indirect costs, overhead, expenses, administrative, federal grants awards

Confused on how indirect costs are allocated for federal grant awards? Contact Frank North at LSL CPAs.

Expenditures for federal grants can be from both direct and indirect costs. Direct costs are those that can be easily assigned to a federal award program, they include cost of goods and services directly related to the grant activity as well as compensation and related fringe benefits of employees who work on the federal grant award. On the other hand, indirect costs share a common objective and cannot be identified readily and specifically with an award program, they usually come from central services activities, such as computer centers, purchasing, accounting, facilities cost, etc.

To claim indirect cost reimbursements under a grant program, a government agency must prepare an indirect cost rate proposal with related documentation to support those costs. The proposal and related documentation must be retained for audit.

A government agency that received more than $35 million in direct Federal funding must submit its indirect cost rate proposal to its cognizant agency. Other government entities with an indirect cost proposal must maintain the proposal and relating supporting documentation for audit. They are not required to submit their proposals unless they are specifically requested to do so by the cognizant agency for indirect costs.

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.

The indirect cost proposal must include the proposed rates, financial data upon which the rate is based and a chart showing the organizational structure of the agency during the period for which the proposal applies. The indirect cost rate proposal must be accompanied by a certification in the form of a Certificate of Indirect Cost signed by the Chief Executive Officer or Chief Financial Officer of the government agency.

If required to be submitted, the indirect cost rates will be reviewed, negotiated and approved by the cognizant agency and used consistently by all federal agencies. The result of each negotiated rate must be formalized in a written agreement between the cognizant agency for indirect costs and the government agency.

Effective with the Uniform Guidance, any non-Federal entity that has never received a negotiated indirect cost rate, except for those non-Federal entities described in Appendix VII to Part 200—States and Local Government and Indian Tribe Indirect Cost Proposals, paragraph D.1.b, may elect to charge a de minimis rate of 10% of modified total direct costs which may be used indefinitely. Costs must be consistently charged as either indirect or direct costs but may not be double charged or inconsistently charged as both. If chosen, this methodology once elected must be used consistently for all Federal awards until a non-Federal entity chooses to negotiate for an indirect cost rate.

If you need further guidance on indirect cost allocation for single audit compliance, contact  LSL CPAs. or you can contact Frank North directly.

Frank North

Frank has not stopped learning and teaching since he joined LSL CPAs as a staff auditor in 1994. He attributes his tenure to the variety of clients and fun culture of the firm. Given that he now works mainly with municipalities and government entities, that’s saying a lot. But he enjoys the organization required to perform these audits while simultaneously mentoring audit team members to perform at their best. Frank also works with clients on financial reporting and accounting throughout the year. You can reach Frank at 714-672-0022. Read Frank's full bio.