2 CFR 200, Subpart F, Appendix IV, Section B. identifies the following specific methods for allocating indirect costs.

• Simplified allocation

  2 CFR 200, Subpart F, Appendix IV, Section B.2.a., states that where an organization's major functions benefit from its indirect costs to approximately the same degree, the allocation of indirect costs may be accomplished by (i) separating the organization's total costs for the base period as either direct or indirect, and (ii) dividing the total allowable indirect costs (net of applicable credits) by an equitable distribution base. The result of this process is an indirect cost rate which is used to distribute indirect costs to individual Federal awards. The rate should be expressed as the percentage which the total amount of allowable indirect costs bears to the base selected.

  This method should also be used where an organization’s major functions benefit from its indirect costs to approximately the same degree, and may be used where the level of Federal awards to an organization is relatively small.

• Multiple allocation base

  2 CFR 200, Subpart F, Appendix IV, Section B.3.a, states that where an organization's indirect costs benefit its major functions in varying degrees, indirect costs must be accumulated into separate cost groupings. Each grouping must then be allocated individually to benefitting functions by means of a base which best measures the relative benefits.

   

  The indirect costs allocated to each function are then distributed to individual Federal awards and other activities included in that function by means of an indirect cost rate(s).

• Direct allocation method

  2 CFR 200, Subpart F, Appendix IV, Section B.4.a, states that some nonprofit organizations treat all costs as direct costs except general administration and general expenses. These organizations generally separate their costs into three basic categories: (i) General administration and general expenses, (ii) fundraising, and (iii) other direct functions (including projects performed under Federal awards).

  Joint costs, such as depreciation, rental costs, operation and maintenance of facilities, telephone expenses, and the like are prorated individually as direct costs to each category and to each Federal award or other activity using a base most appropriate to the particular cost being prorated.

  Specific instructions on the computation of indirect cost rates with the conditions on when to use each method are contained in 2 CFR 200, Subpart F, Appendix IV, Section B.

• Special indirect cost rates

  2 CFR 200, Subpart F, Appendix IV, Section B.5 also provides for the use of Special Indirect Cost Rates. In some instances, a single indirect cost rate for all activities of an organization or for each major function of the organization may not be appropriate, since it would not take into account those different factors which may substantially affect the indirect costs applicable to a particular segment of work.

The rate methodology selected by an organization needs to match a business’ operations. The allocation base should best represent the causal relationship between costs being allocated and the final cost objectives (awards, fundraising, lobbying, etc.).

The allocation base selected by the non-profit organization must be:

• reasonable and consistently applied to direct costs,
• supported by accurate and current data,
• appropriate to the particular cost being distributed, and
• one which results in an accurate measure of the benefits provided to each activity of the organization.

The Federal agency with the largest dollar value of Federal awards with an organization will be designated as the cognizant agency for indirect costs for the negotiation and approval of the indirect cost rates unless different arrangements are agreed to by the Federal agencies concerned. Once an agency is assigned cognizance for a particular nonprofit organization, the assignment will not be changed unless there is a shift in the dollar volume of the Federal awards to the organization for at least five years.

2 CFR 200, Subpart F, Appendix IV, Section C.2.g states that the result of each negotiation must be formalized in a written agreement between the cognizant agency for indirect costs and the nonprofit organization. The Negotiated Indirect Cost Rate Agreement shall specify: (a) the final rate(s), (b) the base(s) to which the rate(s) apply, and (c) the period(s) for which the rate(s) apply. The Negotiated Indirect Cost Rate Agreement shall not change any monetary ceiling, obligation, or specific cost allowance or disallowance provided for in each grant or contract between the parties.

2 CFR 200, Subpart E, Section 200.414 (c) (1) states that the negotiated rates must be accepted by all Federal awarding agencies. Appendix I of this Guide contains a sample of the NICRA used by USAID.

Failure by the parties to agree on any final rate(s) under this provision is considered a dispute within the meaning of the Standard Provision, “Disputes.” If a dispute arises in a negotiation of an indirect cost rate between the cognizant agency for indirect costs and the nonprofit organization, the dispute must be resolved in accordance with the appeals procedures of the cognizant agency for indirect costs. A sample is as follows:

The Agreement Officer (AO) decides any dispute between the organization as defined in 2 CFR 200.86, and USAID arising under an assistance award. The AO’s decision is final unless the recipient appeals the decision.

As outlined in 2 CFR 700.15, if the organization disagrees with the AO’s final decision, the organization may appeal the AO’s decision to the USAID’s Deputy Assistant Administrator, Bureau for Management, or designee. Send the appeal to the Deputy Assistant Administrator, Bureau for Management, U.S. Agency for International Development, Management Bureau, 1300 Pennsylvania Ave, NW, Washington, D.C. 20523. A copy of the appeal must be concurrently furnished to the AO. No hearing will be provided.

The appeal must be in writing and must be postmarked within thirty (30) calendar days of receipt of the AO’s final decision. The organization must include all relevant and material evidence to support its position and must provide a copy of the appeal to the AO.

Immediately upon receiving an appeal, the Deputy Assistant Administrator, Bureau for Management, or designee, and the AO must forward the appeal to the Bureau for Management, Office of Acquisition and Assistance, Compliance Division (M/OAA/C) at compliance@usaid.gov. M/OAA/C will:

• consult with other divisions within M/OAA as needed before preparing a recommendation for the deciding official; and
• coordinate a review by General Counsel

Within sixty (60) calendar days of receiving the appeal, M/OAA/C must notify the recipient of the status (i.e., denied, approved, or more time is needed). The AO must place a copy of the final decision in the award files.

A decision under this provision by the Deputy Assistant Administrator, Bureau for Management is final.

Grants providing for ceilings as to the indirect cost rates or amounts will be subject to the ceilings stipulated in the grants or other agreements. The ceiling indirect cost rates or the indirect cost rates cited in grants or agreements, whichever is lower, will be used to determine the maximum allowable indirect costs on the grants or agreements.

Be aware that the NICRA does not change any monetary ceiling, obligation or specific cost allowance or disallowance provided for in each award between the parties. Therefore, care needs to be taken to ensure that amounts claimed do not exceed award limitations or indirect cost rate ceilings.

2 CFR 200, Subpart D, Section 200.333(f)(1) and (2), “Retention requirement for records” states the following:

(f) Indirect cost rate proposals and cost allocations plans. This paragraph applies to the following types of documents and their supporting records: indirect cost rate computations or proposals, cost allocation plans, and any similar accounting computations of the rate at which a particular group of costs is chargeable (such as computer usage chargeback rates or composite fringe benefit rates).

1. If submitted for negotiation. If the proposal, plan, or other computation is required to be submitted to the Federal Government (or to the pass-through entity) to form the basis for negotiation of the rate, then the 3-year retention period for its supporting records starts from the date of such submission.
2. If not submitted for negotiation. If the proposal, plan, or other computation is not required to be submitted to the Federal Government (or to the pass-through entity) for negotiation purposes, then the 3-year retention period for the proposal, plan, or computation and its supporting records starts from the end of the fiscal year (or other accounting period) covered by the proposal, plan, or other computation.

If any litigation, claim or audit is started before the expiration of the 3-year period, the records shall be retained until all litigations, claims or audit findings involving the records have been resolved.

Prior to the preparation of an indirect cost rate proposal and supporting documentation, the cost principles established by 2 CFR 200, Subpart E, Cost Principles, should be thoroughly reviewed. If indirect costs are allowed under the terms of the award, the entity will then be ready to prepare an indirect cost rate proposal beginning with the following steps:

• Organization Review: If one does not already exist, prepare a formal organizational chart(s), or a rough draft version, and provide any information or material explaining the various services and/or functions for each unit. Determine which units are indirect (administrative) functions of the organization. Determine the services that are allowable and allocable to Federal grants and contracts per the applicable cost principles.
• Review federal and non-federal funding: Review the federal and non-federal expenditures to determine the amount associated with federal programs being funded.
• Review the Accounting Structure: Obtain a chart of accounts, or some other list of accounts for your organization, which identifies the specific direct and indirect accounts.
• Prepare a Cost Policy Statement: Develop a written policy that outlines the costs considered as direct, the costs considered to be indirect, and the rationale to support those costs. Please refer to sample Cost Policy Statement included in Section 3.G of this guide.
• Determine Indirect Cost Rate Structure: Determine which method is best for the organization, i.e., direct cost allocation or simplified, and whether special indirect cost rates are required, i.e. on-site, off-site, fringe benefit rate for full-time vs. part-time. In selecting the appropriate method, the organization should consider the following:
  

  a. Organizational structure
  b. Level of Federal fundingvalue= c. Reports generated from their accounting system
  d. Availability of data on square footage, number of transactions, employees, purchase orders, etc.
  e. Additional effort and cost required to achieve a greater degree of accuracy.

• Reconcile to Financial Statements: Reconcile the indirect cost rate proposal to the audited financial statements.
• Submission and Review of Rate Proposal: Submit the indirect cost proposal to M/OAA/CAS/OCC at the e-mail referenced in section 1.G. of this guide. The Contract Specialist within M/OAA/CAS/OCC will follow up, after reviewing the indirect cost proposal, with questions, and/or concerns – and may request additional documentation, and/or narrative responses, in support of the indirect cost proposal. The Contract Specialist will document any meeting and/or telephone conversations, and e-mails during the review process. The entity provides any changes, and submits any revised and/or supporting documentation as requested by M/OAA/CAS/OCC. Once the review is completed, USAID will then issue and provide the Negotiated Indirect Cost Rate Agreement (NICRA).
• Implementation: An organization must utilize the NICRA approved provisional indirect cost rates when preparing proposals once a NICRA is signed by both parties. The final indirect cost rates negotiated in the NICRA are used for administratively closing federal awards and adjusting billings for prior periods. Maintain documentation for audit purposes – refer to Section 1.P entitled, “Retention of Records,” of the guide.

The rate methodology selected by an organization needs to match a business’ operations. The allocation base should best represent the causal relationship between costs being allocated and the final cost objectives (awards, fundraising, lobbying, etc.).

The following allocation bases are acceptable examples for use when indirect costs are allocated to benefiting cost objectives by means of an indirect cost rate.

• Fringe benefits rate. This indirect cost rate allocates employee benefits such as payroll taxes, vacation, sick, retirement, health care, bonus, deferred compensation, insurance, etc.).

  The following are samples of fringe benefits bases of application:

  ✓ Total direct and indirect labor dollars excluding leave (vacation, sick, and holidays)

  ✓ Total direct and indirect labor dollars including leave (vacation, sick, and holidays)
   

• Overhead rate. This indirect cost rate allocates expenses related to the management or supervision of activities or cost that benefit more than one final cost objective (e.g., division middle management, supervisors, project leadership benefiting multiple awards, site rent, etc.). Typically these are costs that would not be incurred if it was not for the awarded contract or grant.

  The following are samples of overhead bases of application:

  ✓ Direct salaries and wages including (or excluding) all fringe benefits.

  ✓ Direct salaries and wages including vacation, holiday, sick pay, and other paid absences excluding all other fringe benefits.
   

• General & Administrative (G&A) rate. This indirect cost rate allocates expenses associated with the management and administration costs that benefit the organization as a whole (e.g., accounting department, chief executive officer).

  The following are samples of G&A bases of application:

  Simplified Allocation Base:
  The simplified allocation base includes all direct costs (labor, travel, ODC, subaward, etc.) fundraising, and exclude G&A expenses.

  Modified Total Direct Cost (MTDC):
  Modified Total Direct Cost (MTDC) excludes equipment, capital expenditures, participant support costs and the portion of each subaward in excess of $25,000.

  Other items may only be excluded when necessary to avoid a serious inequity in the distribution of indirect costs, and with the approval of the cognizant agency for indirect costs.

The proposed allocation base(s) is subject to negotiation and approval by USAID. The grantee is required to provide written notification to the indirect cost negotiator prior to implementing any changes which could affect the applicability of the approved rates.

Ensure All Appropriate Costs Are Included in the Base of Allocation(s)

2 CFR 200, Subpart E, Section 200.413 (f), states that the costs of activities performed by the non-Federal entity primarily as a service to members, clients, or the general public when significant and necessary to the non-Federal entity's mission must be treated as direct costs whether or not allowable, and be allocated an equitable share of indirect (F&A) costs. Some examples of these types of activities include:

• Maintenance of membership rolls, subscriptions, publications, and related functions,
• Providing services and information to members, legislative or administrative bodies, or the public,
• Promotion, lobbying, and other forms of public relations,
• Conferences except those held to conduct the general administration of the non-Federal entity,
• Maintenance, protection, and investment of special funds not used in operation of the non-Federal entity. See also 2 CFR 200, Subpart E, Section 200.442, Fundraising and investment management costs, and
• Administration of group benefits on behalf of members or clients, including life and hospital insurance, annuity or retirement plans, and financial aid.

The checklist below addresses the documentation to provide and steps needed when an organization is seeking a NICRA for the first time. This checklist is also included in Appendix III, “Indirect Cost Rate Proposal Checklist for First Time NICRA,” and includes the basic instructions to complete and submit an indirect cost rate proposal.

Indirect Cost Rate Proposal (ICR) Checklist for First Time NICRA

1. Contact person information (preferably the person who prepared the ICR):
   • Entity name and mailing address
   • Employer identification number (EIN)
   • Point of contact name and position title
   • Email address
   • Office telephone number
   • Entity’s internet website address, if any
2. For each type of rate proposed provide a detailed rate calculation to include the pool of expenses, the base of application, and all unallowable costs.
3. Provide a comparative analysis of indirect cost pools and bases by detailed account to prior fiscal year actual costs.
4. Entity’s written policy for allocating and identifying direct and indirect costs, i.e. cost allocation methodology.
5. Written policies and procedures for screening unallowable costs.
6. Description of the allocation base used in each rate calculation.
7. Prior year audited financial statements including any affiliated organizations, and the single audit in accordance with 2 CFR 200, Subpart F, Section 200.512(a)(1).  For small businesses, supporting documentation can include “reviewed” financial statements with the associated indirect cost calculations.  If a small business has clearly established indirect cost rates, pools and bases that an external CPA firm has validated, this should be sufficient for the recognition of indirect cost rates under the award.  The statements must be reconciled to the indirect cost rate(s) calculation.  Include the level of transaction testing performed by the independent auditor on direct and indirect costs claimed.
8. Reconciliation schedule for each indirect cost pool and allocation base showing each reclassification and adjustment to the financial statements to arrive at the cost pools and allocation bases. Each reclassification and adjustment must be explained in notes to the reconciliation schedule.
9. Copy of IRS Form 990.
10. Indicate which, if any, of the following the organization used to establish executive compensation, and provide the following supporting documentation:
    • Compensation Committee
    • Independent compensation consultant
    • Written employment contract
    • Compensation survey or study
    • Approval by the board or compensation committee

    Provide the amount of executive compensation paid to the top 5 executives.

11. Description of accounting system.
12. Breakdown of indirect salaries by position title, amount and indirect percentage.
13. B reakdown of fringe benefits.
14. Description of non-profit's timekeeping system and a copy of a completed time sheet, if applicable, when an employee works on multiple activities or cost objectives.
15. Treatment of paid absences and signed statement of treatment of paid absences.
16. A schedule that summarizes total cost by line item expenditure, which should include , but not be limited to:
    • Total expenditures (reconcilable to the audit if using actual numbers)
    • Exclusion with footnote explanation
    • Direct and indirect costs
    • Indirect cost rate calculation and federal percentage
17. A list of subawards under your prime awards (required for Modified Total Direct Cost (MTDC) base only). Please provide a schedule showing the amount excluded under each subaward.
18. Schedule of all awards grouped by funding agency with majority federal funding listed on top.
19. Did your organization receive more than $10 million in federal funding of direct costs in the fiscal year(s) in which you are requesting an indirect cost rate?
     

    ______ Yes. 2 CFR 200, Subpart F, Appendix IV, Section B.2.e. states “…a breakout of the indirect cost component into two broad categories, Facilities and Administration as defined in subparagraph A.3 of this appendix is required. The rate in each case must be stated as a percentage which the amount of the particular indirect category (i.e., Facilities or Administration) is of the distribution base identified with that category”.

    ______ No. The breakdown is not required.

20. Organization chart.
21. Signed certificate of indirect costs.
22. Signed lobbying certificate.
23. A copy of the IRS letter granting nonprofit status.
24. A copy of the organization’s severance policy.
25. A copy of the organization’s bonus policy.
26. Submit ICR to NON- PROFIT-ICR-PROPOSAL@USAID.GOV

A. Example - Personnel Cost Worksheet

Leave absence such as vacation, holiday, sick leave, and other paid absences were included in salaries.

Note: Salaries and fringes included in this exhibit are for illustrative purposes only.

Labor is the most significant cost incurred by an organization.  Therefore, the organization should have internal controls in place regarding labor costs incurred that are evident, well defined, regularly maintained and updated as necessary, and verify effectiveness.

Note that 2 CFR 200, Subpart E, Section 430(i)(1), Standards for Documentation of Personnel Expenses, indicates that charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records, among other conditions disclosed in this section, must be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated; and are incorporated into the official records of the non-Federal entity.  They should also support the distribution of the employee's salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity.

Also, 2 CFR 200, Subpart E, Section 430(i)(3) states that in accordance with Department of Labor regulations implementing the Fair Labor Standards Act (FLSA) (29 CFR part 516), charges for the salaries and wages of nonexempt employees, in addition to the supporting documentation described in this section, must also be supported by records indicating the total number of hours worked each day.

Download Example - Personnel Cost Worksheet [PDF 52 KB]