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Allowable Costs
INDIRECT COST RATE &
COST ALLOCATION PLANS
Presenter:
David Steele, Chief
SMPID Fiscal Unit
OVERVIEW
Cost Allocation Plans (CAPS) and
Indirect Cost Rates (ICDRs)
 Methods for Allocating Indirect Costs
 Developing IDCRs and CAPs
 RSA Findings
 Resources

WHAT ARE COST ALLOCATION PLANS
AND INDIRECT COST RATES?
Cost Allocation Plans and Indirect Cost Rates
are:
 The means by which costs are identified in
a logical and systematic manner for
reimbursement under federal grants; and
 They are documents that identify,
accumulate, and distribute allowable
direct and indirect costs to benefiting
activities.
WHAT ARE DIRECT AND
INDIRECT COSTS?
Direct Costs
 Costs that can be identified specifically with
a final cost objective.
Indirect Costs
 Costs that are incurred for a common
purpose benefiting more than one cost
objective; and
 Not readily assignable to the cost objectives
specifically benefitted.
WHY ARE COST ALLOCATION PLANS AND INDIRECT
COST RATES NECESSARY?
 Compliance with OMB Circular A-87 (relocated to
2 CFR Part 225);
 Documentation for Auditors;
 Management Information; and
 U.S. Department of Education Requirements
(EDGAR).
“A grantee must have a current indirect
cost rate agreement to charge indirect
costs to a grant. To obtain an indirect cost
rate, a grantee must submit an indirect
cost proposal to its cognizant agency and
negotiate an indirect cost agreement.”
(Emphasis added)
 34 CFR 75.560(b) (EDGAR)
WHAT IS AN INDIRECT COST RATE PROPOSAL
(IDC RATE PROPOSAL)?
PART 225—COST
PRINCIPLES FOR STATE,
LOCAL, AND INDIAN TRIBAL
GOVERNMENTS
(OMB CIRCULAR A–87)
2 CFR Part 225, Appendix E
defines an indirect cost rate
proposal as the
documentation prepared by
the governmental unit or
subdivision thereof to
substantiate its request for the
establishment of an indirect
cost rate.
WHAT IS A COGNIZANT AGENCY?
The cognizant agency means the federal agency
responsible for reviewing, negotiating, and
approving cost allocation plans or indirect cost
rate proposals developed under 2 CFR Part 225
on behalf of all federal agencies. The cognizant
agency is determined by the greater amount of
federal funding awarded from an agency to
each state based on the review of each states
Federal Schedule of Expenditures (except for
territories).
DOED INDIRECT COST GROUP COORDINATION
WHEN ANOTHER AGENCY IS COGNIZANT
 With regard to indirect cost rate proposals, the
Department coordinates with other cognizant
agencies when an IDC rate proposal involves an ED
award that requires a restricted indirect cost rate. VR
does not currently require a restricted indirect cost
rate.
 In addition, ED’s Indirect Cost Group assists RSA in
resolving indirect cost issues identified through
program monitoring.
RSA COORDINATION WHEN ANOTHER
AGENCY IS COGNIZANT
When DHHS or DOL are the cognizant agency for the VR
program, the RSA Fiscal Unit Chief receives a copy of
indirect cost proposals/revisions or cost allocation plan
proposals/revisions. To the extent possible, RSA
financial management specialists review the documents
to determine if there are any concerns. If concerns are
noted, RSA contacts the DHHS or DOL representative to
obtain clarification from the submitting agency and
resolve any concerns.
COST ALLOCATION PLAN
As defined in 2 CFR Part 225, a cost allocation
plan includes:
 Central service cost allocation plan (a.k.a.,
state-wide-cost allocation plan (SWCAP));
 Indirect cost rate proposal;
 Public assistance cost allocation plan (mostly
HHS);
 Cost allocation plan (indirect cost allocations
not using rates).
WHAT IS A CENTRAL SERVICE COST
ALLOCATION PLAN?
2 CFR Part 225 Appendix C defines the central service
cost allocation plan as the documentation identifying,
accumulating, and allocating or developing billing rates
based on the allowable costs of services provided by a
governmental unit on a centralized basis to its
department and agencies.
ENGLISH PLEASE!
The process used to allocate certain services on a
centralized basis (e.g., motor pools, computer centers,
purchasing, accounting, etc.) that may not be performed
within the scope of the individual entity receiving the
award. The process must allocate these costs to the
benefiting program in a reasonable and consistent
manner. This process is called the central services cost
allocation plan, commonly known as the state-wide-cost
allocation plan (SWCAP).
WHAT DO I NEED TO KNOW ABOUT CENTRAL
SERVICE COST ALLOCATION PLANS (SWCAPS)?
 States that wish to charge the costs of central
support services to federal awards must first prepare
a SWCAP to allocate those costs to departments or
units they benefit.
 States are required to submit a SWCAP to HHS for
each year in which it claims central service costs
under federal awards.
 Costs omitted from this plan will not be reimbursed.
 Approved SWCAPs can be found on the HHS, Division
of Cost Allocation website at:
http://rates.psc.gov/fms/dca/dca_swcap.html
WHAT IS AN INDIRECT COST (IDC) RATE?
An indirect cost rate is a mechanism 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
the direct costs. The IDC rate allows one to calculate
the appropriate allocation of indirect costs
associated with any one project by applying the
negotiated indirect cost rate to the respective base
used to develop the rate.
TYPES OF IDC RATES
Three different types of indirect cost rates can be
approved by the cognizant agency:
1) Predetermined – established for current or multiple
future period(s) based on current data and are not
subject to adjustment, except under very unusual
circumstances.
2) Fixed – established for a current period based on
current data with a carry forward adjustment to the
rate computation for a subsequent period.
3) Provisional – temporary rates used for funding and
billing indirect costs, pending the establishment of a
final rate for a period.
WHAT IS THE DIRECT COST “BASE” AND HOW
IS IT DETERMINED?
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.
WHAT IS THE DIRECT COST “BASE” AND HOW
IS IT DETERMINED? (CONT.)
 The distribution base may be total direct costs
(excluding capital expenditures and other distorting
items, such as pass-through funds, major
subcontracts, etc.), direct salaries and wages, or
another base which results in an equitable
distribution.
 Both the direct costs and the indirect costs shall
exclude capital expenditures and unallowable costs.
WHAT IS MEANT BY OTHER DISTORTING ITEMS?
 Agencies should exclude distorting items like
payments for consumer services to CRPs, vendors
and consumers.
 Subcontract amounts in excess of the first
$25,000.
INDIRECT COST RATE
An indirect cost rate is:
Indirect
Cost
Pool
Direct
Cost
Base
Indirect
Cost
Rate
INDIRECT COST POOL
An indirect cost pool is:
Departmental
Cost
SWCAP
Indirect
Cost
Pool
WHAT ARE THE SUBMISSION REQUIREMENTS FOR COST
ALLOCATION PLANS AND INDIRECT COST RATE PLANS?
Cost Allocation Plans and Indirect Cost Rates
must be:
 Developed and submitted within six months
after the close of the entity’s fiscal year;
 Submitted as required by the cognizant agency;
 Inclusive of all units desiring to claim indirect
costs; and
 Maintained on file if submission is not required.
GRANTEE RESPONSIBILITIES
Grantees are responsible for ensuring that costs
are:
 Allowable;
 Reasonable;
 Treated consistently;
 In compliance with GAAP;
 Allocable to the federal program;
 Proportional to benefit received; and
 Adequately documented.
HEADS-UP: ABNORMAL/MASS SEVERANCE PAY


Severance payments, but not
accruals, associated with
normal turnover are
allowable. Such payments
shall be allocated to all
activities of the governmental
unit as an indirect cost.
Abnormal or mass severance
pay will be considered on a
case-by-case basis and is
allowable only if approved by
the cognizant federal agency.
MASS SEVERANCE: DEFINITION
Mass severance or termination benefits would include
all expenses associated with the event. This would
include: lump sum payments that may be linked to
years of service, increased pension benefits such as
granting additional years or eliminating penalties for
early retirement, payments of unused leave, and the
cost of any other incentive offered to employees as an
incentive to leave government service, such as buyouts. (ASMB C-10)
MASS SEVERANCE: PRIOR APPROVAL
The costs of these special termination benefits must
be determined and prior approval of such costs must
be obtained from the federal cognizant office prior to
claiming these costs directly or indirectly against
federal programs. The requests for prior approval, at a
minimum, must demonstrate the reasonableness and
allocability of such costs to federal programs.
MASS SEVERANCE: PRIOR APPROVAL REVIEW
 Ability to demonstrate costs are allowable to federal




award;
Buy-out should be government-wide;
Plan should address estimated savings, total and
federal, in both dollars and number of employees;
Governmental unit should analyze the effect the
downsizing will have on the operation, continuity, and
effectiveness of programs;
Governmental unit and the cognizant agency must
establish an agreement providing for compensation to
the Federal Government should the terms and
conditions of the buy-out/severance plan not be met.
(ASMB C-10)
HEADS-UP: TERMINATION LEAVE
When a governmental unit uses
the cash basis of accounting, the
cost of leave is recognized in the
period that the leave is taken and
for which leave is paid. Payments
for unused leave when an
employee retires or terminates
employment are allowable in the
year of payment provided they
are allocated as a general
administrative expense to all
activities of the governmental
unit or component. (2 CFR Part
225, Appendix B)
HEADS-UP: COST SHIFTING
Costs cannot be
shifted to different
awards to avoid
funding deficiencies
or to circumvent
restrictions.
WHAT FINDINGS HAS RSA
IDENTIFIED RELATED TO SWCAPS?
1) Agencies paying duplicate costs.
2) SWCAP expenses not being allocated to the
required programs/awards.
3) Agency being charged through SWCAP for
expenses not allocable to the award.
WHAT FINDINGS HAS RSA IDENTIFIED
RELATED TOINDIRECT COSTS?
1) Not having a current, approved Cost Allocation
Plans or Indirect Cost Rates.
2) Costs/salaries included in plan/proposal not
being allocated to appropriate programs (VR, IL,
IL-OIB, state programs, etc.).
3) Inconsistency in charging costs as direct or
indirect between federal awards.
4) Costs that do not benefit the award are
inappropriately allocated via the ICR.
QUESTION
ANSWER
Are the costs of
significant software
projects allowable as
charges to federal
awards?
Programs benefitting from
such projects should be
charged only for amortization
of the capitalized costs once
the projects are implemented
and in use by federal
programs. The costs should
be amortized over the useful
life of the intangible asset.
QUESTION
Is it permissible to
allocate costs (either
directly or indirectly) on
the basis of revenue or
on the basis of funds
available under federal
grants or contracts?
ANSWER
No. The allocation of costs
by either of these
methods is unacceptable.
Cost must be allocated on
the basis of cost/
expenditures incurred.
QUESTION
How do IDC rates get applied to subcontractors? For example, a grantee has a 15
percent indirect rate, the grantee has two
subcontractors that do not have indirect cost
rate agreements with an agency of the federal
government. Should the two subcontractors
charge the 15 percent rate being utilized by the
grantee or should they charge everything
directly?
ANSWER
NO, the two subcontractors cannot use the prime grantee's
15% rate, and NO they shouldn't direct charge everything
unless they have a direct cost allocation plan approved by
the cognizant federal agency.
If the subcontractors have direct federal awards, they should
already have an indirect cost rate approved by the cognizant
federal agency. If they only receive federal funds in flowthrough fashion, or via subawards, the organization will not
have a cognizant federal agency. Why? The Government
has privity only with the prime recipient, who has the
fiduciary responsibility for the subcontractor's actions. In
that scenario, the prime recipient is also responsible for
indirect cost oversight.
ANSWER (CONT.)
To determine allowability, allocability and
reasonableness of the indirect costs charged by the
two subcontractors, the prime grantee should
consider the relevant program regulations, OMB
circulars, and supplemental guidance.
References
Education Department General Administrative
Regulations (EDGAR) http://www.ed.gov/policy/fund/reg/edgarReg/edg
ar.html
HHS –ASMB C-10 & Other Reference Information http://rates.psc.gov/
OMB Circulars http://www.whitehouse.gov/omb/circulars/
ED’s Indirect Cost Group Website http://www.ed.gov/about/offices/list/ocfo/fipao/ic
gindex.html
QUESTIONS
QUESTIONS?