal.
17. Can we use the negotiated indirect cost rate for all of our federal programs?
Yes, the agreed upon rate(s) shall be accepted and made available to all federal agencies for their use unless prohibited or limited by statute.
It is our understanding that state and local agencies will also accept the federally approved rate(s).
18. We have misplaced a copy of the signed negotiation agreement. How should we go about obtaining another copy?
Please fax a written request for a duplicate/replacement copy of your signed agreement. The ICS fax line number is 916-566-7110.
The request must be on your organization‘s letterhead and signed by an individual who is authorized to negotiate indirect cost rates.
19 Who do we contact to obtain clarification or interpretation on the cost principles (2 CFR 225 and 2 CFR 230, formerly OMB Circulars)?
For assistance with cost principles‘ interpretation and clarification issues, please contact Maria Nua, ICS Program Analyst, by telephone
at 916.566.7103 or email at ics@nbc.gov. If you need further clarification, you may also contact the Office of Management and Budget
(OMB) directly. Please address your request to:
Mr. Gilbert Tran
Office of Federal Financial Management
Office of Management and Budget (OMB)
725 17th Street NW, Room 6026
Washington, DC 20503
Phone: 202.395.3052 (direct)
Phone: 202.395.3993 (main office)
Email: Hai_M._Tran@omb.eop.gov
Non-Profit
1. Which federal agency is the cognizant agency for my organization?
OMB guidance states the federal agency that provides the majority of federal funding should be the cognizant agency to negotiate the
indirect cost rate. DOI/ICS is the federal cognizant agency designated by OMB to negotiate indirect cost rates for all Indian Tribal
Governments and their component units*, insular area governments (such as Guam), and nonprofit/state/local/ entities that receive a
majority of federal funding from the Department of Interior.
Under interagency agreements, ICS is also negotiating indirect cost rates for organizations that received a majority of federal funding from
the Environmental Protection Agency, the Department of Agriculture-Rural Housing Service, and the Institute of Museum and Library Services.
*Component units are legally separate organizations for which the elected officials of the primary government are financially accountable.
2. What is the difference between an indirect cost rate and a cost allocation plan?
An indirect cost rate is a device for determining in a reasonable manner the proportion of indirect costs each program should bear.
It is the ratio (expressed as a percentage) of the indirect costs to a direct cost base. Indirect costs are grouped into a common pool and
then distributed to individual federal awards by the use of the indirect cost rate. Once negotiated by ICS, an indirect cost rate will be
accepted and used by all federal agencies unless prohibited by statute, meaning an organization can use the negotiated rate to take on
new programs/grants from all federal agencies.
Whereas, a cost allocation plan (CAP) is a document that explains an organization‘s methodology in identifying, accumulating, and
allocating allowable costs to its all departments and agencies. Some federal agencies still require an approved indirect cost rate
even though a CAP has already been approved.
3. Is there a standard format that we should follow to compile the indirect cost proposal (ICP) or cost allocation plan (CAP)?
ICS has created sample proposal formats, checklists, and templates to assist you in completing the ICP or CAP proposals. Please select the
sample proposal for your type of organization, (i.e., Nonprofit Organization). Although it is not required that you follow our ICP or CAP
format, doing so will expedite the review process because our format will contain the information needed to process the ICP or CAP.
4. What is the $25,000 subgrant/subcontract rule applicable to nonprofit organizations?
According to 2 CFR 230 (Circular A-122), Appendix A, Section D.3.f, if the nonprofit organization‘s distribution base is modified total
direct costs (MTDC), then the organization is subject to the $25,000 subaward rule. The rule states that MTDC includes "subgrants and
subcontracts up to the first $25,000 of each subgrant or subcontract (regardless of the period covered by the subgrant or subcontract)".
Please note that this rule only applies to subawards given out by the nonprofit organization.
5. What is the definition of a subgrant and a subcontract?
In order to answer this question, we refer to the definition of award, subaward, and subreceipient from EPA‘s Uniform Administrative
requirements for Grants and Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations located at
40 CFR 30.2.
Award means financial assistance that provides support or stimulation to accomplish a public purpose. Awards include grants and other
agreements in the form of money or property in lieu of money, by the Federal Government to an eligible recipient. The term does not include:
technical assistance, which provides services instead of money; other assistance in the form of loans, loan guarantees, interest subsidies,
or insurance; direct payments of any kind to individuals; and, contracts which are required to be entered into and administered under
procurement laws and regulations.
Subaward means an award of financial assistance in the form of money, or property in lieu of money, made under an award by a recipient
to an eligible subrecipient or by a subrecipient to a lower tier subrecipient. The term includes financial assistance when provided by any
legal agreement, even if the agreement is called a contract, but does not include procurement of goods and services nor does it include
any form of assistance which is excluded from the definition of "award" in §215.2(e).
Subrecipient means the legal entity to which a subaward is made and which is accountable to the recipient for the use of the funds provided.
The term may include foreign or international organizations (such as agencies of the United Nations) at the discretion of the Federal awarding
agency.
6. What is the basis in allocating space costs or asset depreciation/use allowance?
According to 2 CFR 230 (A-122), Appendix A, Section D.3.c.1, areas that serve a single function or program shall be assigned to that function (or program).
For areas that serve multiple functions (or programs) and on capital improvements and equipment used in such buildings, they "shall be allocated to the individual functions performed in each building on the basis of usable square feet of space, excluding common areas, such as hallways, stairwells, and restrooms."
For jointly used areas within the building such as individual meeting rooms and laboratories, the allocation basis should be (1) the benefiting function‘s employees and other users on a full-time equivalent (FTE) basis or salaries and wages of those individual functions benefiting from the use of that space, or (2) organization-wide employee FTEs or salaries and wages applicable to the benefit functions of the organization.
Insular Areas/State/Local Governments
1. Which federal agency is the cognizant agency for my organization?
The Office of Management and Budget (OMB) published in the January 6, 1986 Federal Register, a list of cognizant agency assignments for
state and local governments. To date, this list has not been revised. OMB guidance states the federal agency that provides the majority
of federal funding should be the cognizant agency to negotiate the indirect cost rate. DOI/ICS is the federal cognizant agency designated
by OMB to negotiate indirect cost rates for insular area governments (such as Guam) and state and local governments that received majority
of federal funding from the Department of Interior.
2. What is the difference between an indirect cost rate and a cost allocation plan?
An indirect cost rate is a device for determining in a reasonable manner the proportion of indirect costs each program should bear.
It is the ratio (expressed as a percentage) of the indirect costs to a direct cost base. Indirect costs are grouped into a common pool
and then distributed to individual federal awards by the use of the indirect cost rate. Once negotiated by ICS, an indirect cost rate
will be accepted by all federal agencies unless prohibited specifically by statute, meaning an entity can use the negotiated rate to take
on new programs/grants from all federal agencies.
Whereas, a cost allocation plan (CAP) is a document that explains an organization‘s methodology in identifying, accumulating, and
allocating allowable costs to its all departments and agencies. Some federal agencies still require an approved indirect cost rate even
though a CAP has already been approved.
3. Is there a standard format that we should follow to compile the indirect cost proposal (ICP) or cost allocation plan (CAP)?
ICS has created ICP or CAP sample formats, checklists, and templates to assist you in completing the proposal package.
Please select the sample proposal for your type of organization (i.e., Insular Areas, State and Local Government). Although it is not
required that you follow our ICP or CAP format, doing so will expedite the review process because our format will contain the
information needed to process the ICP or CAP.
4. What is the 3 percent limitation applicable to SWCAP/CSCAP?
For state entities that receive federal aid apportionment through the Department of Interior, Fish and Wildlife Service‘s Wildlife
Restoration Act (PR) and Sport Fish Restoration Act (DJ), there are restrictions placed on the expenditure of indirect costs in relation
to these funds.
Specifically, 50 CFR Ch.1, Part 80.15 (d) requires that "administrative costs in the form of overhead or indirect costs for state
central services [SWCAP/CSCAP] outside of the state fish and wildlife agency must be in accord with an approved cost allocation plan and
shall not exceed three percentum (3%) of the annual apportionment."
ICS has created a sample 3% limitation verification schedule and working template for your convenience. If your entity receives PR/DJ funding,
ICS requires a submission of the 3% limitation verification schedule.
5. The SWCAP/CSCAP for the year that we are finalizing has not been negotiated, what should we do?
According to 2 CFR 225, Appendix E, Section D.1.d, if the proposed central service cost allocation plan for the period being negotiated
has not been approved by the time the indirect cost rate proposal is submitted, the indirect cost proposal may be prepared with an amount
for central services that is based on the latest federally approved central service cost allocation plan. The difference between these
central service amounts and the amounts ultimately approved will be compensated for by an adjustment in a subsequent period. Please contact
ICS for an example demonstrating how the adjustment will be made.
Indian Tribal Governments
1. Which federal agency is the cognizant agency for my organization?
OMB guidance states the federal agency that provides the majority of federal funding should be the cognizant agency to negotiate the indirect
cost rate. However, DOI/ICS is the federal cognizant agency designated by OMB to negotiate indirect cost rates for all Indian Tribal
Governments and their component units* regardless of funding.
*Component units are legally separate organizations for which the elected officials of the primary government are financially accountable.
2. Is there a standard format that we should follow to compile the indirect cost proposal?
ICS has created sample proposal formats, checklists, and templates to assist you in completing the proposal package. Please select the
sample proposal for your type of organization (i.e., Tribal Government). Although it is not required that you follow our proposal format,
doing so will expedite the review process because our format will contain the information needed to process the proposal.
3. Due to presentation changes required in GASB 34, the audited financial statements no longer have the detailed program
information needed to compile the indirect cost rate proposal. What should we do?
In order to avoid situations like this, tribal entities may want to request that their CPA include the detailed program information in
the supplemental section of the audit. Without the detailed information in the audit, the tribal entity may be required to provide a
copy of the general ledger or CPA work sheets to support the costs included in the proposal.
4. Our tribal organization did not receive total reimbursement (100%) of indirect costs from the program funding agencies;
therefore, we had to supplement the programs‘ indirect cost collections with tribal dollars. Do we need to count the tribal supplements as
part of the indirect cost collections?
ICS will only consider the indirect cost collections/recoveries received from funding agencies as indirect cost collections.
Tribal supplements to program indirect cost collections are NOT counted, although tribal supplements (used for indirect cost expenditures)
need to be excluded from the direct cost base. Tribal supplements used for indirect cost collections are not counted because doing so would
overstate the indirect cost collection amounts and thus have a detrimental impact to the tribal entity‘s carryforward amount.
5. Some programs do not pay indirect costs or have a limitation on the amount of indirect costs collected; can these programs
be excluded from the direct cost base?
According to 2 CFR 225 (A-87), Appendix A, Section C.3.b, "All activities which benefit from the governmental unit‘s indirect costs,
including unallowable activities and services donated to the governmental unit by third parties, will receive an appropriate allocation of
indirect costs."
Also, Section C.3.c states that "Any cost allocable to a particular Federal award or cost objective under the principles provided for 2 CFR
part 225 may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by law or terms of the
Federal awards, or for other reasons."
We interpret these guidelines to mean that all programs regardless of funding (or lack of funding) for indirect cost recoveries must be
considered in the base for purposes of determining indirect cost rates. All programs that benefit from the organization‘s indirect cost
(which includes space occupancy and human resources costs) must be allocated their share of the organization‘s indirect cost pool.
6. Do indirect cost collections/recoveries need to be supported with adequate documentation?
Yes, indirect cost collections/recoveries identified by program funding sources must be supported by one of the following documents types:
- Audited financial statements (preferred)
- A letter from the CPA who performed the audit
- A copy of the audited general ledger showing the grand total of indirect cost collection/recovery by program funding sources, or
- Documents from the funding agencies
7. Our tribal organization‘s federal funding is under the A-133 threshold of $500,000 and an audit is not required,
what do we need to submit with the proposal?
If your organization is not required to have an audit because the federal funding is under the $500,000 threshold, a copy of your general
ledger (or IRS Form 990 for nonprofit organizations) is needed to substantiate the costs included in the proposal.
8. What types of legal costs are allowable in the indirect cost pool?
Only legal salaries (in-house attorneys) or legal costs (for contracted legal services) related to an allowable indirect cost activity
and supported with adequate documentation will be eligible for inclusion in the indirect cost pool. Legal costs related solely to general
government operations (an unallowable cost) or to direct cost activities (i.e., federal awards) are not allowable in the indirect cost pool.
Governments may, however, apply to program managers to recover direct legal costs from funding agencies through program agreements.
Legal salaries must related to allowable indirect cost activities and be adequately documented and supported in accordance with 2 CFR 225
(A 87), Appendix B, Section 8.h.(4) in order to be included in the indirect cost pool. Please see Question 9 for further explanation of
adequate salary documentation requirements for employees (attorneys or legal staff) that work on multiple activities. Contracted indirect
legal services costs should be supported with billings or contract invoice documentation.
9. What is considered adequate documentation to support the salaries and wages of personnel included in the indirect
cost pool?
2 CFRs 225 and 230 (A-87 and A-122) require employee salaries and wages to be properly documented and approved. Proper documentation includes:
-
Salary and Wage Certifications--for use when employees are expected to work solely on a single federal award or cost objective.
You must certify that employees are assigned to a single award or cost objective and work only on that award or cost objective during
the period being certified. The certifications should be:
i. prepared at least semi-annually and
ii. signed by the employee or supervisory official with first-hand knowledge of the employees' work.
-
Personnel Activity Reports or equivalent documentation* is required for employees who work on multiple activities, that is
i. more than one federal award or
ii. a federal and a non-federal award or
iii. an indirect and a direct cost activity or
iv. two or more indirect activities with different cost allocation bases or
v. an unallowable activity and a direct or indirect cost activity.
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Personnel Activity Reports or equivalent documentation* must meet the following criteria:
i. prepared at least monthly,
ii. signed by the employee,
iii. account for the total activity for which each employee is being compensated, and
iv. reflect an after-the-fact distribution of the work that has actually been completed by each employee.
*As the cognizant agency, we have the right to approve substitute systems for allocating salaries and wages in place of activity reports.
Substitute systems may include random sampling that meets acceptable statistical sampling standards, case counts, or other quantifiable
measures of employee effort. We may accept sampling that does not fully comply with sampling standards provided that the amounts involved
are minimal or would result in a lower cost to the government than sampling that complied with accepted statistical sampling standards.
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