ESBD_401736_1742825941308_Cost Allocation Guide_September 2019.pdf

Cost Allocation Guide for

State and Local Governments

U.S. DEPARTMENT OF EDUCATION

Indirect Cost Division

Office of Grants Administration

Office of Finance and Operations

September 2019

U.S. Department of Education Betsy DeVos Secretary

Office of Finance and Operations Office of Grants Administration J.F. Stader, P.E.

Deputy Assistant Secretary for Grants Administration

September 2019

This report is in the public domain. Authorization to reproduce it in whole or in part is granted.

While permission to reprint this publication is not necessary, the citation should be U.S. Department of Education, Office of the Chief Financial Officer, Cost Allocation Guide for State and Local Governments, Washington, D.C., 2019.

This report is available on the Department’s website at https://www2.ed.gov/about/offices/list/ocfo/fipao/abouticg.html

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CONTENTS

FOREWORD

SECTION I: GENERAL INFORMATION

A. Authority B. Key Terms C. Types of Indirect Cost Rates Pass-through entities can issue de minimis rates to their subrecipients D. Uniform Guidance Indirect Cost Rate Extensions E. Special Indirect Cost Rate F. Approval and Negotiation of Indirect Cost Rates G. Disputes H. Records Retention I. Proposal Submission Due Dates

SECTION II: GUIDELINES FOR PREPARING INDIRECT COST RATE PROPOSALS

A. Determination of Indirect Cost Rates B. Detailed Steps C. Submission of Proposals D. Cost Allocation Plans

SECTION III: REIMBURSEMENT OF INDIRECT COSTS

A. Requirements for Reimbursement B. Application of Indirect Cost Rates C. Indirect Cost Limitations D. Administrative Cost Limitations

SECTION IV: INDIRECT COST RATE METHODS

A. General Information B. Simplified Method C. Direct Allocation Method D. Multiple Allocation Base Method E. Special and Restricted Indirect Cost Rates F. Restricted Indirect Cost Rates — Questions and Answers

SECTION V: STATE AND LOCAL AGENCIES RESPONSIBILITIES

A. General B. State Educational Agency Procedures C. Subrecipients

SECTION VI: TIME REPORTING REQUIREMENTS

A. General Information B. Standards for Documentation of Personnel Expenses

C. Personnel Charges to Federal Awards D. Time and Attendance Reporting E. Substitute or Alternative Systems F. Policies and Procedures

SECTION VII: COMMON INDIRECT COST ISSUES

A. Compensation B. Unallowable Costs C. Credits D. Interest E. Depreciation F. Subawards G. Unsupported Costs

SECTION VIII: QUESTIONS AND ANSWERS

A. Application of Principles B. Federal Cognizance C. Allocation of Costs D. Subawards E. Other Items

SECTION IX: DEFINITIONS

APPENDICES

APPENDICES: MODELS, EXAMPLES AND REFERENC

Submission Documentation Guidance and Templates Organization Information

Capitalization Policy Cost Policy Statement (See Exhibit-Cost Policy Statement Cover Letter (See Exhibit — Cover Letter Function Codes/Cost Centers Listing (See Exhibit — Function Codes List) Object Codes Listing (See Exhibit — Object Codes List) Organization Chart (See Exhibit — Organization Chart) Organization Profile

Supporting Schedules and Documentation Carry-forward Adjustment Central service cost allocation plan/Statewide cost allocation plan (SWCAP) Exclusions Schedule Federal Grant Award Listing Financial Information Restricted Rate Adjustments Schedule Salary and Fringe Benefit Schedule Statement of Total Costs and Indirect Costs

Subaward and Subcontract Schedule Trend Analysis Unused Leave Payout Schedule

Administrative Forms Certificate of Indirect Costs Indirect Cost Rate Agreement Lobbying Certificate Local Education Agency Model Indirect Cost Plan (TBD) Website References

WEBSITE

REFERENCES.docx

ACKNOWLEDGEMENTS

The Cost Allocation Guide for State and Local Governments represents a major initiative to establish key standards and practices in the area of cost allocation.

State and local educational agencies and ED’s program offices provided valuable input for the contents of the original Guide, published in September 2009. In 2016, ICD developed a pilot group and worked closely with several state education agencies on the standardized submission templates. During 2017, ICD received feedback from several states and incorporated this feedback into the current Guide.

The ICD staff worked extensively to ensure that this Guide contains current information and addresses the needs of grantees. The Indirect Cost Division staff includes Frances Outland, Director, Associate Directors; Andre Hylton, Phillip Luster, and Emily Wen, Negotiators; Nelda Barnes, Vivian Crouch, Mae Ewell, Catherine Hull, Anthony Johnson, Christian Muniz, and Damien Williams. During our research, ICD used information and related websites from other federal agencies’ indirect cost departments, including the U.S. Department of Health and Human Services, the U.S.

Department of the Interior, the U.S. Department of Justice, and the U.S. Department of Labor.

ED’s Office of Finance and Operations expresses gratitude and appreciation to all who contributed to the completion of this Guide.

SECTION I

SECTION I: GENERAL INFORMATION

A. Authority

This Cost Allocation Guide for State and Local Governments is based on the requirement of the Code of Federal Regulations (CFR) under Office of Management and Budget (OMB) grant guidance under 2 CFR 200, “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards” (subsequently referred to as the Uniform Guidance) and Education Department General Administrative Regulations (EDGAR) under 34 CFR 75 and 76.

The Uniform Guidance under 2 CFR 200 establishes the standard that one federal agency is responsible for the review, negotiation, and approval of indirect cost rate proposals.

As provided in EDGAR at 34 CFR 76.561, the secretary establishes that each state educational agency, on the basis of a plan approved by the U.S. Department of Education secretary, shall approve an indirect cost rate for each local educational agency (LEA) that makes such a request, and the secretary has delegated cost allocation responsibilities to the chief financial officer of each LEA.

ICD negotiates directly with organizations that receive the majority of their direct federal funding from the U.S. Department of Education or are designated by the Office of Management and Budget to negotiate with the Department of Education — such as state educational agencies.

B. Key Terms

For purposes of this Guide, the following definitions of key terms apply1:

Central Service Cost Allocation Plan (2 CFR 200.9) is 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 departments and agencies.

Cognizant Agency (2 CFR 200.19) means the Federal agency responsible for reviewing, negotiating, and approving cost allocation plans or indirect cost proposals developed under this part on behalf of all Federal agencies. The cognizant agency for indirect cost is not necessarily the same as the cognizant agency for audit. For assignments of cognizant agencies, see the following:

(a) For IHEs: Appendix III to Part 200—Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Institutions of Higher Education (IHEs), paragraph C.11.

(b) For nonprofit organizations: Appendix IV to Part 200—Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Nonprofit Organizations, paragraph C.2.a.

1 For many of these terms, more detailed definitions are provided at 2 CFR Part 200.

(c) For State and local governments: Appendix V to Part 200—State/local Government-wide Central Service Cost Allocation Plans, paragraph F.1.

(d) For Indian tribes: Appendix VII to Part 200—States and local Government and Indian Tribe Indirect Cost Proposal, paragraph D.1.

Cost Allocation Plan is a document that identifies, accumulates, and distributes allowable direct and indirect costs to cost objectives. The plan also identifies the allocation methods used for distribution to cost objectives, on the basis of relative benefits received.

Governmental Unit is the entire state, local, or federally recognized Indian tribal government, which includes components.

Indirect Costs (2 CFR 200.56) are costs that have been incurred for common or joint purposes.

Indirect costs benefit more than one cost objective and cannot be readily identified with a particular final cost objective.

Indirect Cost Rate is a method for determining, in a reasonable manner, the proportion of indirect costs each program should bear. The indirect costs are included in the numerator (pool) and the direct costs are included in the base (denominator). The result is expressed as a percentage (rate) of the indirect costs to direct costs.

Indirect Cost Rate Proposal (2 CFR 200.57) is documentation prepared by a governmental unit or component thereof to substantiate its request for the establishment of an indirect cost rate.

Local Educational Agency (LEA) is a public board of education or other public authority legally constituted within a state for either administrative control or direction of public elementary or secondary schools in a city, county, township, school district, or other political subdivision of a state; or such combination of school districts or counties a state recognizes as an administrative agency for its public elementary or secondary schools.

Local Government (2 CFR 200.64) is any unit of government within a state, including a county, borough, municipality, city, town, township, parish, local public authority — including any public housing agency under the United States Housing Act of 1937, school district, special district, intrastate district, council of governments (whether or not incorporated as a nonprofit corporation under State law), and any agency or instrumentality of a multi-regional, or intrastate or local government.

Non-Federal Entity (NFE), also referred to as “grantee,” is the organization to which a grant is awarded and that is accountable for the use of the funds provided. The NFE or grantee is the entire legal entity even if only a particular component of the entity is designated in the grant award document.

State is any of the states of the United States, District of Columbia, Commonwealth of Puerto Rico, any territory or possession of the United States, or any agency or instrumentality of a state exclusive of local governments.

State Educational Agency (SEA) is the state board of education or other agency or office primarily responsible for the supervision of public elementary and secondary schools in a state.

In the absence of this office or agency, it is an office or agency designated by the governor or state law.

Subaward (Subgrant) is an award made by a pass–through entity to a subrecipient to carry out part of a federal award received by the pass-through entity. It does not include payments to a contractor or payments to an individual that is a beneficiary of a federal program. A subaward may be provided through any form of legal agreement, including an agreement that the pass-through entity considers a contract.

Subrecipient (2 CFR 200.93) is a non-Federal entity that receives a subaward from a pass-through entity to carry out part of a Federal program; but does not include an individual that is a beneficiary of such program. A subrecipient may also be a recipient of other Federal awards directly from a Federal awarding agency.

Characteristics of a subrecipient include but are not limited to when the non-Federal entity

1. determines who is eligible to receive what Federal assistance.

2. measures performance in relation to accomplishing the Federal program objectives.

3. is responsible for programmatic decision making.

4. must adhere to applicable Federal program requirements specified in the Federal award.

5. uses the Federal funds to carry out a program for a public purpose specified in authorizing statute, as opposed to providing goods or services for the benefit of the pass-through entity.

C. Types of Indirect Cost Rates

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.

Final Rate is an indirect cost rate applicable to a specified past period, which is based on the actual allowable costs of the period. A final rate is not subject to adjustment.

Fixed Rate (with Carry-forward) is an indirect cost rate calculated similarly to a predetermined rate, except the difference between the estimated costs and the actual costs of the period is carried forward as an adjustment to the rate computation of a subsequent period.

Predetermined Rate is an indirect cost rate applicable to a specified current or future period, usually the governmental unit’s fiscal year. This rate is based on an estimate of the costs to be incurred during the period. Except under very unusual circumstances, a predetermined rate is not subject to adjustment. Because of legal constraints, predetermined rates are not permitted for federal contracts; they may, however, be used for grants or cooperative agreements.

Unrestricted indirect cost rates are those calculated for use on programs without limitations on indirect costs.

Restricted Rates — Certain ED grant programs have a statutory requirement prohibiting the use of federal funds to supplant non-federal funds. These programs require the use of a restricted indirect cost rate, computed in accordance with 34 CFR 76.564-76.569. Adjustments to the unrestricted rate calculation are made and result in a lower rate to claim indirect cost reimbursement on restricted rate programs.

De Minimis Rate is a rate provided for at 2 CFR 200.414(f) that does not require the use of an indirect cost rate agreement approved by the cognizant agency. Non-federal entities that have never received a negotiated indirect cost rate may elect to charge a de minimis rate of 10 percent of modified total direct costs, which may be used indefinitely. If the NFE chooses to use the de minimis rate, it must do so consistently for all Federal awards until it chooses to negotiate a rate. The NFE may apply for indirect cost rate any time. Any non-federal entity seeking this rate must inform their grant or program officer prior to the award of their grant. As described in CFR §200.403 “Factors Affecting Allowability of Costs,” costs must be consistently charged as either indirect or direct costs, and the same costs that have been allocated as indirect costs must not be also classified as direct costs.

The de minimis rate is not applicable to the following programs:

• programs administered by SEAs and LEAs

• restricted programs subject to supplement and not supplant clause requirements

(applicable provisions in EDGAR 34 CFR §§75.563 and 76.563)

• training grants

Pass-through entities can issue de minimis rates to their subrecipients.

D. Uniform Guidance Indirect Cost Rate Extensions

In accordance with §2 CFR 200.414(g), the NFE may request an extension of its current rates for up to four years, as stated below:

Any NFE that has a current federally negotiated indirect cost rate may apply for a one-time extension of the approved rate for a period of up to four years. This extension will be subject to review and approval by the cognizant agency. If an extension is granted, the NFE may not request a rate review until the extension period ends. At the end of the four-year extension, the non-Federal entity must re-apply for a rate. A subsequent one-time extension (up to four years) is permitted if a renegotiation is completed between each extension request.

The required level of documentation is determined by the cognizant agency. The Department of Education follows the additional guidance provided by OMB in its frequently asked questions https://cfo.gov/wp-content/uploads/2015/09/9.9.15-Frequently-Asked-Questions.pdf

(FAQ) on this subject. The following guidance is applicable to request for extensions under 2 CFR 200.414(g) as follows:

1. Written request (email or letter) with the number of years requested submitted within 60 days or sooner before the due date of the next submission of the indirect cost rate proposal.

2. Determination of eligibility for the extension: NFEs with fixed carry-forward rates are not eligible; NFEs that have cost reimbursable contracts are not eligible; NFEs that do not have sufficient historical experience or potential future business that would justify granting the extension are not eligible.

3. If eligible for rate extension, the following additional documents may be requested by

ED:

a. Most recent audited financial statements or current expenditures for the last completed fiscal year

b. Current Listing of Grants by agency, award amount, and performance period.

Information on any applications made for significant awards and the probability of them being awarded

E. Special Indirect Cost Rate

Many ED programs are subject to statutory requirements that the Federal funds be used to “supplement and not supplant” ongoing educational services; therefore, they are subject to restricted indirect cost rates as defined in EDGAR under 34 CFR 75.563 and 34 CFR 76.563.

For those programs under the supplement not supplant requirements, a special rate is required, which is termed a “restricted indirect cost rate.” If special rate circumstances exist as a restricted rate, the NFE must make the cognizant agency aware of these special requirements for the purpose of rate negotiation. Some grantees have an approved cost allocation plan from their cognizant agency. Even if the cost allocation plan is approved, if the grantee receives funds from an ED program that is subject to the “supplement not supplant” requirement, the grantee must use a restricted indirect cost rate. In addition to a restricted rate, a training grant with an 8 percent limitation is another example of a special indirect cost rate.

According to 2 CFR 200, Appendix VII, (C)(4)(b), “Where Federal statutes restrict the reimbursement of certain indirect costs, it may be necessary to develop a special rate for the affected Federal award. Where a ‘restricted rate’ is required, the same procedure for developing a non-restricted rate will be used except for the additional step of the elimination from the indirect cost pool those costs for which the law prohibits reimbursement.” The requirements and guidance are defined in the Education Department General and Administrative Regulations (EDGAR) at 34 CFR 75.563 and 76.563 and computed in accordance with 34 CFR 76-564 –

76.569. In addition, according to 2 CFR 200, Appendix VII (E)(1), “Negotiation and Approval of Rates,” it is stated that where a Federal awarding agency has reason to believe that special operating factors affecting its Federal awards necessitate special indirect cost rates, the funding https://cfo.gov/wp-content/uploads/2015/09/9.9.15-Frequently-Asked-Questions.pdf agency will, prior to the time the rates are negotiated, notify the cognizant agency for indirect costs.

F. Approval and Negotiation of Indirect Cost Rates

The ICD will negotiate and approve indirect cost rates submitted by entities for which ED is the cognizant federal agency. LEAs shall submit their indirect cost rate proposals to SEAs for approval. In situations where a local government receives funds only as a subrecipient, the pass-through entity is responsible for the approval of the subrecipient's indirect cost rates in accordance with the uniform guidance requirements.

G. Disputes

If a dispute arises during the negotiation, the concern may be addressed to ED’s Deputy Assistant Secretary for Grants Administration. ED’s Office of Administrative Judges has the authority to review disputes involving funds recovery actions under specific programs only.

Appeals

When an indirect cost rate negotiator and a grantee cannot reach agreement on an acceptable indirect cost rate, the cost negotiator shall make a unilateral determination of the rate(s) and will notify the NFE. ICD will advise the NFE of its right to appeal the determination and will provide information about the appeal procedures, upon request. Based on the information provided by the cost negotiator and the grantee, ED’s Deputy Assistant Secretary for Grants Administration shall review the appeal and issue a memorandum sustaining, modifying, or denying the unilateral rate issued.

H. Records Retention

In accordance with the provisions of 2 CFR 200.333, “Retention requirements for records,” records shall be retained for three years for indirect cost proposals and cost allocation plans.

The three-year period runs from the submission of certain financial documents (explained further below) and is based on the following circumstances:

Indirect cost rate proposals and cost allocations plans. This paragraph applies to the following types of documents and their supporting records: indirect cost rate computations or proposals, cost allocation plans, and any similar accounting computations of the rate at which a particular group of costs is chargeable (such as computer usage chargeback rates or composite fringe benefit rates).

1. If submitted for negotiation. If the proposal, plan, or other computation is required to be submitted to the Federal Government (or to the pass-through entity) to form the basis for negotiation of the rate, then the three-year retention period for its supporting records starts from the date of such submission.

2. If not submitted for negotiation. If the proposal, plan, or other computation is not required to be submitted to the Federal Government (or to the pass-through entity) for negotiation purposes, then the three-year retention period for the proposal, plan, or computation, and its supporting records, starts from the end of the fiscal year (or other accounting period) covered by the proposal, plan, or other computation.

In addition to the exception given for the indirect cost proposals and cost allocation plans, the general rule for maintaining records for a period of three years is that if any litigation, claim or audit is started before the expiration of that three-year period, the records must be retained until all litigation, claims, or audit findings involving those records have been resolved or final action is taken.

According to 2 CFR 200.333: “Retention requirements for records”:

Financial records, supporting documents, statistical records, and all other non-Federal entity records related to a Federal award must be retained for a period of three years, from the date of submission of the final expenditure report or, for Federal awards that are renewed quarterly or annually, from the date of the submission of the quarterly or annual financial report, respectively, as reported to the Federal awarding agency or pass-through entity in the case of a subrecipient.

Federal awarding agencies and pass-through entities must not impose any other record retention requirements upon non-Federal entities. The only exceptions are the following:

1. If any litigation, claim, or audit is started before the expiration of the 3-year period, the records must be retained until all litigation, claims, or audit findings involving the records have been resolved and final action taken.

2. When the non-Federal entity is notified in writing by the Federal awarding agency, cognizant agency for audit, oversight agency for audit, cognizant agency for indirect costs, or pass-through entity to extend the retention period.

3. Records for real property and equipment acquired with Federal funds must be retained for 3 years after final disposition.

4. When records are transferred to or maintained by the Federal awarding agency or pass-through entity, the 3-year retention requirement is not applicable to the non-Federal entity.

5. Records for program income transactions after the period of performance. In some cases recipients must report program income after the period of performance. Where there is such a requirement, the retention period for the records pertaining to the earning of the program income starts from the end of the non-Federal entity's fiscal year in which the program income is earned.

If any litigation, claim or audit is started before the expiration of the 3-year period, the records must be retained until all litigation, claims, or audit findings involving those records have been resolved or final action is taken.

I. Proposal Submission Due Dates

The due dates for submission of indirect cost proposals to the cognizant agency depend on whether an organization has previously established an indirect cost rate with the government, as well as the type of organizational entity (nonprofit, commercial, state or local government).

Please note that an indirect cost proposal must be submitted to the cognizant agency.

NFEs that have previously established indirect cost rates with the Government must submit a new indirect cost proposal to the cognizant agency within six months after the close of the Entity’s fiscal year (2 CFR 200, Appendix VII(D)(1)(d)). The certificate must be signed on behalf of the NFE by the chief financial officer or an individual designated by an individual at a level no lower than vice president or chief financial officer. The requirement for an indirect cost proposal is an annual requirement and is in effect as long as the organization is claiming indirect costs as part of its award.

Extension of Due Dates

Occasionally, extenuating circumstances may justify an extension of the due date for submission of a proposal. When a due date cannot be met, a written request for an extension, stating the reasons, must be sent to ICD prior to the due date. If a NFE is consistently late without adequate explanations, ICD would inform program offices and may recommend withholding of indirect cost recovery on existing award agreements when submission due dates have not been met.

SECTION II

SECTION II: GUIDELINES FOR PREPARING INDIRECT COST RATE

PROPOSALS

Prior to the preparation of an indirect cost rate proposal and supporting documentation, the NFEs should thoroughly review the applicable cost principles. The 2 CFR 200 establishes the federal requirements for the determination of allowable and unallowable direct and indirect costs and the preparation of indirect cost proposals.

Indirect cost rate proposals require supporting schedules and documentation. The following steps are recommended in preparing an indirect cost rate proposal. An indirect cost rate proposal model for a SEA is included in the Appendix. The proposal should be tailored to the organization’s structure.

Before calculating an indirect cost rate, the NFE should consider and review the following:

• Organizational structure

• Level of Federal funding

• Requirements of the Uniform Guidance (2 CFR 200) and EDGAR

• Accounting system reports

• Policies related to the charging of direct and indirect costs

• Availability of data on square footage, number of transactions, number of employees, etc., (if necessary to support cost calculations)

• Effort and cost required to achieve differing degrees of accuracy

• Need for a restricted indirect cost rate

A. Determination of Indirect Cost Rates

The basic methods for calculating indirect cost rates include the simplified, direct allocation, and the multiple allocation base methods. These methods and special (or restricted) indirect cost rates are discussed in further details in Section IV.

In order to prepare an indirect cost rate proposal, total costs, regardless of funding source, must be classified into one of the following categories: direct, indirect, and excludable costs.

The following detailed steps will guide the preparation of the proposal.

B. Detailed Steps

1. Determine Total Expenditures

Information from the NFE’s accounting system should be used to determine total expenditures. Total costs, regardless of the funding source, should be identified for each fund, function, and object class (expenditure type). Federal and non-federal outlays should be determined.

2. Identify Unallowable and Excluded Costs

Before calculating an indirect cost rate, the NFE should review the uniform guidance to determine which costs are unallowable or should be excluded from the indirect cost pool and/or distribution base. All activities that benefit from the governmental unit’s indirect costs, including unallowable activities and donated services, should receive an appropriate allocation of indirect costs. All direct costs that are supported by indirect activities, including unallowable costs and the value of donated services, will be included in the direct cost base when calculating indirect cost rates.

Unallowable costs include but are not limited to debt service, fines and penalties, contingencies, lobbying, and election expenses. The indirect cost rate calculation and application should remove all unallowable costs. However, some unallowable costs must be allocated their share of indirect costs if they either generated or benefited from the indirect costs. The unallowable costs, when significant and necessary to the non-federal entity’s mission, must be treated as direct costs whether or not allowable, and be allocated an equitable share of indirect costs.

The indirect cost rate calculation should exclude certain costs specified by 2 CFR 200.68 or costs which may distort or produce an inequity in the distribution of indirect costs to benefitting activities. Excludable costs include but are not limited to pass-through funds (funds provided to the NFE for specific subrecipients, such as funds designated for LEAs), subaward or subcontract expenditures in excess of $25,000, food purchases, equipment purchases, charges for patient care, and rental costs (per 2 CFR 200, FAQ.68- 3). The exclusion of rental costs in the definition of modified total direct costs (MTDC) is to exclude a cost item that may be a distorting item and skew the distribution of indirect costs), tuition remission, scholarships and fellowships, participant support costs, and any other costs which may distort the distribution of indirect costs.

The same costs should be excluded when calculating the rate and indirect cost reimbursement because the activities listed above require minimal administrative support.

Below are two examples of funds that can be awarded to a state agency. The examples explain when costs should be included in the direct cost base (denominator) or excluded from the rate calculation.

Example 1

The SEA receives a $1,000,000 award from a federal agency. The purpose of the award is to have specific school districts conduct seminars on a new federal program. The SEA awards $100,000 each to 10 school districts. Each of the school districts is responsible for payroll, issuing contracts and purchase orders, acquiring and paying for supplies, reimbursement for travel, and other similar administrative costs. The only efforts the SEA spends on these awards are providing electronic payments and reviewing end-of-year financial reports. The $1,000,000 award is a “pass-through” and therefore excluded. There is minimal benefit from these funds received from the SEA. For each school district, the expenditures are part of the base for calculating their indirect cost rate.

Example 2

A state agency receives a $500,000 grant from a corporate endowment to improve mathematics instruction. The endowment does not allow indirect cost reimbursement under its grants. The agency hires five full-time staff with the funds.

The state agency pays the salaries, fringe benefits, local travel, supplies, and other staff expenses. All expenses incurred under this endowment grant are included in the state agency’s base (except distorting items). It does not matter whether the endowment allows indirect costs or not. These costs benefit from the state agency’s allowable indirect costs (payroll, personnel, procurement, data processing, etc.).

Therefore, the costs are included in the base. If not, the state agency’s other programs absorb an unfair portion of the costs of administering the endowment grant.

3. Determine Direct Costs

Direct costs are those that can be identified specifically with a particular cost objective.

The direct costs of a federal award can be specifically identified to the program and may be charged directly to the program. Examples of direct costs that may be charged to a federal program include the following:

• Compensation of the employees who works on the program

• Supplies and materials used for the program

• Equipment purchased and used for the program

• Travel expenses incurred specifically to carry out the program

4. Determine Indirect Costs

The Uniform Guidance defines indirect costs (2 CFR 200.56 Indirect (facilities & administrative (F&A)) costs) as those that are incurred for a common or joint purpose benefiting more than one cost objective. In addition, indirect costs cannot be readily identified as benefiting a particular cost objective. Examples of indirect costs include the salaries and expenses for the following activities which benefit the organization as a whole:

• Accounting

• Personnel

• Purchasing

Indirect costs are normally charged to federal programs through the indirect cost rate.

Non-federal entities must be consistent in treating costs as direct or indirect under federal awards. Once a cost is treated as direct or indirect, it should be treated that way for all projects and activities, regardless of the source of funding. Any major change in the treatment of costs from indirect to direct or direct to indirect should be discussed with the cognizant agency for indirect costs for approval. These are accounting changes and impact the costs to the various grant programs.

5. Reconcile Proposal to Financial Statements/Expenditure Reports

Reconcile amounts in the indirect cost rate proposal to the audited financial statements or final expenditure reports. The organization is expected to provide support or explanation for any material variances.

6. Select the Distribution Base

The direct cost base (distribution base) selected should be the one best suited for assigning indirect costs to all cost objectives in accordance with the relative benefits received. The distribution bases commonly used are listed below. A restricted indirect cost rate must be calculated using a modified total direct cost base in accordance with 34 CFR 76.564-76.569.

Organizations preferring to apply the indirect cost rate to a salaries and wages base may use a conversion calculation. The conversion calculation allows a restricted indirect cost rate to be based on and applied to salaries and wages.

Commonly used distribution direct cost bases include the following:

a. Direct salaries and wages, including applicable fringe benefits

b. Direct salaries and wages, excluding fringe benefits

c. Total direct costs, excluding such items as equipment purchases, capital expenditures (e.g. alterations/renovations), charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs and the portion of each subaward in excess of $25,000, pass-through funds, or any other cost which may distort the distribution of indirect costs to benefiting activities.

This base is referred to as a modified total direct costs (MTDC) base.

The selection of an appropriate direct cost base should be based upon the commonality of costs to all cost objectives. The proposed allocation base(s) is subject to negotiation and approval.

Any modifications to the “approved” base require prior written approval. Failure to obtain such written approval may result in cost disallowances.

7. Compute the Indirect Cost Rate

Using the results of the steps listed above and the indirect cost proposal formats shown in the Appendices, compute the appropriate indirect cost rate. For programs requiring the use of a restricted indirect cost rate, the grantee must calculate the restricted rate in accordance with the guidance provided in Section IV.

8. Complete Indirect Cost Rate Proposal Documentation Checklist

The following information is recommended to be submitted with the indirect cost rate proposal:

a. Capitalization Policy (including the capitalization threshold)

b. Certificate of Indirect Costs

c. Certification of Lobbying Costs

d. Cost Policy Statement

e. Cover Letter

f. Depreciation Schedule

g. Federal Grants and Contracts List

h. Exclusions Schedule

i. Financial Statements (e.g. comprehensive annual financial report (CAFR)

Expenditures Report)

j. Organization Chart and Profile

k. Restricted Rate Adjustment Schedule

l. Salary and Fringe Benefits Schedule

m. Statement of Indirect Costs

n. Statement of Total Costs (including carry-forward schedule for fixed rate)

o. Statewide Cost Allocation Plan (if applicable)

p. Subawards and Subcontracts Schedule

q. Unused Leave Schedule

r. Trend Analysis

s. Website Links to Accounting Policy Manual, and Listing of Funds, Functions and

Object Codes

For detailed information about each of the required supporting documentation, please refer to the addendum “Appendices.”

C. Submission of Proposals

An indirect cost rate proposal, with supporting documentation, must be developed and (when required) submitted to ED on an annual basis. The proposal should be submitted no later than six months after the close of the NFE’s fiscal year, unless an exception is approved by ED.

The indirect cost rate proposal and supporting documentation should be submitted to the U.S.

Department of Education via electronic submission. Electronic submissions should be in a format compatible with the software used by the ICD and spreadsheets should be formatted for standard printing. Prior to providing the submission electronically, NFEs should contact the ICD for additional information regarding supported formats. The documents are submitted to the Director and Intake Processor or to the mailbox at IndirectCostGroup@ed.gov.

After the receipt of the proposal, the point of contact(s) listed in the proposal should receive an email from our office within ten business days confirming receipt of the proposal package. If you do not hear from our office within ten business days, please follow up by emailing IndirectCostGroup@ed.gov.

Non-federal entities with programs that require the use of restricted rate who are required to submit a restricted indirect cost rate proposal will submit their restricted indirect cost rate proposal to their cognizant federal agency.

D. Cost Allocation Plans

Cost allocation plans (CAPs) are generally submitted in lieu of an indirect cost rate proposal. A CAP may be necessary when substantial direct costs of programs consist of joint or common cost distributions and/or when the nature of the grantee’s activities is such that direct costs cannot be adequately determined with reasonable precision. In such situations, use of a CAP may be more suitable than an indirect cost rate. Non-federal entities considering a CAP are required to contact their cognizant agency before submission of the CAP methodology, to determine if CAP is acceptable for the circumstances.

mailto:IndirectCostGroup@ed.gov mailto:IndirectCostGroup@ed.gov

SECTION III

SECTION III: REIMBURSEMENT OF INDIRECT COSTS

A. Requirements for Reimbursement

The Uniform Guidance (2 CFR 200.403 “Factors affecting allowability of costs”) outlines the factors to consider in determining the allowability of costs. Except where otherwise authorized by statute, costs must meet the following general criteria in order to be allowable under Federal awards:

(a) Be necessary and reasonable for the performance of the Federal award and be allocable thereto under these principles.

(b) Conform to any limitations or exclusions set forth in these principles or in the Federal award as to types or amount of cost items.

(c) Be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the non-Federal entity.

(d) Be accorded consistent treatment. A cost may not be assigned to a Federal award as a direct cost if any other cost incurred for the same purpose in like circumstances has been allocated to the Federal award as an indirect cost.

(e) Be determined in accordance with generally accepted accounting principles (GAAP), except, for State and local governments and Indian tribes only, as otherwise provided for in this part.

(f) Not be included as a cost or used to meet cost sharing or matching requirements of any other federally-financed program in either the current or a prior period. See also §200.306 Cost sharing or matching paragraph (b).

(g) Be adequately documented. See also §§200.300 Statutory and national policy requirements through 200.309 Period of performance of this part.

B. Application of Indirect Cost Rates

The dollar amount of indirect costs allocable to a federal award will be determined by applying the approved indirect cost rate to the direct cost base, unless there are statutory or administrative limitations on the indirect costs (See Section III, C.). For purposes of illustrating the application of indirect cost rates, assume an ED grantee has approved indirect cost rates as follows:

Type From To Rate Base Applicable To

Fixed 7/1/17 06/30/18 17.0% MTDC Unrestricted

Fixed 7/1/17 06/30/18 9.0% MTDC Restricted

Distribution Base:

Modified total direct cost (MTDC) — Total direct costs, excluding equipment, capital expenditures, participant support costs, pass-through funds, and the portion of each subaward (subcontract or subgrant), above $25,000 (per award; per year).

Note: Other distribution bases include salaries and wages (SW), and salaries, wages, and fringe benefits (SWF). The indirect cost rate must always be applied to the approved base.

Applicable To:

Unrestricted rates apply to programs that do not require a restricted rate per 34 CFR 75.563 and 34 CFR 76.563.

Restricted rates apply to programs that require a restricted rate per 34 CFR 75.563 and 34

CFR 76.563.

From July 1, 2017, through Dec. 31, 2018, the grantee has incurred the following costs on ED grants:

No Data Unrestricted

Grants Restricted

Grants Totals Notes

Personnel $198,000 $267,300 $465,300 1 Other Direct 126,000 187,200 313,200 2 Equipment 26,100 15,300 41,400 3 Subcontracts 65,700 89,100 154,800 4 Pass-through 1,276,200 2,349,000 3,625,200 5 Totals $1,692,000 $2,907,900 $4,599,900 No Data

Notes:

1. Includes fringe benefits

2. Includes travel, supplies, equipment with a unit cost of less than $5,000

(considered supplies), and other costs that generate or benefit from the organization's indirect costs

3. Equipment purchases with unit costs of $5,000 or more

4. Subaward under "Unrestricted" grant total $65,700. The first $25,000 is included in the base. The remaining $40,700 is excluded from the base.

5. Subaward expenses under “Restricted” grant total $89,100. The first $25,000 for each of the two subcontracts is included in the base, totaling $49,300. The remaining $39,800 is excluded from the base.

Expenses Included in Base Subaward A $24,300 $24,300 Subaward B 64,800 25,000 Total $89,100 $49,300

6. Pass-through amounts represent funds provided to the NFE for specific subrecipients.

The amounts subject to the indirect cost rate are shown below. These are amounts to which the indirect cost rate is applied. The rate must be applied in a manner consistent with the calculation methodology. The following illustration reflects how indirect costs should be billed using the rates calculated on the previous page:

No data No data Unrestricted

Grants Total Costs

Unrestricted Grants

Subject to Indirect

Restricted Grants Total Costs

Restricted Grants

Subject to Indirect

Personnel $198,000 $198,000 $267,300 $267,300 Other Direct 126,000 126,000 187,200 187,200 Equipment 26,100 0 15,300 0 Subcontracts 65,700 25,000 89,100 49,300 Pass-through 1,276,200 0 2,349,000 0 Totals $1,692,000 $349,000 $2,907,900 $503,800 No data No data No data No data No data Indirect Cost Rate No data 17.00% No data 9.00% Indirect Cost Billings No data $59,330 No data $45,342

C. Indirect Cost Limitations

Reimbursement of indirect costs is subject to the availability of funds and statutory or administrative restrictions. Such restrictions include the supplement-not-supplant provision (restricted rates) and the 8 percent indirect cost rate limitation on training grants.

When the amount allowable under a limitation is less than the amount otherwise allowable as indirect costs per 2 CFR 200, the amount unrecoverable as indirect costs may not be shifted to another federal award. ED regulations further state that the unrecovered indirect costs cannot be used for matching or cost sharing purposes or charged as direct costs to other awards.

D. Administrative Cost Limitations

Some ED awards have statutory or regulatory limitations on the costs of administration. The costs of administration are those portions of reasonable, necessary, and allowable costs associated with the overall project management and administration. These costs can be both personnel and non-personnel, and both direct and indirect. Therefore, the limitation applies to the combined claims for indirect costs and direct administration costs. Generally, direct administration costs differ from indirect charges in that the latter are considered organization-wide costs.

Examples of direct administration are salaries, benefits, and other expenses of the recipient's staff who perform the following functions:

• managing overall program, program coordination, and office functions, including the salaries and related costs of the executive director, project director, and/or project evaluator

• preparing program plans, budgets schedules, and related amendments

• monitoring programs, projects, subrecipients, and related systems and processes

• developing systems and procedures, including management information systems, for assuring compliance with program requirements

• preparing reports and other documents related to the program requirements

• evaluating program results against stated objectives

• performing divisional-level administrative services, such as program-specific accounting, auditing, or legal activities

Examples of non-labor costs for direct administration include the following:

• costs for goods and services required for the administration of the program, including the rental or purchase of equipment, utilities, office supplies, and postage, and the rental and maintenance of office space

• travel costs incurred for official business in carrying out program management

The following illustration reflects how administrative cost limitations may affect an award. In the illustration, assume a 15 percent administrative cost limitation. The limitation is applied to the total award. The effect on the indirect cost reimbursement is shown below:

Grant/Contract Funds Available $1,000,000

Administrative Cost Limitation at 15%

$ 150,000

(1)

Direct Program Administrative Cost Incurred

$ 112,500

Allowable Indirect Cost Reimbursement $ 37,500 (2)

Total Administrative Cost Reimbursement

$ 150,000

Indirect Costs:

Modified Direct Total Costs (MTDC) Incurred on Grant/Contract (including costs for Direct Administration)

$ 450,000

Indirect Costs Calculation (Rate of 10% of MTDC) $ 45,000 (2)

a. Grantees must note the administrative cost limitation of $150,000 applies to both (combined) direct administration and indirect costs.

b. Although indirect costs are calculated at $45,000 as a result of applying the negotiated rate to MTDC, the indirect costs reimbursement is limited to $37,500.

The overall administrative cost limitation of $150,000 minus the $112,500 in direct program administrative costs leaves a balance of $37,500 for indirect cost reimbursement. The allowable amount of direct program administrative cost is determined first, and second, the allowable amount of indirect cost reimbursement is determined.

SECTION IV

SECTION IV: INDIRECT COST RATE METHODS

A. General Information

According to 2 CFR 200, there are certain methods of allocating indirect costs and determining indirect cost rates. The methods to be used depend upon the governmental unit’s number of major functions and how the functions benefit from the indirect costs. In this section, the Simplified Method, Direct Allocation Method, Multiple Allocation Base Method and special/restricted indirect cost rates are discussed.

B. Simplified Method

The Simplified Method is used when a grantee has only one major function encompassing a number of individual projects or activities and the level of federal awards is relatively small. It is applicable whenever a grantee's major functions benefit from its indirect costs to approximately the same degree. The allocation of indirect costs may be accomplished by (1) classifying the grantee total costs for the base period as either direct or indirect, and (2) dividing the total allowable indirect costs (net of applicable credits) by an equitable distribution base.

Both the direct costs and the indirect costs shall generally exclude distorting items and unallowable costs.