INDIRECT COST

1

• INDIRECT COST
• BASICS
• Presented byGene Fornecker, CPA
• DPI School Finance Auditor

2
OVERVIEW

• The discussion will include a review of common
  definitions related to indirect cost area
• You will be more familiar with indirect cost rate
  calculations, application for rates for your
  district and requirements for reimbursement
• Determine the applicability of ICR rates for your
  district

3
AUTHORITY

• OMB Circular A-87, Cost Principles for State,
  Local and Indian Tribal Governments establishes
  policy that ONE federal agency is responsible for
  the review, negotiation and approval of indirect
  cost rate proposals prepared by government
  agencies
• U.S. Department of Education is the cognizant
  agency for the State of WI

4
INTRODUCTION

• Topic of indirect costs is one of most highly
  misunderstood federal concepts
• Misunderstood by
• Grantee program staff
• Awarding agency staff
• Government officials
• The media

5
IMPORTANT DEFINITIONS

• Indirect cost rate a device for determining in a
  reasonable manner the proportion of indirect
  costs each program should bear
• It is a method for allocating indirect costs to
  projects
• The ratio between indirect costs (pool) and an
  equitable base

6
DEFINITIONS (contd)

• Direct costs those costs that can be
  specifically identified with a particular final
  cost objective (for example a particular award)
• Indirect costs those costs that have been
  incurred for common or joint objectives and
  cannot be readily identified with a particular
  cost objective (overhead, G A)

7
TYPES OF INDIRECT COSTS

• Administrative and clerical salaries and benefits
• Membership and subscriptions
• Office supplies
• Local telephone and line charges
• Postage
• General purpose software and supplies

8
UNALLOWABLE COSTS

• OMB Circular A-87, Unallowable Activities
• Organized fund raising
• Lobbying
• Lawsuits against the government
• Bad debts
• Contributions and donations
• Fines and penalties
• Entertainment
• Equipment and other capital expenditures

9
WHY ARE INDIRECT COST RATES NEEDED?

• To provide a uniform method
• Funding indirect costs
• Charging indirect costs
• To provide an equitable allocation of indirect
  costs across all projects

10
RESTRICTED VS. UNRESTRICTED

• Why the distinction?
• Certain Dept of ED grant programs have a
  statutory requirement prohibiting the use of
  federal funds to supplant non-federal funds
• Supplanting? Ambiguous concept that does not
  allow the use of federal funds to replace
  otherwise local funds for certain expenditures
• Very difficult to prove this quantifiably

11
RESTRICTED VS. UNRESTRICTED

• Restricted rate is calculated by taking the
  unrestricted rate and modifying it so as to
  exclude certain maintenance and operation
  expenditures
• Both rates are calculated by DPI
• Most grants only allow restricted rate to be used
  due to non-supplanting regulations

12
INDIRECT COST PROPOSAL

• Formal plan and methodology for calculating rates
  on a consistent basis
• Organizational review
• Tying costs to functions
• Submission of plan to Cognizant Agency
• Federal Review
• Negotiation
• Issuance of Rate Agreement

13
INDIRECT COST PROPOSAL

• What does this mean for WI schools?
• DPI establishes ICR plan for all districts
• DPI negotiates with Dept of ED
• Every 5 years the plan is resubmitted and new
  agreement is reached
• Available on DPI website
• http//www.dpi.state.wi.us/sfs/indirect.html

14
TYPES OF RATES

• Provisional/Final
• Predetermined
• Fixed-Rate with Carry-forward
• Temporary billing rate
• Used by WI school districts

15
What is a Fixed Rate with Carry-Forward
Provision?

• The predetermined rate is an ICR applicable to a
  specified year (current fiscal year) based upon
  an ESTIMATE of current year costs
• Fixed Rate with Carry-Forward ICR is the same as
  a predetermined rate except the differences
  between actual and estimated costs are carried
  forward and become part of the rate calculation
  currently

16
CALCULATIONS

• ICR Allowable indirect costs divided by Direct
  Cost Base
• Direct Cost Base generally includes direct wages,
  benefits, and other direct costs excluding
  capital equipment purchases

17
CALCULATIONS (contd)

• DPI calculates rates for all districts
• For 2008-09, rates based upon audited 2006-07
  Annual Report data
• Carry-forward provision is determined
• Form PI-1161 is submitted if adjustment to DPI
  calculations are requested
• November 1 is deadline for submitting adjustments
• DPI notifies districts of adjusted rates and
  posts to website in December

18
REPORTING FOR DPI ADMINISTERED FEDERAL AWARDS

• Budget Request
• Must identify indirect costs on original request
  or submit budget amendment
• Program Fiscal Report (PI-1086)
• Claim form
• Can request reimbursement for indirect costs
  throughout the year

19
WILL APPLYING FOR INDIRECT COSTS EQUAL MORE
FUNDING?

• Maybe
• Entitlement awards will not generate additional
  funding due to indirect costs
• Only so much total funding is available
• If you apply indirect cost to the award it will
  reduce the amount of the grant award allocable to
  direct cost
• Discretionary grant awards may lead to more
  funding
• Competition with other districts for funding so
  must include indirect in budget request to be
  considered

20
GENERAL RULE

• You have to include an estimate for indirect cost
  in each budget request in order to qualify for
  reimbursement and have the potential of receiving
  greater grant awards

21
Example

• Grant award 10,000
• All costs on budget are direct costs
• Can not charge any indirect costs unless a budget
  revision is approved
• Budget Revision approved
• 9,500 direct cost
• 500 indirect cost
• Had the effect of reducing direct costs
  reimbursable by the grant awardno additional
  funding generated

22
What if direct program costs exceed original
budget?

• You can over expend major budgeted line items by
  10 and elect not to claim any indirect cost on
  your claims
• Effect you still receive no more than the
  original grant award!

23
Why bother with indirect costs?

• Applying for grants including indirect costs may
  result in higher overall grant awards
• When grant funds are unspent, the allocation of
  indirect costs against the grant reduce the grant
  carryover to the next year and helps subsidize
  overhead costs normally paid for in the
  districts operating budget

24
RESOURCES

• DPI Management Services Website
• http//www.dpi.state.wi.us/sms/index.html
• DPI Financial Services Website
• http//www.dpi.state.wi.us/sfs/index.html
• Circular A-102 and A-133
• http//www.whitehouse.gov/omb/circulars/index.html

25
QUESTIONS

• Gene Fornecker, 608/267-7882
• Eugene.fornecker_at_dpi.wi.gov