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Indirect Cost Group (ICG)

The following is an excerpt from the "Cost Allocation Guide for State and Local Governments"


Application of Principles:

Q. Is OMB Circular A-87 mandatory to determine allowable costs for state and local governments?

A. Yes. The Circular states that these principles will be applied by all federal agencies in determining costs incurred by governmental units under federal grants, cost reimbursement type contracts, and cooperative agreements (including subgrants and subcontracts) except those with (1) publicly-financed educational institutions subject to OMB Circular A-21, and (2) programs administered by publicly-owned hospitals and other providers of medical care that are subject to requirements promulgated by the sponsoring federal agencies.

Q. Are public school systems under the same guidelines as state and local governments and subject to OMB Circular A-87?

A. The standards for public schools are included in OMB Circular A-87.

Q. Will the indirect costs, determined by applying the indirect cost rate to federal programs, be reimbursed to state and local governments?

A. The indirect costs will be recognized as part of the total cost of the federal programs, except where restricted or prohibited by law. The reimbursement of indirect costs is determined by the federal awarding agency.

Federal Cognizance:

Q. Can another federal agency question the costs included in a central service cost allocation plan submitted to and approved by the cognizant agency?

A. Approved central service costs are set in a negotiation agreement, signed by the representatives of the state or local government and the cognizant federal agency. However, in restricted indirect cost rate calculations, occupancy and maintenance costs and other statewide costs unallowable per 34 CFR 76.565-569, are adjusted from the approved central services costs. Other similar adjustments include, but are not limited to:

  • Legal costs related to tort cases, tort settlements, and legal proceedings related to the organization’s mission, rather than its internal management. For example, legal costs for a school district boundary dispute, or for advice on educational activities, are unallowable. Legal costs related to the organization’s personnel system or related procurement activities are allowable.

  • State auditor costs related to non-federal activities are unallowable.

  • Q. Where can states and local governments receive additional information or clarification on the implementation of OMB Circular A-87?

    A. Federal agencies assigned cognizance for central service cost allocation plans or indirect cost rate proposals can provide guidance. Additionally, guidance is included in the Implementation Guide for OMB Circular A-87.

    Q. Is there is a form called a “Federally negotiated rate agreement"?

    A. The Indirect Cost Rate Agreement provides indirect cost rates a state or local department/agency may use to claim indirect costs under federal programs. The Agreement covers specific periods and must be re-negotiated as required. The Agreement is issued by the cognizant federal agency. The Agreement is signed by both the recipient organization and the cognizant federal agency.

    Q. Who is responsible for the approval of state and local central service cost allocation plans and indirect cost proposals?

    A. The U.S. Department of Health and Human Services approves state and local government’s central service cost allocation plans.

    Q. How will a central service plan be used?

    A. The central service plan is used to distribute allowable central service costs to each of the individual government departments. The costs are allocated and included in the appropriate state agency’s indirect cost proposal.

    Q. Our public school district receives direct federal grant funds. Who approves the indirect cost rate?

    A. LEA indirect cost oversight is delegated to the SEAs. Contact the business office at the SEA to obtain information about the approved rate.

    Allocation of Cost:

    Q. How can a grantee distinguish between a direct cost and an indirect cost?

    A. Generally, a direct cost is one that is incurred specifically for one activity. Indirect costs are of a more general nature and are incurred for the benefit of several activities. Once a grantee makes an election and treats a given cost as direct or indirect, that treatment must be applied consistently and may not change during the fiscal year.

    Q. Is it permissible to allocate costs (either directly or indirectly) on the basis of revenue or on the basis of funds available under federal grants or contracts?

    A. No. The allocation of costs by either of these methods is unacceptable. Cost must be allocated on the basis of costs/expenditures incurred.

    Q. Do we need to follow the time reporting requirements of OMB Circular A-87 for the salaries and wages of employees that are used for matching requirements on federal awards?

    A. Salaries and wages of employees used in meeting cost sharing or matching requirements must be supported in the same manner as those claimed as allowable costs on federal awards.


    Q. If a grantee hires an individual to perform speech pathology services to students in the school, is the service considered a subaward?

    A. No, this is a professional service providing an auxiliary expertise normally provided in-house. The costs would not be treated as a subaward and are not subject to the exclusion of amounts over $25,000.

    Q. . If a grantee contracts with a software vendor to provide technical support and enhancement of existing business software, would this be considered a subaward

    A. No, if this cost is for organization-wide support, then it is an indirect cost.

    Q. Would a school nurse that only provides medication (not an instructor) to students in the classroom be considered a subaward?

    A. No, this is a professional service providing an auxiliary expertise normally provided in-house. The costs would not be treated as a subaward and are not subject to the “exclusion of amounts over $25,000”.

    Other Items:

    Q. Are the costs of significant software projects allowable as charges to federal awards?

    A. Federal programs benefitting from such projects should be charged only for amortization of the capitalized costs once the projects are implemented and in use by federal programs. The costs should be amortized over the useful life of the intangible asset.

    Q. May estimates be used when calculating provisional or fixed rates?

    A. Provisional and fixed indirect cost rates should be based on the most currently available actual cost data or estimates supported by appropriate documentation. Supportable estimates may be more appropriate than a prior year’s cost in circumstances where expected changes are not reflected in the actual cost data. Regarding the fixed rate, estimates may be included in the part of a fixed rate calculation reflecting the current proposed rate (not the part of the calculation with the comparison of the previous year’s recovery to the actual rate).

    Q. Must a grantee have an approved indirect cost rate to charge indirect costs to programs?

    A. ED requires grantees charging indirect costs to programs to obtain a federally approved indirect cost rate. LEAs obtain approve indirect cost rates from the SEA via a Delegation Agreement with ED. ED grant officers may approve a temporary indirect cost rate of 10% of direct salaries and wages, for grantees receiving ED awards and who do not have a federally approved rate. However, a grantee must submit an indirect cost rate proposal to its cognizant agency within 90 days of the grant award notice.

    Q. May a grantee apply an approved restricted rate to unrestricted programs?

    A. Grantees have the option to use the restricted rate for indirect cost claims under all federal programs that permit reimbursement. The rate must be current, however, meaning it is approved and covers the period coincident with grant activities.

    Restricted Indirect Cost Rates:

    Q. What is the background on the restricted indirect cost rate?

    A. Many of the large educational entitlement programs that provide funds to state and local jurisdictions were created by legislative statute which require that the federal funds be used to "supplement and not supplant" on-going educational services. This means that state and local agencies have tax revenue or other financial resources of their own to finance the education. Without the "supplement not supplant" provision, states could simply reduce its support of educational service to the extent of the newly available federal funding or could substitute federal money for tax revenue already generated to fund schools.

    Q. What are Restricted Rates?

    A.Restricted rates are established to incorporate the provisions of program legislation that bar supplanting. The restricted indirect cost rate formula is described at 34 CFR 75.564 and 76.565. The formula limits the general management costs that can be included in the indirect cost pool (numerator) and requires adjustments to the MTDC base (denominator).

    Q. What is the practical effect of the restricted indirect cost rate formula?

    A. The formula results in a marginal distribution of administrative costs required to implement federal assistance. The calculation of the restricted indirect cost rate is viewed as a funneling process. The first step requires the state and local unit of government to segregate the accounting of costs between indirect and direct with full cost reimbursement in mind. The restricted indirect cost rate determination further filters costs that are be incurred by the state or local unit of government. Rules at 34 CFR 76.565 allow only costs for the "direction and control" of the grantee to be considered general management costs.

    Costs associated with activities under organizational units that are not for department level management also are not considered general management costs. Therefore, in a restricted rate setting, indirect costs are purged to include only "organization-wide" general management costs at the grantee level (e.g., bookkeeping, accounting, payroll, auditing, procurement, and personnel). The general management costs are refined again to exclude costs of the Chief Executive Officers, their immediate officers, component officers and related costs. Related costs include applicable fringe benefits, travel, space costs and other associated costs. These costs are then reclassified from indirect to the MTDC base.

    Q. Who are the Chief Executive Officers?

    A. The Chief Executive Officer exercises overall responsibility for the operation and management of the organization. The Chief Executive Officer's immediate office includes any Deputies or similar office, along with the immediate support staff. It is important to emphasize that the Chief Executive Officer of the grantee is not the Governor or member of an elected or appointed Board. Expenses for these positions are already unallowable as general government expenses.

    Q. What are Component Costs?

    A. Generally, components are organizational units for both indirect and direct functions existing one level below the Chief Executive Officer unit. Depending on the organization, there may be circumstances where component costs would properly be accounted for in the indirect cost pool. The grantee’s organizational structure is considered in determining adjustments for components.

    Q. What does the term organization-wide mean in the restricted indirect cost rate determination?

    A. The term organization-wide means those departmental level direction and control function costs that all grantees have in common. The regulations describe accounting, payroll, and personnel management as examples of organizational disciplines. Often cross cutting educational activities (e.g., Curriculum Development, Pupil Data, Library Services, Evaluation Services, and School Services) are mistaken for indirect cost functions. They are not for direction and control of the organization, but rather provide services to schools or students. Those cost centers are program service functions, even if they have system-wide impact.

    The restricted indirect costs includes activities related to maintaining operations as a business concern, but not the delivery of services that the state or local government provides as part of its specific mission.

    Q. May costs for divisional administration be billed directly to federal programs?

    A. Generally, such costs are the obligation of the state and local government. An exception would be granted if the program official makes a determination that the costs are specifically required for the award.

    Q. Space type costs are accepted in a usual indirect cost environment. How are they accounted for in the restricted indirect cost formula?

    A. Occupancy and space maintenance costs as described at 34 CFR 76.568 are included in the direct cost base (denominator) for the restricted indirect cost rate determination. However, if the state and local government can identify the portion of space that supports allowable indirect cost personnel, then the costs may be included with allowable general management costs.

    Q. May the space costs that are reclassified to the other direct cost base be recovered through direct billings?

    A. No. These space costs are the financial responsibility of the organization.

    Q. When occupancy costs are part of the approved statewide costs, how are they treated for Restricted Rate purposes?

    A. Occupancy costs are disallowed, except where allowable under 34 CFR 76.568 (b). The disallowed amount is not included in the base, because these costs are not incurred by the grantee.


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    Last Modified: 10/19/2012