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.
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 Attachment C) and not otherwise
treated as direct 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 State 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 the Superintendent
of Documents, U.S. Government Printing Office.
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 grantee department or agency, accounting and personnel
services performed within the grantee department or agency, depreciation
or use allowances on buildings and equipment, the costs of operating
and maintaining facilities, etc.
does not apply to State public assistance agencies. These agencies should
refer instead to Attachment D.
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.
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.
pool" is the accumulated costs that jointly benefit two or more programs
or other cost objectives.
"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 award bearing
a fair share of the indirect costs in reasonable relation to the benefits
received from the costs.
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. 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
"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.
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.
"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.
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, shall be so selected as to avoid
inequities in the allocation of costs.
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 awards and other activities included in that function
by means of an indirect cost rate(s).
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.
a. Where a
grantee agency'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 grantee agency'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
the direct costs and the indirect costs shall 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, major
subcontracts, etc.), (2) direct salaries and wages, or (3) another
base which results in an equitable distribution.
a. Where a
grantee agency's indirect costs benefit its major functions in varying
degrees, such costs shall be accumulated into separate cost groupings.
Each grouping shall 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
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 shall
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.
where a special indirect cost rate(s) is required in accordance
with subsection 4, the separate groupings of indirect costs allocated
to each major function shall be aggregated and treated as a common
pool for that function. The costs in the common pool shall 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, major subcontracts,
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.
a. In some
instances, a single indirect cost rate for all activities of a grantee
department or agency 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 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
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 subsections 2. and 3., and (2) the award to which
the rate would apply is material in amount.
this Circular adopts the concept of the full allocation of indirect
costs, there are some Federal statutes which restrict the reimbursement
of certain indirect costs. Where such restrictions exist, it may
be necessary to develop a special rate for the affected award.
Where a "restricted rate" is required, the 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.
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 the Common Rule.
b. A governmental
unit for which a cognizant agency assignment has been specifically
designated must submit its indirect cost rate proposal to its
cognizant agency. The Office of Management and Budget (OMB) will
periodically publish lists of governmental units identifying the
appropriate Federal cognizant agencies. The cognizant agency for
all governmental units or agencies not identified by OMB will
be determined based on the Federal agency providing the largest
amount of Federal funds. In these cases, a governmental unit must
develop an indirect cost proposal in accordance with the requirements
of this Circular and maintain the proposal and related supporting
documentation for audit. These governmental units are not required
to submit their proposals unless they are specifically requested
to do so by the cognizant agency. Where a local government only
receives funds as a sub-recipient, the primary recipient will
be responsible for negotiating and/or monitoring the sub-recipient's
Indian tribal government desiring reimbursement of indirect costs
must submit its indirect cost proposal to the Department of the
Interior (its cognizant Federal agency).
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 Federal
agency. 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.
of proposals. The following shall be included with each indirect cost
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 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
where appropriate, by the Federal cognizant agency in a subsequent
c. The approximate
amount of direct base costs incurred under Federal awards. These
costs should be broken out between salaries and wages and other
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.)
Each indirect cost rate proposal shall be accompanied by a certification
in the following form:
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:
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 OMB Circular A-87, "Cost Principles
for State and Local Governments." Unallowable costs have been adjusted
for in allocating costs as indicated in the cost allocation plan.
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.
rates will be reviewed, negotiated, and approved by the cognizant Federal
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 funding agency has reason to believe that
special operating factors affecting its awards necessitate special indirect
cost rates, the funding agency will, prior to the time the rates are
negotiated, notify the cognizant Federal agency.
The use of predetermined
rates, if allowed, is encouraged where the cognizant agency has reasonable
assurance based on past experience and reliable projection of the grantee
agency'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.
The results of
each negotiation shall be formalized in a written agreement between
the cognizant agency 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 shall be made available to all Federal agencies for their use.
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 Attachment B of this Circular, 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,
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 grantee 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 grantee agency level (i.e.,
the agency specifically identifies fringe benefit costs to individual
employees), the governmental unit should so advise the cognizant agency.
provided by the grantee agency. In some cases, governmental units provide
and bill for services similar to those covered by central service cost
allocation plans (e.g., computer centers). Where this occurs, the governmental
unit should be guided by the requirements in Attachment C relating to
the development of billing rates and documentation requirements, and
should advise the cognizant agency 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.
allocations not using rates. In certain situations, a governmental unit,
because of the nature of its 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 review,
negotiation, and approval.
Appeals. If a
dispute arises in a negotiation of an indirect cost rate (or other rate)
between the cognizant agency and the governmental unit, the dispute
shall be resolved in accordance with the appeals procedures of the cognizant
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 agency regulations).
To the extent that problems are encountered among the Federal agencies
and/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.