Indirect Cost Rate ProposalConcepts / Intricacies / Strategies

Presented by Carter Ray

October 25, 2006 PBMA Conference

What’s up with this ICRP stuff ?

ICRP Course Outline• 1. Indirect Cost Rate Proposal (ICRP) Definitions

• 2. ICRP Rate is a Ratio (i.e. numerator / denominator)

• 3. Indirect Cost Pools

• 4. Excludable Unallowable Costs (direct & indirect)

• 5. Rate Types: Fixed, Provisional or Final

• 7. Fixed Rate Formula (most common for Probation)

• 8. Rate Development Methods

• 9. Sample “Simplified Method” ICRP

• 10. Avoid Audit Risks & Maximize Reimbursement

ICRP Definitions (Circular A-87)• 1.) “Circular A-87” provides principles and standards used by local

governments to determine both direct and indirect costs applicable to Federal grants and other federal awards (e.g. Title IV-E). [A-87 item #1 page 1]

• 2.) “Indirect Cost Rate Proposal” (ICRP) is used to substantiate local government request for an indirect cost rate. The ICRP must include subsidiary worksheets, cross-referenced and reconciled to the financial data upon which the rate is based.

• 3.) “A-87 Implementation Guide” is intended to provide guidance on the interpretation and implementation of A-87. This guide has been developed in coordination with OMB. [A-87 Implementation Guide “Preface”]

• 4.) “Certificate of Indirect Costs” attests that Probation ICRP indirect costs are allowable and properly allocable on basis of a “beneficial or causal relationship” to federal awards. It must be signed by county’s “chief financial officer” (e.g. County Auditor-Controller). [A-87, Attachment A, item D]

• 5.) “Cost Objective” means a function, organizational subdivision, contract, grant, or other activity for which ICRP cost data is needed (e.g. IV-E allowable service categories, camp facility cost for sale of beds).

ICRP Definitions (cont.)• 6.) “Indirect Costs” are: (a) incurred for common/joint purpose benefiting more

than one cost objective, & (b) not readily assignable to benefited cost objectives without effort disproportionate to results. [A-87 item F.1. page 11]

• 7.) “Direct Costs” can be identified with a final cost objective. Includes salaries directly coded to a cost objective (e.g. IV-E direct salaries per continuous time coding or time study). [A-87 item E, page 10]

• 8.) “Central Services Cost Allocation Plan” (CAP = “Cost Plan”) identifies county allowable costs provided on centralized basis (e.g. auditor-controller, human resources, public works, etc.). [A-87 item B.4. page 7]

• Note: See Appendix A of the CAP for Probation Dept. share of CAP.

• 9.) “Certificate of Cost Allocation Plan” attests that all Cost Plan centralized services costs are allowable per A-87. Signed by county Auditor-Controller. Adjustment shall be made at least annually for any central service revenue (whether billed or collected). [A-87 item G.4 page 46]

ICRP Definitions (cont.)• 10.) “Interagency Services” of one agency (dept.) charged to another

agency (dept.) in the gov’t unit may include allowable direct costs plus pro rate share of indirect costs. This doesn’t refer to CAP services. [A-87 item G page 11]

• Example: Probation may include ICRP indirect costs when billing Probation Officer services to Public Health (TCM) or to Mental Health (S/D Medi-Cal).

• 11.) “Cognizant Agency” refers to OMB designated agency responsible for reviewing, negotiating and approving, cost plans or indirect cost proposals. For countywide Cost Allocation Plan (CAP = Cost Plan) OMB has allowed DHHS to delegate cognizance for CA counties to State Controller’s Office. [CA Cost Plan Handbook, section 1130, page 8]

• Note: Probation ICRP’s do not have to be submitted to a “cognizant agency” (unless requested by Feds), however, a “Certificate of Indirect Costs” signed by county Auditor-Controller must be kept on file. [A-87 item H.1. page 12]

• 12.) “Base” means accumulated direct costs (e.g. total direct salaries) used to distribute indirect costs to Federal awards. [A-87 Attach. E item B.4 pg 51]

ICRP Rate is a Ratio

• ICRP rate = Indirect Costs (numerator) • Direct Cost Base (denominator)

• Direct Cost Base = direct costs (normally either direct salaries or total direct costs (excluding any extraordinary/distorting costs) used to distribute indirect costs to Federal grants or Federal entitlement programs.

Indirect Cost Pools• The total indirect costs (i.e. numerator) a Probation Indirect Cost Rate

consists of the sum of the following 3 Indirect Cost Pools:

• 1.) Cost Allocation Plan (CAP) Indirect Cost Pool• Consists of the countywide central services department costs (e.g.

County Executive Office, County Counsel, Auditor-Controller, Purchasing, Public Works, etc.) that are allocated to Probation.

• 2.) Probation Dept.-Wide Administration Indirect Cost Pool• Consists of Chief Probation Officer, Accounting, Personnel & Training,

Information Systems, and may include other dept.-wide support costs.

• 3.) Direct Service Division/Program Indirect Cost Pool (optional)• Probation Dept. may have this indirect cost pool (in addition to

Probation Admin.). If so, it could consist of Deputy Chief Probation Officers, managers, support staff, and operating costs of a direct service division(s) for costs not readily identified with cost objective(s).

Excludable Unallowable Costs

• 1.) Grant funded indirect costs: Any specific indirect costs that are grant funded must be removed from the indirect cost pool that is otherwise associated with this cost.

• Example: If an accounting position is funded by a grant, then exclude from indirect costs by showing it in “Excludable/Unallowable Costs” column of the ICRP worksheet for Probation Dept. Admin. Division.

• 2.) Transfers of Financing (shown in “Other Financing Uses”): This consists of transfers of financing going from Probation Dept. to other departments. Show it in “Excludable/Unallowable Costs” column since it must be excluded from either indirect or direct costs in an ICRP.

• Example: Probation may transfer a financial contribution towards the purchase of vehicles, or say buildings, where a county central services dept. does the accounting for the purchase/construction project.

Excludable Unallowable Costs (cont.)

• 3.) Equipment and other capital expenditures: Unallowable as indirect costs except when depreciation or use allowance cost is determined. Also unallowable as direct costs except where approved in advance by the federal awarding agency. [A-87 item #11 page 23 and item # 15 page 25]

• Note: Countywide central services cost allocation plan (CAP) indirect cost pool costs may include allowable use allowance costs for equipment or buildings that are allocated to the Probation Dept. (see CAP Schedule A summary listing of Probation Dept. as a cost plan unit).

• 4.) Donated Services: The value of donated or volunteer services are not reimbursable either as direct or indirect costs. However, the value of donated services may be used to meet cost sharing/matching requirements if specifically allowed by the federal award agency. [A-87 item #12 page 24]

Rate Types: Fixed, Predetermined, Provisional or Final

• 1.) Fixed Rate: Rate established in advance of use, based on an estimate of future costs, but not retroactively adjusted. Difference between estimated and actual allowable costs carried forward as “roll forward” adjustment to ICR of a subsequent period. [A-87 Implementation Guide, Attachment E, item 6.2.1]

• • Note: “Fixed rate” commonly used by county direct service departments such

as Probation.

• 2.) Predetermined Rate: Based on an estimate of costs for the period. Predetermined rates must be negotiated with the cognizant agency. A-87 encourages long-term use of predetermined rates over two to four years where “high degree of assurance that the agreed upon rate will not exceed one that would result if actual costs were determined”.

• Note: Colleges may use predetermined rates negotiated with DHHS.

ICRP Rate Types (cont.)

• 3.) Provisional Rate: Rate is a temporary rate, agreed to in advance, based on anticipated future costs. Subject to retroactive adjustment at a future date after actual costs are known.

• 4.) Final Rate: Established after the actual costs are known. It adjusts the provisional rate but is administratively burdensome. Underpayments resulting from application of provisional rate subject to availability of funds, while overpayments must be credited or returned.

• Note: Medicare may apply “final rate” approach on hospital cost reports.

"Fixed Rate" Indirect Cost Rate Example

ICRP developed for use in FY 05-06:

Total Est.* Indirect Costs for FY 05-06 +/- Rollforwd = ICRP %Total Est.* Direct Salary Costs for FY 05-06 Adjust

* FY 05-06 Est.Costs = Actual Costs for FY 03-04 (i.e. 2 yrs. earlier)

Rollforward Adjustment = FY 05-06 ICRP % - FY 03-04 ICRP %

Note: ICRP %'s used in rollfoward adjustment should excludeCountywide Cost Allocation Plan (CAP), since CAP alreadyhas a bulit-in rollfoward adjustment process.

Rate Development Methods• 1.) Simplified Method: If the agency (Probation) major functions (i.e.

Institutions & Field Services) benefit from indirect costs to approx. same degree, the 3 indirect cost pools may be allocated using single base (e.g. total Probation Officer direct salaries). That is to say, the 3 indirect pools may be aggregated and distributed using single indirect cost rate.

• 2.) Multiple Allocation Base Method: If an agency’s indirect costs benefit major functions in varying degrees, indirect costs shall be put into separate cost groupings. Each indirect cost grouping is allocated to benefited functions by a base which best measures relative benefits. Appropriate base may be salaries, documents processed, use hours, square feet, etc. The separate indirect cost groupings are allocated to each major function and the results are aggregated into single common pool for that function. Lastly, the single common pool for a function is distributed to Federal awards using a single indirect cost rate.

• Note: CAP’s employ multiple allocation method, however, Probation allocates it’s CAP share to direct service Divisions by simplified method.

Rate Development Methods (cont.)

• 3.) Special Rates: A single indirect cost rate for the agency (Probation) for all activities may not be appropriate. Different physical location factors, level of admin. support, organizational arrangements, or combination may create need for separate rates.

• Example: Let’s say an Institutions division camp facility will be selling beds to other counties. In this situation, site costs will be a “cost objective” for purpose of calculating bed-day charges. Accordingly, Institutions “base” should include all site based staff (i.e. Officers and support staff).

• However, unlike Institutions, Field Services needs to exclude support staff from ICR “base” (due to IV-E cost objectives). Thus, Institutions & Field Services will separate special rates.

Rate Development Methods (cont.)"SIMPLIFIED METHOD" TEST

Source: "A-87 Implementation Guide" Attachment E, Notes to Illustration 6-1, item (d).

Here are sample test ratios for a Probation Dept. having only two direct service divisions

i.e. Juvenile Services and Adult Services:

Juvenile Svcs. Div. Indirect = A % = B %

Direct Salaries Juvenile Svcs.

$61,210 = 12.72% = 23.01%

$481,182

Per A-87 Guide a range between 12.72 % and 23.01 % is "minor" and a single overall

Probation rate may be computed by adding 3 indirect cost pools (i.e. CAP + Probation

Dept-wide Admin. + any indirect in direct service Divisions) and allocating the 3 indirect

cost pools over a single base (e.g. total direct salaries or total Prob. Officer salaries).

Here's example of resulting Simplified Method rate formula:

CAP + Prob. Dept-wide Admin. + Direct Svc. Divisions Indirect

Total Probation Direct Salaries

Adult Svcs. Div. Indirect

Direct Salaries Adult Svcs.

$47,480

$206,320

Sample “Simplified Method” ICRP

Rate development steps (per A-87 Implementation Guide illustration 6-1):

• a.) Column 1: List total costs (indirect, excludable & direct) for each Probation Dept. direct service Division. Also, list total Probation Dept.-wide administrative costs and Probation share of CAP costs.

• b.) Column 2: Classify costs that are excludable capital expenditures (except for depreciation/structural use allowances) and unallowable costs (e.g. transfers to other depts.).

• Important: Classify grant funded costs that would otherwise be indirect costs as excludable costs in column 2.

• c.) Column 3: Classify indirect costs for each Probation division.

• d.) Column 4 & 5: Classify direct costs that comprise the rate “base” (e.g. Officer direct salaries) in column 4 and “all other direct costs” in column 5.

• • e.) Combined Indirect Cost Rate (before roll-forward adj.): Divide total allowable

indirect costs (col. 3 total) by distribution “base” (col. 4 total).

Sample SB Co. Probation Single Indirect Cost Rate Calculation if "Simplified Method" Used

ICRP for Use in FY 05-06 (est. using FY 03-04 actuals)

1 2 3 4 5

Exclusions/ Indirect Direct Salaries All Other

Division / Bureau Total Unallowable Costs (Officers Only) Direct Costs

Institutions 12,701,710 322,680 (a) 2,078,039 7,593,517 2,707,474

Field Services 17,034,040 15,000 (b) 4,129,388 10,254,270 2,635,382

subtotal 29,735,750 337,680 6,207,427 17,847,787 (d) 5,342,856

Dept. Indirect Costs (i.e. Dept. Admin.)

Institutions 1,550,128 1,550,128

Field Services 2,292,136 2,292,136

subtotal 3,842,264 0 3,842,264 0 0

Services Furnished (but not billed) by Other Gov't Agencies (i.e. CAP)

Institutions 1,463,729 1,463,729

Field Services 1,353,621 1,353,621

subtotal 2,817,350 0 2,817,350 0 0

Total 36,395,364 337,680 12,867,041 (c) 17,847,787 5,342,856

Total Indirect Costs (c) = 12,867,041 = 72.09% Combined Indirect Cost Rate (before roll-forward)Direct Salaries "Base" (d) 17,847,787

(a) 322,680 = acct. 7901 "Oper. Trf. Out" $ for Probation capital project overseen by General Services Dept.

(b) 15,000 = acct. 7901 drug testing fees shared with Alcohol, Drug & Mental Health Services Dept. per M.O.U.

SB Co. Probation Comparison of Field Services* Indirect Cost Rates* Field Services = Juvenile & Adult Divisions (Div 03/04) excluding Institutions Division

Prior Yr. CY Proposed VarianceA. Div. 03/04 Related Indirect Costs as % of Base:

1.) Indirect Salaries 35% 35% -2.) Wk Comp / Unempoy / Liability Ins 5% 10% 5%3.) Svcs, Supl & Other (w/o Liability Ins.) 1% 1% -4.) Div 01 Alloc. to Div 03/04 (w/o CAP) 22% 23% 1%5.) CAP Allocated to Div 03/04 13% 13% -6.) Cost Rate Roll-Forward 8% 12% 4%

Proposed Indirect Cost Rate: 84% 94% 10%B. Allowable Indirect Costs (in thousands):

1.) Indirect Salaries 3,588 3,572 (16) 2.) Wk Comp / Unempoy / Liability Ins 498 1,078 580 3.) Svcs, Supl & Other (w/o Liability Ins.) 44 52 8 4.) Div 01 Alloc. to Div 03/04 (w/o CAP) 2,292 2,380 88 5.) CAP Allocated to Div 03/04 1,354 1,364 10

Combined Allowable Indirect Costs: 7,776 8,446 670 C. Allowable Direct Salaries "Base": 10,254 10,277 23 D. Combined Indirect Cost Rate ( B / C ): 75.83% 82.18% 6.35%E. Cost Rate Roll-Forward: 7.81% 11.72% 3.91%

Proposed Indirect Cost Rate: 83.64% 93.90% 10.26%

Avoid Audit Risks & Maximize Reimbursement

• 1.) IV-E Audit Risk #1: Assume direct service Division supervisors/support staff are time surveying. If they are using distribution %’s determined before services are performed, these costs are unallowable by Feds (regardless of whether treated as direct or indirect). [A-87 item h. pages 20-21]

• 2.) IV-E Audit Risk #2: Even if risk #1 avoided, IV-E auditor may say these staff costs are “not readily assignable to (IV-E) cost objectives” as direct costs and are allowable only if treated as “indirect costs” in certified ICR.

• 3.) Avoid Audit Risks & Maximize IV-E: Put direct service Division supervisors/support staff into an ICR indirect cost pool. Also, this is likely to increase IV-E revenue. This is because Probation Officers are likely coding a greater portion of time to IV-E than supervisors/support staff are coding to IV-E as a portion of their time. When supervisors/support staff are “indirect costs” in an ICR, their time is apportioned the same as Probation Officers.

• See example of results of moving these costs to “indirect” on next page.

Example of IV-E Revenue Increase if Supervisors/Support Staff Moved to Indirect

Assume: 1.) Probation officers time survey 20 % of their hours to IV-E. 2.) Supervisors/support staff time survey 10 % of their hours to IV-E 3.) Probation officers FY salaries total $7,000,000 (w/ CY = PY actual) 4.) Supervisors/support FY salaries total $1,000,000 (w/ CY = PY actual) 5.) Total indirect costs (CAP + Prob. Adm. + Dir. Svc. Indirect) = ICR numerator *

A. Direct Svc. Div. Supervisors/Support Staff Time Survey as "Direct" IV-E

ICR x + = Gross Cost

4,400 K * x .20 (7,000 K) + .10(1,000 K) + .20(7,000 K) + .10(1,000 K) =7,000 K + 1,000 K

0.55 x 1,400 + 100 + 1,400 + 100 = 2,325 K

B. Direct Svc. Div. Supervisors/Support Staff Moved to "Indirect" IV-E

ICR x + = Gross Cost

(4,400 K + 1,000 K) * x .20 (7,000 K) + 0 + .20(7,000 K) + 0 =7,000 K

0.77 x 1,400 + 0 + 1,400 + 0 = 2,478 K

IV-E Gross Costs if Superv./Support are "Indirect": 2,478,000IV-E Gross Costs if Superv./Support are "Direct": (2,325,000)

153,000Assume IV-E Federal Eligibility Rate (FER) of 80 %: x .80

IV-E Federal Financial Participation (FFP) at 50 %: x .50IV-E $ Increase if Superv./Support Staff Moved to "Indirect": 61,200

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IV-E Direct Salaries IV-E Direct Salaries

IV-E Direct Salaries IV-E Direct Salaries

Simplifying Algebraic Formula for IV-E Claims

1.) Sample Amounts for IV-E Claim Formula:

Indirect Cost Rate (ICR) = 5,400,000 = 0.777,000,000

IV-E Direct Salaries = 1,400,000

2.) Formula in Most Detailed Form:

Indirect IV-E Direct IV-E Direct IV-E GrossCost Rate Salaries Salaries = Costs

0.77 X 1,400,000 + 1,400,000 = 2,478,000

3.) Formula Simplified:1,400,000 X .77 + 1 = 2,478,000

4.) Formula in Simpliest Algebraic Form:1,400,000 X 1.77 = 2,478,000

Here's resulting formula in narrative form:IV Direct Salaries X 1.ICR = IV-E Gross Costs

Two Views of Formula for Calculating Indirect Costs for IV-E or Grant Claiming

A = Indirect Costs (i.e. CAP + Prob. Dept. Adm. + Direct Svc. Div.(s) Indirect)

B = Distribution Base for ICR (e.g. Direct Salaries for Direct Svc. Div.(s)

C = Portion of Direct Svc. Div.(s) Salaries to be Claimed (to IV-E or a grant)

D = Distributed Share of Indirect Cost for IV-E or Grant Claim

Portion of Claimable DistributedDirect Base to Indirect Direct Base Indirect Costs

ICR be Claimed Costs as % of Base for Claim

A X C = A X C = DB B

Avoid Audit Risks & Max. Reimb. (cont.)• 4.) Supplanting: Federal funds may not be used to supplant State or local

funds. Federal funds must be used to supplement existing funds for program activities and not replace funds (i.e. county General Fund $) which have been appropriated for the same purpose. [ref. OJP Financial Guide, pg. 24]

• Important: This requirement could prevent unanticipated revenue (e.g. extra IV-E $ from new ICR) from being used to reduce county General Fund $ that had been earmarked for Probation that fiscal year. See item #5 (below) on how to designate unanticipated $ for Probation use in future years.

• 5.) Designated Fund Balance: Designations represent management’s intended future use of resources and “generally should reflect actual plans approved by the government’s senior management” (i.e. county Executive Office). [ GAAFR page 50, 2005 edition published by GFOA]

• Strategy: If you have extra year-end $, get county Executive Office to approve Probation improvement type project (e.g. new computer system or institutional safety modifications). Cannot be on-going budget needs.

•

ICRP Web Sites

“OMB Circular A-87 Cost Principles for State, Local & Indian Tribal Governments” www.whitehouse.gov/omb/circulars/

“Implementation Guide for OMB Circular A-87” (select ASMB C-10 Pdf file) www.hhs.gov/grantsnet/state/

“Handbook of Cost Plan Procedures for California Counties” (CA Cost Plan Handbook) www.sco.ca.gov/ard/manual/costplanhandbook.pdf

“Governmental Accounting, Auditing, and Financial Reporting” (GAAFR) www.gfoa.org Site doesn’t provide access to “blue book”, however you may select “join GFOA” and then purchase it (not cheap)