Review of the COFAR’s Recent Webcast on Cost Allocation, Indirect Rates and De Minimis Rates
The Council of Financial Assistance Reform (COFAR) has published its third edition of its webcast series. It is in the form of several brief panel discussions on a number of topics, and can be found at: https://cfo.gov/2016/07/05/july-2016-uniform-guidance-promising-practices-in-implementation/.
If you are the Chief Financial Officer or Controller in your organization, I recommend viewing Panel 5: Indirect Cost Rates. The discussion is only about fifteen (15) minutes and is well worth the time for those who work in this area. The panel members cover a number of key points that, while not new requirements or new interpretations of the applicable regulations, seem often to be confused by agencies, passthrough entities (including states), and grant recipients. I would paraphrase the highlights of their discussion as follows:
- Nonprofits are often under-funded with respect to costs they characterize as indirect, in part as a result of passthrough entities seeking to limit subrecipient recovery of indirects. Passthrough entities should remember that goal in negotiation of indirect cost rates is about getting the rate right – fair distribution of indirect costs – not about cost reduction for the passthrough entity.
- Passthrough entities should not place caps on indirect costs without any statutory authority to do so.
- Indirect costs are often incorrectly equated to administrative costs – they are not the same thing.
- The de minimis rate (available to entities that have never before had a negotiated rate) should not be asserted by passthrough entities as a de facto rate. The choice to take the de minimis rate or negotiate a rate is the subrecipient’s, not the passthrough’s.
- If an entity has a federally-recognized negotiated rate, passthrough entities must accept it.
- The key step for any entity desiring to establish an indirect cost rate, whether negotiated or the de minimis rate, is first identifying its costs and reasonably categorizing those costs as direct or indirect. From there, either electing the de minimis rate or negotiating a rate becomes a much less daunting endeavor.
If you are interested in further reading, the panel also references a 2010 Government Accountability Office report that addresses the challenges faced by nonprofits in recovering their actual indirect costs from passthrough entities. Though not specifically named by the panel, that report is almost certainly GAO-10-477, Nonprofit Sector: Treatment and Reimbursement of Indirect Costs Vary among Grants, and Depend Significantly on Federal, State, and Local Government Practices, available at: http://www.gao.gov/products/GAO-10-477. It is also an interesting read for those who operate in this area.
For further information or questions on cost allocation or indirect costs, including federally-negotiated rates or the de minimis rate, please contact an attorney at Feldesman Tucker Leifer Fidell LLP at (202) 466-8960.