Appendix VII to Part 200 - States and Local Government and Indian Tribe Indirect Cost Proposals
2:1.1.2.2.1.6.48.23.12 : Appendix VII
Appendix VII to Part 200 - States and Local Government and Indian
Tribe Indirect Cost Proposals A. General
1. Indirect costs are those that have been incurred for common
or joint purposes. These costs benefit more than one cost objective
and cannot be readily identified with a particular final cost
objective without effort disproportionate to the results achieved.
After direct costs have been determined and assigned directly to
Federal awards and other activities as appropriate, indirect costs
are those remaining to be allocated to benefitted cost objectives.
A cost may not be allocated to a Federal award as an indirect cost
if any other cost incurred for the same purpose, in like
circumstances, has been assigned to a Federal award as a direct
cost.
2. Indirect costs include (a) the indirect costs originating in
each department or agency of the governmental unit carrying out
Federal awards and (b) the costs of central governmental services
distributed through the central service cost allocation plan (as
described in Appendix V to this part) and not otherwise treated as
direct costs.
3. Indirect costs are normally charged to Federal awards by the
use of an indirect cost rate. A separate indirect cost rate(s) is
usually necessary for each department or agency of the governmental
unit claiming indirect costs under Federal awards. Guidelines and
illustrations of indirect cost proposals are provided in a brochure
published by the Department of Health and Human Services entitled
“A Guide for States and Local Government Agencies: Cost
Principles and Procedures for Establishing Cost Allocation Plans
and Indirect Cost Rates for Grants and Contracts with the Federal
Government.” A copy of this brochure may be obtained from HHS
Cost Allocation Services or at their website.
4. Because of the diverse characteristics and accounting
practices of governmental units, the types of costs which may be
classified as indirect costs cannot be specified in all situations.
However, typical examples of indirect costs may include certain
state/local-wide central service costs, general administration of
the non-Federal entity accounting and personnel services performed
within the non-Federal entity, depreciation on buildings and
equipment, the costs of operating and maintaining facilities.
5. This Appendix does not apply to state public assistance
agencies. These agencies should refer instead to Appendix VI to
this part.
B. Definitions
1. Base means the accumulated direct costs (normally
either total direct salaries and wages or total direct costs
exclusive of any extraordinary or distorting expenditures) used to
distribute indirect costs to individual Federal awards. The direct
cost base selected should result in each Federal award bearing a
fair share of the indirect costs in reasonable relation to the
benefits received from the costs.
2. Base period for the allocation of indirect costs is
the period in which such costs are incurred and accumulated for
allocation to activities performed in that period. The base period
normally should coincide with the governmental unit's fiscal year,
but in any event, must be so selected as to avoid inequities in the
allocation of costs.
3. Cognizant agency for indirect costs means the Federal
agency responsible for reviewing and approving the governmental
unit's indirect cost rate(s) on the behalf of the Federal
Government. The cognizant agency for indirect costs assignment is
described in Appendix V, section F.
4. Final rate means an indirect cost rate applicable to a
specified past period which is based on the actual allowable costs
of the period. A final audited rate is not subject to
adjustment.
5. Fixed rate means an indirect cost rate which has the
same characteristics as a predetermined rate, except that the
difference between the estimated costs and the actual, allowable
costs of the period covered by the rate is carried forward as an
adjustment to the rate computation of a subsequent period.
6. Indirect cost pool is the accumulated costs that
jointly benefit two or more programs or other cost objectives.
7. Indirect cost rate is a device for determining in a
reasonable manner the proportion of indirect costs each program
should bear. It is the ratio (expressed as a percentage) of the
indirect costs to a direct cost base.
8. Indirect cost rate proposal means the documentation
prepared by a governmental unit or subdivision thereof to
substantiate its request for the establishment of an indirect cost
rate.
9. Predetermined rate means an indirect cost rate,
applicable to a specified current or future period, usually the
governmental unit's fiscal year. This rate is based on an estimate
of the costs to be incurred during the period. Except under very
unusual circumstances, a predetermined rate is not subject to
adjustment. (Because of legal constraints, predetermined rates are
not permitted for Federal contracts; they may, however, be used for
grants or cooperative agreements.) Predetermined rates may not be
used by governmental units that have not submitted and negotiated
the rate with the cognizant agency for indirect costs. In view of
the potential advantages offered by this procedure, negotiation of
predetermined rates for indirect costs for a period of two to four
years should be the norm in those situations where the cost
experience and other pertinent facts available are deemed
sufficient to enable the parties involved to reach an informed
judgment as to the probable level of indirect costs during the
ensuing accounting periods.
10. Provisional rate means a temporary indirect cost rate
applicable to a specified period which is used for funding, interim
reimbursement, and reporting indirect costs on Federal awards
pending the establishment of a “final” rate for that period.
C. Allocation of Indirect Costs and Determination of Indirect Cost
Rates 1. General
a. Where a governmental unit's department or agency has only one
major function, or where all its major functions benefit from the
indirect costs to approximately the same degree, the allocation of
indirect costs and the computation of an indirect cost rate may be
accomplished through simplified allocation procedures as described
in subsection 2.
b. Where a governmental unit's department or agency has several
major functions which benefit from its indirect costs in varying
degrees, the allocation of indirect costs may require the
accumulation of such costs into separate cost groupings which then
are allocated individually to benefitted functions by means of a
base which best measures the relative degree of benefit. 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).
c. Specific methods for allocating indirect costs and computing
indirect cost rates along with the conditions under which each
method should be used are described in subsections 2, 3 and 4.
2. Simplified Method
a. Where a non-Federal entity's major functions benefit from its
indirect costs to approximately the same degree, the allocation of
indirect costs may be accomplished by (1) classifying the
non-Federal entity's total costs for the base period as either
direct or indirect, and (2) 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 a governmental unit's department or
agency has only one major function encompassing a number of
individual projects or activities, and may be used where the level
of Federal awards to that department or agency is relatively
small.
b. Both the direct costs and the indirect costs must exclude
capital expenditures and unallowable costs. However, unallowable
costs must be included in the direct costs if they represent
activities to which indirect costs are properly allocable.
c. The distribution base may be (1) total direct costs
(excluding capital expenditures and other distorting items, such as
pass-through funds, subcontracts in excess of $25,000, participant
support costs, etc.), (2) direct salaries and wages, or (3) another
base which results in an equitable distribution.
3. Multiple Allocation Base Method
a. Where a non-Federal entity's indirect costs benefit its major
functions in varying degrees, such costs must be accumulated into
separate cost groupings. Each grouping must then be allocated
individually to benefitted functions by means of a base which best
measures the relative benefits.
b. The cost groupings should be established so as to permit the
allocation of each grouping on the basis of benefits provided to
the major functions. Each grouping should constitute a pool of
expenses that are of like character in terms of the functions they
benefit and in terms of the allocation base which best measures the
relative benefits provided to each function. The number of separate
groupings should be held within practical limits, taking into
consideration the materiality of the amounts involved and the
degree of precision needed.
c. Actual conditions must be taken into account in selecting the
base to be used in allocating the expenses in each grouping to
benefitted functions. When an allocation can be made by assignment
of a cost grouping directly to the function benefitted, the
allocation must be made in that manner. When the expenses in a
grouping are more general in nature, the allocation should be made
through the use of a selected base which produces results that are
equitable to both the Federal Government and the governmental unit.
In general, any cost element or related factor associated with the
governmental unit's activities is potentially adaptable for use as
an allocation base provided that: (1) it can readily be expressed
in terms of dollars or other quantitative measures (total direct
costs, direct salaries and wages, staff hours applied, square feet
used, hours of usage, number of documents processed, population
served, and the like), and (2) it is common to the benefitted
functions during the base period.
d. Except where a special indirect cost rate(s) is required in
accordance with paragraph (C)(4) of this Appendix, the separate
groupings of indirect costs allocated to each major function must
be aggregated and treated as a common pool for that function. The
costs in the common pool must then be distributed to individual
Federal awards included in that function by use of a single
indirect cost rate.
e. The distribution base used in computing the indirect cost
rate for each function may be (1) total direct costs (excluding
capital expenditures and other distorting items such as
pass-through funds, subawards in excess of $25,000, participant
support costs, etc.), (2) direct salaries and wages, or (3) another
base which results in an equitable distribution. An indirect cost
rate should be developed for each separate indirect cost pool
developed. The rate in each case should be stated as the percentage
relationship between the particular indirect cost pool and the
distribution base identified with that pool.
4. Special Indirect Cost Rates
a. In some instances, a single indirect cost rate for all
activities of a non-Federal entity or for each major function of
the agency may not be appropriate. It may not take into account
those different factors which may substantially affect the indirect
costs applicable to a particular program or group of programs. The
factors may include the physical location of the work, the level of
administrative support required, the nature of the facilities or
other resources employed, the organizational arrangements used, or
any combination thereof. When a particular Federal award is carried
out in an environment which appears to generate a significantly
different level of indirect costs, provisions should be made for a
separate indirect cost pool applicable to that Federal award. The
separate indirect cost pool should be developed during the course
of the regular allocation process, and the separate indirect cost
rate resulting therefrom should be used, provided that: (1) The
rate differs significantly from the rate which would have been
developed under paragraphs (C)(2) and (C)(3) of this Appendix, and
(2) the Federal award to which the rate would apply is material in
amount.
b. Where Federal statutes restrict the reimbursement of certain
indirect costs, it may be necessary to develop a special rate for
the affected Federal award. Where a “restricted rate” is required,
the same procedure for developing a non-restricted rate will be
used except for the additional step of the elimination from the
indirect cost pool those costs for which the law prohibits
reimbursement.
D. Submission and Documentation of Proposals 1. Submission of
Indirect Cost Rate Proposals
a. All departments or agencies of the governmental unit desiring
to claim indirect costs under Federal awards must prepare an
indirect cost rate proposal and related documentation to support
those costs. The proposal and related documentation must be
retained for audit in accordance with the records retention
requirements contained in § 200.334.
b. A governmental department or agency unit that receives more
than $35 million in direct Federal funding must submit its indirect
cost rate proposal to its cognizant agency for indirect costs.
Other governmental department or agency must develop an indirect
cost proposal in accordance with the requirements of this Part and
maintain the proposal and related supporting documentation for
audit. These governmental departments or agencies are not required
to submit their proposals unless they are specifically requested to
do so by the cognizant agency for indirect costs. Where a
non-Federal entity only receives funds as a subrecipient, the
pass-through entity will be responsible for negotiating and/or
monitoring the subrecipient's indirect costs.
c. Each Indian tribal government desiring reimbursement of
indirect costs must submit its indirect cost proposal to the
Department of the Interior (its cognizant agency for indirect
costs).
d. Indirect cost proposals must be developed (and, when
required, submitted) within six months after the close of the
governmental unit's fiscal year, unless an exception is approved by
the cognizant agency for indirect costs. If the proposed central
service cost allocation plan for the same period has not been
approved by that time, the indirect cost proposal may be prepared
including an amount for central services that is based on the
latest federally-approved central service cost allocation plan. The
difference between these central service amounts and the amounts
ultimately approved will be compensated for by an adjustment in a
subsequent period.
2. Documentation of Proposals
The following must be included with each indirect cost
proposal:
a. The rates proposed, including subsidiary work sheets and
other relevant data, cross referenced and reconciled to the
financial data noted in subsection b. Allocated central service
costs will be supported by the summary table included in the
approved central service cost allocation plan. This summary table
is not required to be submitted with the indirect cost proposal if
the central service cost allocation plan for the same fiscal year
has been approved by the cognizant agency for indirect costs and is
available to the funding agency.
b. A copy of the financial data (financial statements,
comprehensive annual financial report, executive budgets,
accounting reports, etc.) upon which the rate is based. Adjustments
resulting from the use of unaudited data will be recognized, where
appropriate, by the Federal cognizant agency for indirect costs in
a subsequent proposal.
c. The approximate amount of direct base costs incurred under
Federal awards. These costs should be broken out between salaries
and wages and other direct costs.
d. A chart showing the organizational structure of the agency
during the period for which the proposal applies, along with a
functional statement(s) noting the duties and/or responsibilities
of all units that comprise the agency. (Once this is submitted,
only revisions need be submitted with subsequent proposals.)
3. Required certification.
Each indirect cost rate proposal must be accompanied by a
certification in the following form:
Certificate of Indirect Costs
This is to certify that I have reviewed the indirect cost rate
proposal submitted herewith and to the best of my knowledge and
belief:
(1) All costs included in this proposal [identify date] to
establish billing or final indirect costs rates for [identify
period covered by rate] are allowable in accordance with the
requirements of the Federal award(s) to which they apply and the
provisions of this Part. Unallowable costs have been adjusted for
in allocating costs as indicated in the indirect cost proposal
(2) All costs included in this proposal are properly allocable
to Federal awards on the basis of a beneficial or causal
relationship between the expenses incurred and the agreements to
which they are allocated in accordance with applicable
requirements. Further, the same costs that have been treated as
indirect costs have not been claimed as direct costs. Similar types
of costs have been accounted for consistently and the Federal
Government will be notified of any accounting changes that would
affect the predetermined rate.
I declare that the foregoing is true and correct. Governmental
Unit: Signature: Name of Official: Title: Date of Execution: E.
Negotiation and Approval of Rates.
1. Indirect cost rates will be reviewed, negotiated, and
approved by the cognizant agency on a timely basis. Once a rate has
been agreed upon, it will be accepted and used by all Federal
agencies unless prohibited or limited by statute. Where a Federal
awarding agency has reason to believe that special operating
factors affecting its Federal awards necessitate special indirect
cost rates, the funding agency will, prior to the time the rates
are negotiated, notify the cognizant agency for indirect costs.
2. The use of predetermined rates, if allowed, is encouraged
where the cognizant agency for indirect costs has reasonable
assurance based on past experience and reliable projection of the
non-Federal entity's costs, that the rate is not likely to exceed a
rate based on actual costs. Long-term agreements utilizing
predetermined rates extending over two or more years are
encouraged, where appropriate.
3. The results of each negotiation must be formalized in a
written agreement between the cognizant agency for indirect costs
and the governmental unit. This agreement will be subject to
re-opening if the agreement is subsequently found to violate a
statute, or the information upon which the plan was negotiated is
later found to be materially incomplete or inaccurate. The agreed
upon rates must be made available to all Federal agencies for their
use.
4. Refunds must be made if proposals are later found to have
included costs that (a) are unallowable (i) as specified by law or
regulation, (ii) as identified in § 200.420, or (iii) by the terms
and conditions of Federal awards, or (b) are unallowable because
they are clearly not allocable to Federal awards. These adjustments
or refunds will be made regardless of the type of rate negotiated
(predetermined, final, fixed, or provisional).
F. Other Policies 1. Fringe Benefit Rates
If overall fringe benefit rates are not approved for the
governmental unit as part of the central service cost allocation
plan, these rates will be reviewed, negotiated and approved for
individual recipient agencies during the indirect cost negotiation
process. In these cases, a proposed fringe benefit rate computation
should accompany the indirect cost proposal. If fringe benefit
rates are not used at the recipient agency level (i.e., the agency
specifically identifies fringe benefit costs to individual
employees), the governmental unit should so advise the cognizant
agency for indirect costs.
2. Billed Services Provided by the Recipient Agency
In some cases, governmental departments or agencies (components
of the governmental unit) provide and bill for services similar to
those covered by central service cost allocation plans (e.g.,
computer centers). Where this occurs, the governmental departments
or agencies (components of the governmental unit)should be guided
by the requirements in Appendix V relating to the development of
billing rates and documentation requirements, and should advise the
cognizant agency for indirect costs of any billed services. Reviews
of these types of services (including reviews of costing/billing
methodology, profits or losses, etc.) will be made on a
case-by-case basis as warranted by the circumstances involved.
3. Indirect Cost Allocations Not Using Rates
In certain situations, governmental departments or agencies
(components of the governmental unit), because of the nature of
their Federal awards, may be required to develop a cost allocation
plan that distributes indirect (and, in some cases, direct) costs
to the specific funding sources. In these cases, a narrative cost
allocation methodology should be developed, documented, maintained
for audit, or submitted, as appropriate, to the cognizant agency
for indirect costs for review, negotiation, and approval.
4. Appeals
If a dispute arises in a negotiation of an indirect cost rate
(or other rate) between the cognizant agency for indirect costs and
the governmental unit, the dispute must be resolved in accordance
with the appeals procedures of the cognizant agency for indirect
costs.
5. Collection of Unallowable Costs and Erroneous Payments
Costs specifically identified as unallowable and charged to
Federal awards either directly or indirectly will be refunded
(including interest chargeable in accordance with applicable
Federal cognizant agency for indirect costs regulations).
6. OMB Assistance
To the extent that problems are encountered among the Federal
agencies or governmental units in connection with the negotiation
and approval process, OMB will lend assistance, as required, to
resolve such problems in a timely manner.
[78 FR 78608, Dec. 26, 2013, as amended at 79 FR 75889, Dec. 19,
2014; 85 FR 49581, Aug. 13, 2020]