Appendix IV to Part 75 - Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Nonprofit Organizations
45:1.0.1.1.36.6.47.23.12 : Appendix IV
Appendix IV to Part 75 - Indirect (F&A) Costs Identification
and Assignment, and Rate Determination for Nonprofit Organizations
A. General
1. Indirect costs are those that have been incurred for common
or joint objectives and cannot be readily identified with a
particular final cost objective. Direct cost of minor amounts may
be treated as indirect costs under the conditions described in §
75.413(d). After direct costs have been determined and assigned
directly to awards or other work as appropriate, indirect costs are
those remaining to be allocated to benefitting 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. “Major nonprofit organizations” are defined in § 75.414(a).
See indirect cost rate reporting requirements in sections B.2.e and
B.3.g. of this appendix.
B. Allocation of Indirect Costs and Determination of Indirect Cost
Rates 1. General
a. If a nonprofit organization has only one major function, or
where all its major functions benefit from its 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 section
B.2 of this Appendix.
b. If an organization has several major functions which benefit
from its indirect costs in varying degrees, allocation of indirect
costs may require the accumulation of such costs into separate cost
groupings which then are allocated individually to benefitting
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. The determination of what constitutes an organization's major
functions will depend on its purpose in being; the types of
services it renders to the public, its clients, and its members;
and the amount of effort it devotes to such activities as
fundraising, public information and membership activities.
d. 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 section B.2 through B.5 of
this Appendix.
e. The base period for the allocation of indirect costs is the
period in which such costs are incurred and accumulated for
allocation to work performed in that period. The base period
normally should coincide with the organization's fiscal year but,
in any event, must be so selected as to avoid inequities in the
allocation of the costs.
2. Simplified Allocation Method
a. 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 has only one major
function encompassing a number of individual projects or
activities, and may be used where the level of Federal awards to an
organization is relatively small.
b. Both the direct costs and the indirect costs must exclude
capital expenditures and unallowable costs. However, unallowable
costs which represent activities must be included in the direct
costs under the conditions described in § 75.413(e).
c. The distribution base may be total direct costs (excluding
capital expenditures and other distorting items, such as subawards
for $25,000 or more), direct salaries and wages, or other base
which results in an equitable distribution. The distribution base
must exclude participant support costs as defined in § 75.2.
d. Except where a special rate(s) is required in accordance with
section B.5 of this Appendix, the indirect cost rate developed
under the above principles is applicable to all Federal awards of
the organization. If a special rate(s) is required, appropriate
modifications must be made in order to develop the special
rate(s).
e. For an organization that receives more than $10 million in
direct Federal funding in a fiscal year, a breakout of the indirect
cost component into two broad categories, Facilities and
Administration as defined in § 75.414(a), is required. The rate in
each case must be stated as the percentage which the amount of the
particular indirect cost category (i.e., Facilities or
Administration) is of the distribution base identified with that
category.
3. Multiple Allocation Base Method
a. General. Where an organization's indirect costs benefit its
major functions in varying degrees, indirect costs must be
accumulated into separate cost groupings, as described in
subparagraph b. Each grouping must then be allocated individually
to benefitting functions by means of a base which best measures the
relative benefits. The default allocation bases by cost pool are
described in section B.3.c of this Appendix.
b. Identification of indirect costs. Cost groupings must be
established so as to permit the allocation of each grouping on the
basis of benefits provided to the major functions. Each grouping
must constitute a pool of expenses that are of like character in
terms of functions they benefit and in terms of the allocation base
which best measures the relative benefits provided to each
function. The groupings are classified within the two broad
categories: “Facilities” and “Administration,” as described in
section A.3 of this Appendix. The indirect cost pools are defined
as follows:
(1) Depreciation. The expenses under this heading are the
portion of the costs of the organization's buildings, capital
improvements to land and buildings, and equipment which are
computed in accordance with § 75.436 .
(2) Interest. Interest on debt associated with certain
buildings, equipment and capital improvements are computed in
accordance with § 75.449.
(3) Operation and maintenance expenses. The expenses under this
heading are those that have been incurred for the administration,
operation, maintenance, preservation, and protection of the
organization's physical plant. They include expenses normally
incurred for such items as: janitorial and utility services;
repairs and ordinary or normal alterations of buildings, furniture
and equipment; care of grounds; maintenance and operation of
buildings and other plant facilities; security; earthquake and
disaster preparedness; environmental safety; hazardous waste
disposal; property, liability and other insurance relating to
property; space and capital leasing; facility planning and
management; and central receiving. The operation and maintenance
expenses category must also include its allocable share of fringe
benefit costs, depreciation, and interest costs.
(4) General administration and general expenses. The expenses
under this heading are those that have been incurred for the
overall general executive and administrative offices of the
organization and other expenses of a general nature which do not
relate solely to any major function of the organization. This
category must also include its allocable share of fringe benefit
costs, operation and maintenance expense, depreciation, and
interest costs. Examples of this category include central offices,
such as the director's office, the office of finance, business
services, budget and planning, personnel, safety and risk
management, general counsel, management information systems, and
library costs.
In developing this cost pool, special care should be exercised
to ensure that costs incurred for the same purpose in like
circumstances are treated consistently as either direct or indirect
costs. For example, salaries of technical staff, project supplies,
project publication, telephone toll charges, computer costs, travel
costs, and specialized services costs must be treated as direct
costs wherever identifiable to a particular program. The salaries
and wages of administrative and pooled clerical staff should
normally be treated as indirect costs. Direct charging of these
costs may be appropriate as described in § 75.413. Items such as
office supplies, postage, local telephone costs, periodicals and
memberships should normally be treated as indirect costs.
c. Allocation bases. Actual conditions must be taken into
account in selecting the base to be used in allocating the expenses
in each grouping to benefitting functions. The essential
consideration in selecting a method or a base is that it is the one
best suited for assigning the pool of costs to cost objectives in
accordance with benefits derived; a traceable cause and effect
relationship; or logic and reason, where neither the cause nor the
effect of the relationship is determinable. 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 cost grouping are more general in nature, the
allocation must be made through the use of a selected base which
produces results that are equitable to both the Federal Government
and the organization. The distribution must be made in accordance
with the bases described herein unless it can be demonstrated that
the use of a different base would result in a more equitable
allocation of the costs, or that a more readily available base
would not increase the costs charged to Federal awards. The results
of special cost studies (such as an engineering utility study) must
not be used to determine and allocate the indirect costs to Federal
awards.
(1) Depreciation. Depreciation expenses must be allocated in the
following manner:
(a) Depreciation on buildings used exclusively in the conduct of
a single function, and on capital improvements and equipment used
in such buildings, must be assigned to that function.
(b) Depreciation on buildings used for more than one function,
and on capital improvements and equipment used in such buildings,
must be allocated to the individual functions performed in each
building on the basis of usable square feet of space, excluding
common areas, such as hallways, stairwells, and restrooms.
(c) Depreciation on buildings, capital improvements and
equipment related space (e.g., individual rooms, and
laboratories) used jointly by more than one function (as determined
by the users of the space) must be treated as follows. The cost of
each jointly used unit of space must be allocated to the
benefitting functions on the basis of:
(i) the employees and other users on a full-time equivalent
(FTE) basis or salaries and wages of those individual functions
benefitting from the use of that space; or
(ii) organization-wide employee FTEs or salaries and wages
applicable to the benefitting functions of the organization.
(d) Depreciation on certain capital improvements to land, such
as paved parking areas, fences, sidewalks, and the like, not
included in the cost of buildings, must be allocated to user
categories on a FTE basis and distributed to major functions in
proportion to the salaries and wages of all employees applicable to
the functions.
(2) Interest. Interest costs must be allocated in the same
manner as the depreciation on the buildings, equipment and capital
equipment to which the interest relates.
(3) Operation and maintenance expenses. Operation and
maintenance expenses must be allocated in the same manner as the
depreciation.
(4) General administration and general expenses. General
administration and general expenses must be allocated to
benefitting functions based on modified total costs (MTC). The MTC
is the modified total direct costs (MTDC), as described in § 75.2,
plus the allocated indirect cost proportion. The expenses included
in this category could be grouped first according to major
functions of the organization to which they render services or
provide benefits. The aggregate expenses of each group must then be
allocated to benefitting functions based on MTC.
d. Order of distribution.
(1) Indirect cost categories consisting of depreciation,
interest, operation and maintenance, and general administration and
general expenses must be allocated in that order to the remaining
indirect cost categories as well as to the major functions of the
organization. Other cost categories should be allocated in the
order determined to be most appropriate by the organization. This
order of allocation does not apply if cross allocation of costs is
made as provided in section B.3.d.2 of this Appendix.
(2) Normally, an indirect cost category will be considered
closed once it has been allocated to other cost objectives, and
costs must not be subsequently allocated to it. However, a cross
allocation of costs between two or more indirect costs categories
could be used if such allocation will result in a more equitable
allocation of costs. If a cross allocation is used, an appropriate
modification to the composition of the indirect cost categories is
required.
e. Application of indirect cost rate or rates. Except where a
special indirect cost rate(s) is required in accordance with
section B.5 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.
f. Distribution basis. Indirect costs must be distributed to
applicable Federal awards and other benefitting activities within
each major function on the basis of MTDC (see definition in §
75.2).
g. Individual Rate Components. An indirect cost rate must be
determined for each separate indirect cost pool developed. The rate
in each case must be stated as the percentage which the amount of
the particular indirect cost pool is of the distribution base
identified with that pool. Each indirect cost rate negotiation or
determination agreement must include development of the rate for
each indirect cost pool as well as the overall indirect cost rate.
The indirect cost pools must be classified within two broad
categories: “Facilities” and “Administration,” as described in §
75.414(a).
4. Direct Allocation Method
a. 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.
b. This method is acceptable, provided each joint cost is
prorated using a base which accurately measures the benefits
provided to each Federal award or other activity. The bases must be
established in accordance with reasonable criteria, and be
supported by current data. This method is compatible with the
Standards of Accounting and Financial Reporting for Voluntary
Health and Welfare Organizations issued jointly by the National
Health Council, Inc., the National Assembly of Voluntary Health and
Social Welfare Organizations, and the United Way of America.
c. Under this method, indirect costs consist exclusively of
general administration and general expenses. In all other respects,
the organization's indirect cost rates must be computed in the same
manner as that described in section B.2 of this Appendix.
5. 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. For this
purpose, a particular segment of work may be that performed under a
single Federal award or it may consist of work under a group of
Federal awards performed in a common environment. These 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 scientific disciplines or technical
skills involved, the organizational arrangements used, or any
combination thereof. When a particular segment of work is performed
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 such work. 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 it is determined that
(i) the rate differs significantly from that which would have been
obtained under sections B.2, B.3, and B.4 of this Appendix, and
(ii) the volume of work to which the rate would apply is
material.
C. Negotiation and Approval of Indirect Cost Rates 1. Definitions
As used in this section, the following terms have the meanings
set forth in this section:
a. Cognizant agency for indirect costs means the Federal
agency responsible for negotiating and approving indirect cost
rates for a nonprofit organization on behalf of all Federal
agencies.
b. Predetermined rate means an indirect cost rate,
applicable to a specified current or future period, usually the
organization's fiscal year. The rate is based on an estimate of the
costs to be incurred during the period. A predetermined rate is not
subject to adjustment.
c. 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 costs of the
period covered by the rate is carried forward as an adjustment to
the rate computation of a subsequent period.
d. Final rate means an indirect cost rate applicable to a
specified past period which is based on the actual costs of the
period. A final rate is not subject to adjustment.
e. Provisional rate or billing 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 the
period.
f. Indirect cost proposal means the documentation
prepared by an organization to substantiate its claim for the
reimbursement of indirect costs. This proposal provides the basis
for the review and negotiation leading to the establishment of an
organization's indirect cost rate.
g. Cost objective means a function, organizational
subdivision, contract, Federal award, or other work unit for which
cost data are desired and for which provision is made to accumulate
and measure the cost of processes, projects, jobs and capitalized
projects.
2. Negotiation and Approval of Rates
a. Unless different arrangements are agreed to by the Federal
agencies concerned, 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 and, where necessary, other
rates such as fringe benefit and computer charge-out rates. 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 three years. All concerned Federal
agencies must be given the opportunity to participate in the
negotiation process but, after a rate has been agreed upon, it will
be accepted by all Federal agencies. When a Federal agency has
reason to believe that special operating factors affecting its
Federal awards necessitate special indirect cost rates in
accordance with section B.5 of this Appendix, it will, prior to the
time the rates are negotiated, notify the cognizant agency for
indirect costs. (See also § 75.414.) Where a non-Federal entity
only receives funds as a subrecipient, see the requirements of §
75.352.
b. Except as otherwise provided in § 75.414(f), a nonprofit
organization which has not previously established an indirect cost
rate with a Federal agency must submit its initial indirect cost
proposal immediately after the organization is advised that a
Federal award will be made and, in no event, later than three
months after the effective date of the Federal award.
c. Unless approved by the cognizant agency for indirect costs in
accordance with § 75.414(g), organizations that have previously
established indirect cost rates must submit a new indirect cost
proposal to the cognizant agency for indirect costs within six
months after the close of each fiscal year.
d. A predetermined rate may be negotiated for use on Federal
awards where there is reasonable assurance, based on past
experience and reliable projection of the organization's costs,
that the rate is not likely to exceed a rate based on the
organization's actual costs.
e. Fixed rates may be negotiated where predetermined rates are
not considered appropriate. A fixed rate, however, must not be
negotiated if (i) all or a substantial portion of the
organization's Federal awards are expected to expire before the
carry-forward adjustment can be made; (ii) the mix of Federal and
non-Federal work at the organization is too erratic to permit an
equitable carry-forward adjustment; or (iii) the organization's
operations fluctuate significantly from year to year.
f. Provisional and final rates must be negotiated where neither
predetermined nor fixed rates are appropriate. Predetermined or
fixed rates may replace provisional rates at any time prior to the
close of the organization's fiscal year. If that event does not
occur, a final rate will be established and upward or downward
adjustments will be made based on the actual allowable costs
incurred for the period involved.
g. The results of each negotiation must be formalized in a
written agreement between the cognizant agency for indirect costs
and the nonprofit organization. The cognizant agency for indirect
costs must make available copies of the agreement to all concerned
Federal agencies.
h. 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.
i. To the extent that problems are encountered among the Federal
agencies in connection with the negotiation and approval process,
OMB will lend assistance as required to resolve such problems in a
timely manner.
D. Certification of Indirect (F&A) Costs
1. Required Certification. No proposal to establish indirect
(F&A) cost rates must be acceptable unless such costs have been
certified by the non-profit organization using the Certificate of
Indirect (F&A) Costs set forth in subsection 2., below. The
certificate must be signed on behalf of the organization by an
individual at a level no lower than vice president or chief
financial officer for the organization.
2. Each indirect cost rate proposal must be accompanied by a
certification in the following form:
Certificate of Indirect (F&A) Costs
This is to certify that to the best of my knowledge and
belief:
(1) I have reviewed the indirect (F&A) cost proposal
submitted herewith;
(2) All costs included in this proposal [identify date] to
establish billing or final indirect (F&A) costs rate for
[identify period covered by rate] are allowable in accordance with
the requirements of the Federal awards to which they apply and with
Subpart E of part 75.
(3) This proposal does not include any costs which are
unallowable under Subpart E of part 75 such as (without
limitation): public relations costs, contributions and donations,
entertainment costs, fines and penalties, lobbying costs, and
defense of fraud proceedings; and
(4) 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 Federal awards
to which they are allocated in accordance with applicable
requirements.
I declare that the foregoing is true and correct.
Nonprofit Organization: Signature: Name of Official: Title: Date of
Execution: [79 FR 75889, Dec. 19, 2014, as amended at 81 FR 3018,
Jan. 20, 2016]