recovering overhead costs in government contracts: new opportunities november 5, 2015 co-sponsored...

Recovering Overhead Costs inGovernment Contracts:

New OpportunitiesNovember 5, 2015

Co-sponsored by:• California Community Foundation• Center for Nonprofit Management• First5LA

2015 CalNonprofits Annual Policy Convention

• www.calnonprofits.org/overhead• Skills: workshops and webinars• Collaborative discussions with regional

grantmaking associations: changing the norms

• Advocacy with government: enforcing the rules, improving the rules

• 4 ways to recover indirect costs from government

• 1 big new opportunity from OMB• Choosing the strategy that’s best

for you

AGENDA

Who is in our group today?

Why we need to get the full costs of programs reimbursed

Why we need to get the full costs of programs reimbursed

Unfair to nonprofitproviders

Drives nonprofits out of business damaging the safety net

Repairing the roof is a cost of programs

How do your current contracts treatindirect costs?

Four Ways toRecover Indirect Costs

1. 10% minimum rate (OMB)

2. Direct cost charging method

3. Negotiate indirect rate with pass-through entities

4. Obtain federal Negotiated Indirect Cost Rate (NICR)

Option 1: the new 10% rulefrom OMB

OLD• OMB Circulars A-110 and A-

122 for nonprofits• OMB Circulars A - 87 and A -

102 for governments• OMB Circulars A - 21 and A -

110 for universities• Circular A-133 for everyone

NEW• 2CFR 200 Uniform

Guidance• Replaces old circulars• In effect for:

• Awards that begin after 12/26/14 and

• Audits of fiscal years beginning after 12/26/14

For FAQs search COFAROMB Uniform Guidance

• Costs which benefit multiple programs and functions

• Includes but not limited to Administrative costs

• Impossible to track the exact benefit to each program or function – benefit must be estimated

What are indirect costs, again?

Agency-wideadministrative costs

• Board support• Strategy development• Financial management• HR management• IT management

Forbidden cost allocation method(fed rules)

• May not allocate shared costs based on funding

• All cost centers – including those without federal funds – must receive a fair share of allocated costs

Indirect costs in Uniform Guidancepass-through agencies must:

• Accept your NICR* if you have one, or• Either:

Allow you to negotiate indirect rate with them

Use a minimum flat indirect rate of 10% (of modified total direct costs)

* NICR: Negotiated Indirect Cost Rate

Government agencies* cannot:

• Force or entice you to accept an indirect cost rate that is lower than their approved NICR or the 10% de minimis rate

• Cannot award points or preferences to applicants with lower indirect rates

* or nonprofit pass-throughs If this is happening to you, contact CalNonprofits

Term confusion

• Grants? Contracts?• Pass-throughs?• Contractor and

sub-contractor?• Recipients and sub-

recipients?

10% means 10% of MTDC… so

first determine MTDC

4 million x 10% = 400,000

Note that the 10% de minimus rate is10% of MTDC

not 10% of total costs

MTDC Direct Cost Base excludes:

• Equipment & capital expenditures

• Rental costs• Participant support

costs• Charges for patient

care• Tuition remission

• Portion of each sub-award in excess of $25,000

• Other costs that would distort distribution of indirect costs

Option 2: Direct charging shared costs

• Cost allocation plan documents an allowable method to estimate the benefit of shared costs to a federal award

• Allocate indirect costs according to cost allocation plan and charge the appropriate portion as direct cost

Option 2: Direct charging shared costs

Option 2: Direct charging shared costs

Cost allocation rationales for direct charging indirect costs

examples:• % of hours worked in each function (for non-

exempt employees)• % of effort expended for each function (for

exempt employees)• % of transactions• % of participants• % of units of service

Option 3:Negotiating with the pass-through

government agency

Option 4:Obtaining a federal

Negotiated Indirect Cost Rate(NICN)

Next workshop!

Option 4:How to negotiate federal

Negotiated Indirect Cost Rate (NICR)

Next workshop!

Must have direct federal award

Basic steps1. Find your cognizant agency and its negotiating

office2. Prepare comprehensive cost-centered annual

budget3. Identify direct and indirect costs4. Deal with unallowable direct and indirect costs5. Choose which method to use to compute the rate6. Allocate shared costs not included in the rate7. Propose and negotiate rate

Which method is best…

1. 10% de minimis rate?

2. Direct charging method?

3. Negotiating rates with your pass through entities?

4. Federal Negotiated Indirect Cost Rate?

for your nonprofit?

More on the OMB and 10%??? Before you use

the 10% rate• Are our Indirect Costs actually less or

greater than 10% of Modified Total Direct Costs?

• How will we handle requirements for fair allocation of indirect costs to all cost centers?

Applying Indirect Cost Rate

TOTAL Expenses

Unallow indirect costs

Excluded direct costs

Indirect costs MTDC

prog 1 direct

prog 2 direct

prog 3 direct

unallow direct cost

4,450,000 10,000 40,000 400,000 4,000,000 1,000,000 2,100,000 700,000 200,000Indirect Rate .10 400,000 100,000 210,000 70,000 20,000Excluded costs 40,000Unallow indirect 10,000Total Costs 1,100,000 2,310,000 810,000 230,000

An indirect Rate > 10%

TOTAL Expenses

Unallow indirect

costsExcluded

direct costsIndirect

costs MTDCprog 1 direct

prog 2 direct

prog 3 direct

unallow direct cost

4,450,000 10,000 40,000 600,000 3,800,000 1,000,000 1,900,000 700,000 200,000

Indirect 600,000

MDTC 3,800,000

Indirect rate 0.16

Applying 10% LimitTOTAL

Expenses

Unallow indirect

costsExcluded

direct costsIndirect

costs MTDCprog 1 direct

prog 2 direct

prog 3 direct

unallow direct cost

4,450,000 10,000 40,000 600,000 3,800,000 1,000,000 1,900,000 700,000 200,000De Minimis Rate 10% -380,000 380,000 100,000 190,000 70,000 20,000Indirect Costs above 10 % -215,000 215,000Excluded costs -40000 40,000Unallow indirect costs -10000 10,000Total Costs 0 0 5,000 1,100,000 2,090,000 810,000 445,000

Options if your MTDC Indirect Cost Rate Exceeds 10%

• Obtain a negotiated indirect cost rate NICR = to your actual rate

• Identify indirect costs which can be redefined as direct

• Accept the 10% de minimis rate and identify unrestricted sources to cover the excess indirect costs

Must allocate all costs to all cost objectives that benefit

• Includes allocation to unallowable cost centers

• Example: Lobbying cost objective is generally unallowable but must be allocated its fair share of indirect & other common costs

OMB Uniform GuidanceKey changes

• Compter < $5K now “supplies”• Single audit threshold now $750K• New requirements for pass-through agencies• Personnel cost allocation and documentation rules• Procurement procedures new• Indirect costs . . .

Exceptions to Uniform Guidance

• Federal statutes override Uniform Guidance

• OMB has agreed to exceptions proposed by Federal Departments

Exceptions: Certain Block Grants § 200.101

Only these Uniform Guidance provisions apply:

• § 200.202 – Requirement to provide public notice of federal financial assistance programs

• § 200.330 – Sub-recipient and contractor determinations

• § 200.331 – Requirements for pass-through entities

• § 200.332 – Fixed amount sub-awards

Best Approach for Your Organization??

• Test the 10%• Consider costs & benefits of direct

charging• Negotiate a NICR• Speak up about overhead

Timing is Everything

• Talk to your funders about UG• Understand their position• Decide what works best for your

organization as a whole• Get help with funder resistance or

confusion

The good news• There’s a new option for overhead

recovery in government contracts – it’s not perfect but it might be better for you

• CalNonprofits and others continue to get UG fully implemented and clarified(especially LA County initiative)

• Over time we can continue to work to get full recovery

• Upcoming: Session 3 of 3 focused on obtaining a Federal Negotiated Indirect Cost Rate

• Webinars too• CalNonprofits CFO Task Force• www.calnonprofits.org/overhead

Bonus Section:Dealing with Admin Cost Limits

Statutory Limitations on Admin Costs

• Determine if all costs included in your indirect cost center are administrative

• Identify any administrative costs that you will charge as direct costs

• Apply the statutory limitation to determine the amount of admin costs that can be charged to award with the limitation

• Use unrestricted funds to cover remaining fair share of admin costs

Impact of 5% Admin Cost Limitation

TOTAL ExpensesUnallow indirect

costsExcluded

direct costs Indirect costs MTDC Award 1 Award 2 Award 3Unrestricted Sources

4,450,000 10,000 40,000 400,000 4,000,000 1,000,000 2,100,000 700,000 200,000

Indirect Rate .10 400,000 100,000 210,000 70,000 20,000

5% Admin limitation -50,000 50,000

Excluded costs 40,000

Unallow indirect 10,000

Total Costs 1,050,000 2,310,000 810,000 280,000

Possible Strategies to Deal with Statutory Limitations

• Review definitions of admin costs carefully

• Review overall cost allocation methods

• Determine availability of unrestricted sources to subsidize the award with limitations