Part II: Cost Allocation and Indirect Cost Rates

The Office of Management and Budget (“OMB”) and the Council on Financial Assistance Reform (“COFAR”) released additional clarifications to the Uniform Administrative Requirements, Costs Principles, and Audit Requirements for Federal Awards (“Uniform Guidance”) on September 9, 2015 in the form of Frequently Asked Questions (“FAQs”).

This post focuses on the FAQs pertaining to negotiated indirect cost rates and the ten percent of modified total direct costs (MTDC) de minimis rate. For more on the FAQ related to the extension of the procurement standards grace period, read part I of our blog series.

Federally negotiated indirect costs rates and the de minimis rate help address one of the most difficult challenges many federal grant recipients face: How do you ensure that shared costs, such as human resources or facility costs, are properly allocated among different funding sources? Even if you only receive funds from different programs under a single federal agency, cost allocation can be tricky. Many federal grantees receive funds from more than one federal agency as well as from state and local funding sources, which makes the cost allocation challenge seem impossible. Applying one rate to all funding sources provides a practical solution to that challenge.

In the past, many federal agencies and pass-through entities complicated the use of negotiated indirect costs rates by refusing to honor the grantee’s federally negotiated rates. The Uniform Guidance helped eliminate some of that confusion by requiring all federal agencies to honor federally negotiated rates. That means that when a federal grantee has an indirect cost rate, the federal agency agrees to an appropriate rate on behalf of the entire federal government and for any pass-through entities under a federal award. Of course, there are exceptions. One exception, according to the FAQ, is when the recipient or subrecipient that has a federally negotiated indirect cost rate “voluntarily chooses to waive indirect costs or charge less than the full indirect cost rate.” In our view, based on the respective negotiating positions of federal agencies and pass-through entities, it will be very difficult to discern whether the recipient/subrecipient is truly voluntarily relinquishing its rights to its negotiated indirect cost rate.

Even without the exceptions, one drawback to negotiating an indirect cost rate is that the process is often costly and time-consuming. The Uniform Guidance recognizes this drawback and gives grantees the option to take advantage of the ten percent de minimis rate. This option prompted questions on how to calculate MTDC, especially with respect to limitations on costs associated with subawards. The FAQs clarify that when determining MTDC, grantees may take into account an additional $25,000 for each subaward negotiation or renewal.

Just in case you are thinking: “We only have a five percent indirect cost rate, so we should just use the ten percent de minimis rate.” – think again. The Uniform Guidance makes clear that non-federal entities may not take advantage of the ten percent de minimis rate if they already have federally negotiated rates. In addition, the FAQs further clarify that even if you have a negotiated indirect cost rate that is no longer in effect, it cannot use the ten percent de minimis rate.

For more information about the Uniform Guidance, including any clarification from the COFAR,  visit our trainings page for a full list of FTLF trainings and webinars.