Recovering Indirect Costs from Federal Grants Under Uniform GuidanceNovember 13, 2015
Reed W. Risteen, CPA
In previous articles, we have reviewed the major provisions of OMB’s Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance, or UG) and implementation of grantee requirements.
In this article, we’ll take a look at recovering indirect costs from federal grants under UG. One of the common issues our grant-driven clients face is ensuring they are recovering the maximum amount of indirect costs from their federal grants.
According to Section 200.413 of UG, direct costs are defined as “those costs that can be identified specifically with a particular cost objective, such as a federal award, or other internally or externally funded activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy”. Direct costs include items that pertain 100% to a grant and can also include allocated items, such as the allocation of program rent between two programs operating in the same program site.
Indirect costs would be all other allowable costs that are not direct.
Methods of Charging Indirect Costs
Methods of charging indirect costs in the past have included the following:
- Direct charging of indirect costs
- Use of a federally approved indirect cost rate
When federal funds are passed through the state government or another party, we have seen grant budgets break down indirect costs into specific categories such as administrative salaries, telephone, etc. which would require that the grantee charge the indirect costs on that basis. This essentially represents the allocation of individual expense items within indirect costs.
Charging Indirect Costs under Uniform Guidance
The Uniform Guidance only allows for indirect costs to be charged using either:
- The allowed de minimis 10% indirect cost rate based on modified total costs
- A federally approved indirect cost rate
Use of De Minimis Rate
If a grantee previously did not have a negotiated indirect cost rate, and total direct federal awards are less than $10,000,000, it can charge indirect costs using the new de minimis 10% rate based on modified total direct costs without approval from the feds. Direct cost modifications (reductions to total direct costs before applying the 10%) include:
- Subrecipient expenditures in excess of $25,000 per subrecipient
- Capital expenditures
- Charges for patient care
- Rental costs
- Tuition remission
- Scholarships and fellowships
- Participant support costs
The great thing about using the de minimis rate is that it can easily be applied to an individual grant without the need for any agency wide expense information. The following is an example of using the de minimis rate for a grant:
Note that $7,200 is allowable as indirect costs, regardless of what actual indirect costs are. If actual indirect costs are less, that represents a “profit” on the grant. Similarly, if actual indirect costs are more than the $7,200, the grantee would incur a loss on the grant. Unlike some federally negotiated rates, this rate is not subject to ‘true-up” or other subsequent adjustment.
While most grantees’ indirect costs are probably more than 10% of direct costs, the trade-off in using the de minimis rate is potential lost grant revenue to the extent that actual costs exceed the 10%. However, this may also be the case with indirect rates negotiated with the feds. The term “negotiated” means the rate calculated by the grantee in their indirect cost submission is typically negotiated down to a lower percentage by the feds.
Use of a Negotiated Rate
Grantees that already have an approved federal indirect cost rate are not eligible to use the de minimis rate, but they can request an extension of the rate for an additional four years. However, the extension is not automatic and must be approved by the cognizant federal agency. It also appears, although not entirely clear in UG, that grantees that have over $10,000,000 in direct federal awards are not eligible for the de minimis rate either. Continuing prior guidance, entities with over $10,000,000 in direct federal awards are required to submit an indirect rate proposal in which indirect costs are placed in two pools―facilities and administration.
We have also seen clients submit cost allocation plans to the feds that did not follow the standard indirect cost submission guidelines, and were approved.
Grantees passing federal funds through to other agencies are generally required to reimburse indirect costs using the subrecipient’s federally approved indirect rate (if they have one) or using the 10% deminimis rate. This should mean that state and other passthrough agencies are budgeting indirect costs as a lump sum as computed by the applicable indirect cost rate rather than budgeting indirect costs by line item, as discussed in the beginning of this article.
We have also heard that some states have statutory limits on admin costs that could limit indirect cost recovery to less than the de minimis rate, which would seem to violate UG.
Federal grantees may also receive state grants, and those grants may be subject to state cost standards that may not be compatible with the federal indirect rates. That situation could lead to the grantee using the de minimis rate for federal grants and direct charging or cost pools for state grants.
Use of the de minimis rate seems to be a very simple solution to charging federal indirect costs, but how it plays out in practice, particularly with federal passthrough agencies involved, should be interesting to see.
Please contact Reed Risten, email@example.com with any questions.