U.S. Department of Justice, Office of Justice Programs

Financial Guide 2006 - Part III - Chapter 17: Indirect Costs

Highlights of Chapter

  • Approved Plan Available
  • No Approved Plan
  • Establishment of Indirect Cost Rates
  • Distribution Bases
  • Cost Allocation Plans-Central Support Services
  • Lobbying Costs and the Indirect Cost Pool

Approving Rates for Subrecipients

Indirect costs are costs of an organization that are not readily assignable to a particular project, but are necessary to the operation of the organization and the performance of the project. The cost of operating and maintaining facilities, depreciation, and administrative salaries are examples of the types of costs that are usually treated as indirect.

Approved Plan Available

  1. The awarding agency may accept any current indirect cost rate or allocation plan previously approved for a recipient by any Federal awarding agency on the basis of allocation methods substantially in accord with those set forth in the applicable cost circulars.
  2. Where the approved final indirect cost rate is lower than the actual indirect cost rate incurred, recipients may not charge expenses included in overhead pools (e.g., accounting services, legal services, building occupancy and maintenance, etc.) as direct costs.
  3. Organizations with an approved indirect cost rate, utilizing total direct costs as the base, usually exclude contracts under awards or corporation agreements from any overhead recovery. The negotiation agreement will stipulate that major subcontracts are excluded from the base for overhead recovery. The term subcontract means any contract awarded under the award or corporation agreement.

No Approved Plan

If a recipient does not have an approved Federal indirect cost rate, funds budgeted for indirect costs will not be recoverable until a rate is approved. A special condition will be added to the award prohibiting drawdown for indirect cost reimbursement until an indirect cost rate has been approved and a GAN has been issued retiring the special condition.

Exception: If OMB has not assigned a Federal agency with cognizance for a local jurisdiction, then the unit of government is not required to submit its indirect cost proposal, unless the new cognizant agency (based on preponderance of Federal dollars) requires a copy of the proposal.

Establishment of Indirect Cost Rates

  1. In order to be reimbursed for indirect costs, a recipient must first establish an appropriate indirect cost rate. To do this, the recipient must prepare an indirect cost rate proposal and submit it to the cognizant Federal agency. The cognizant Federal agency is generally determined based on the preponderance of Federal dollars received by the recipient. See instructions on how to negotiate an indirect cost rate.
  2. Local units of government need only submit their cost allocation plans and indirect cost proposals, if specifically requested by their cognizant Federal agency assigned by OMB.
  3. The proposal must be submitted in a timely manner (within 6 months after the end of the fiscal year) to assure recovery of the full amount of allowable indirect costs. The proposal must be developed in accordance with principles and procedures appropriate to the type of institution involved.
  4. To support the indirect cost proposal, Federal recipients are responsible for ensuring that independent audits of their organizations are conducted in accordance with existing Federal auditing and reporting standards set forth in OMB Circular A-133. This audit report must be submitted to the cognizant agency to support the indirect cost proposal. After negotiations, the cognizant agency will establish either a predetermined, provisional, final, or fixed-with-carry-forward indirect cost rate.
  5. A signed certification from the grantee organization requesting an indirect cost rate must accompany the indirect cost allocation plan. This organization must certify that the indirect cost allocation plan only includes allowable costs.
  6. Copies of brochures of indirect cost rates that may describe the procedures involved in the computation may be obtained from the U.S. Superintendent of Documents, U.S. Government Printing Office, Mail Stop: SSOP, Washington, DC 20402-9328.
    • OASC-1 (Rev)-A Guide for Colleges and Universities, Cost Principles and Procedures for Establishing Indirect Cost Rates for Research Awards with the Department of Health, Education and Welfare.
    • OASMB-5 (Rev)-A Guide for Non-Profit Institutions, Cost Principles and Procedures for Establishing Indirect Cost and Other Rates for Awards with the Department of Health, Education, and Welfare.
    • ASMB C-10-A Guide for State, Local, and Indian Tribal Governments, Cost Principles and Procedures for Establishing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government.

Distribution Bases

Irrespective of the allocation method used by the organization the following three distribution bases will only be allowed by OJP:

  1. Modified Total Direct Cost (MTDC). This base includes all direct costs incurred by the organization with the exception of distorting items such as equipment, capital expenditure, cash flow funds, and major subcontracts or subgrants over $25,000.
  2. Direct Salaries and Wages. This base includes only the direct salaries and wages incurred by the organization.
  3. Direct Salaries and Wages plus Fringe Benefits. This base includes only the direct salary and wages and the direct fringe benefits incurred by the organization.

Cost Allocation Plans-Central Support Services

State agencies and local units of government may not charge to an award, the cost of central support services supplied by the State or local units of government except pursuant to a cost allocation plan approved by the cognizant Federal agency. The rate which is to be applied may be on a fixed, predetermined, or fixed-with-carry-forward provision.

Lobbying Costs and the Indirect Cost Pool

When an organization seeks reimbursement for indirect costs, total lobbying costs shall be separately identified in the indirect cost rate proposal and thereafter treated as other unallowable activity costs in accordance with the above procedures and Attachment A of OMB Circular A-122.

  1. Organizations shall submit, as part of their annual indirect cost rate proposal, a certification that the requirements and standards have been complied with.
  2. Organizations shall maintain adequate records to demonstrate that the determination of costs as being allowable or unallowable pursuant to Attachment B of OMB Circular A-122 complies with the requirements of the Circular.
  3. Time logs, calendars, or similar records shall not be required to be created for purposes of complying with this section during any particular calendar month when:
    1. When conditions (a) and (b) above are met, organizations are not required to establish records to support the allowability of claimed costs in addition to records already required or maintained. Also, when conditions (a) and (b) above are met, the absence of time logs, calendars, or similar records will not serve as a basis for disallowing costs by contesting estimates of lobbying time spent by employees during a calendar month
    2. The employee engages in lobbying, as defined above
    3. Twenty-five percent or less of the employee's compensated hours of employment during that calendar month constitutes lobbying as defined above
    4. Within the preceding 5-year period, the organization has not materially misstated allowable or unallowable costs of any nature, including legislative lobbying costs.

Approving Rates for Subrecipients

This is the responsibility of the direct recipient. The Federal awarding agency will not approve indirect cost rates beyond the direct recipient level.

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