Indirect Costs

1. Indirect Costs Grants – Brown Bag Lunch Series April 2014 By: Tracy Morkunas, CPA Controller’s Office

2. What is a Direct Cost? • A direct cost is an expense that is directly related to your program • Program Coordinator’s salary & fringe • Bus rental for students under the grant program • Anything directly identifiable to your program

3. What is an Indirect Cost? OMB Circular A-21 refers to Indirect as “Facilities & Administration” costs (F&A) • Some define it as: • any costs shared between multiple programs for which a definitive amount can not be directly attributed to a specific grant • Basically, it’s overhead

4. Indirect Cost Examples • Depreciation & Use Allowances • Building & Equipment improvements • Operation & Maintenance expenses • Utilities, janitors, security, etc. • General Administration expenses • Accounting, Payroll, Purchasing, Audit, etc. • This presentation!

5. What is an Indirect Cost Rate? • Dept. of Education defines it as: • “…a mechanism for determining…what proportions of Departmental/organization administration costs each program should bear. An indirect cost rate represents the ratio between the total indirect costs and benefiting direct costs, after excluding and or reclassifying unallowable costs, and extraordinary or distorting expenditures.” • It’s a percentage of direct costs

6. Indirect Cost Pool vs. Allocation Base Indirect cost pool Indirect allocation base The organization’s indirect costs (in aggregate) The total expenditures that created the indirect costs The pool & base can vary, i.e. could be all indirect costs vs. total expenses, or could be all indirect payroll costs vs. total payroll costs.

7. Indirect Cost Rate Indirect Cost Pool Indirect Cost Allocation Base

8. Obtaining an Indirect Rate • Organizations can apply for a rate • The cognizant Federal agency approves indirect cost rates • CCRI engages an external vendor to assist us in calculating the indirect costs • They determine what is the best allocation base to use given the structure of our expenditures • Once they calculate the rate, it goes to the Fed’s for approval

9. How much is it, really? • CCRI engaged an outside firm to determine the best indirect cost base and rate • CCRI’s Federally approved indirect rate (thru FY14) is based upon total salaries • For On-campus activities: 65% of Salaries only • For Off-campus activities: 25% of Salaries only

10. Why are there different rates? • Although CCRI has obtained a Federally approved indirect rate, most grants have an indirect cost limitation • Every contract is allowed to specify a ceiling rate and cost basis. Here’s some examples: • 8% of total expenditures excluding equipment • 20% of Salary & Fringe • 0% - indirect is not allowed! • Each contract can make a more restrictive rate, but cannot increase the rate above our actual costs

11. What if the Rate Changes? • Periodically, CCRI must obtain a new rate • We’re in that process now • The vendor recalculates what the actual indirect rate/cost was for the previous time period and adjusts the new rate accordingly • If the rate changes during a grant term, we USUALLY can’t increase the rate charged without funding source approval

12. How is it Charged to my Grant? • Depending on the grant, Accounting charges indirect costs to your grant on either a monthly or quarterly basis • Typically done when we bill to the Funding Source • Accounting sets up rules in Banner so that Banner automatically calculates it

13. Who gets my indirect dollars? • The dollars go to the College’s general indirect income line • This helps the College to fund the enormous amount of indirect costs related to all grants Q: Why can’t I decide how my grant’s indirect dollars are spent? A: We don’t have enough to cover all grant’s indirect expenditures!

14. Penalties for Non-Compliance • If an indirect cost is expressly unallowable under a Federal grant: • Penalty equals the amount of the disallowance plus any interest paid (if any) and could be doubled under certain circumstances • There may also be other administrative, civil, & criminal penalties • The cognizant contracting officer decides if the penalties are to be assessed or waived & if a criminal investigation is necessary

15. What do I need to do? • The Grant Director must ensure that all expenditures are hitting the correct account lines in Banner • Review Banner often! • Accounting applies indirect based upon what is in Banner • If expenses are misclassified, Accounting won’t know they’re applying indirect incorrectly

16. Misapplication Example • Assume your grant has an 8% indirect rate applied to all expenses EXCEPT capital (equipment) • If your Admin Assistant enters a requisition for $20,000 piece of equipment on the Education Supplies account (714221) instead of Equipment, Banner will apply the indirect rate on the equipment • Your grant will be OVERcharged by $1,600

17. Summary • Indirect costs are basically overhead costs that can’t be quickly identified • There’s lots of indirect costs on all grants whether or not they’re charged • CCRI has a Federally approved rate • Grant Directors need to make sure expenses hit the right lines so that indirect isn’t incorrectly applied