Recovering Overhead Costs in Government Contracts: New Opportunities November 5, 2015 Co-sponsored by: California Community Foundation Center for Nonprofit Management First5LA 2015 CalNonprofits Annual Policy Convention

Skills: workshops and webinars Collaborative discussions with regional grantmaking associations: changing the norms Advocacy with government: enforcing the rules, improving the rules

4 ways to recover indirect costs from government 1 big new opportunity from OMB Choosing the strategy that’s best for you AGENDA

Who is in our group today?

Why we need to get the full costs of programs reimbursed

Unfair to nonprofit providers Drives nonprofits out of business damaging the safety net Repairing the roof is a cost of programs

How do your current contracts treat indirect costs?

Four Ways to Recover Indirect Costs 1.10% minimum rate (OMB) 2.Direct cost charging method 3.Negotiate indirect rate with pass- through entities 4.Obtain federal Negotiated Indirect Cost Rate (NICR)

Option 1: the new 10% rule from OMB OLD OMB Circulars A-110 and A- 122 for nonprofits OMB Circulars A - 87 and A for governments OMB Circulars A - 21 and A for universities Circular A-133 for everyone NEW 2CFR 200 Uniform Guidance Replaces old circulars In effect for: Awards that begin after 12/26/14 and Audits of fiscal years beginning after 12/26/14 For FAQs search COFAR OMB Uniform Guidance

Costs which benefit multiple programs and functions Includes but not limited to Administrative costs Impossible to track the exact benefit to each program or function – benefit must be estimated What are indirect costs, again?

Agency-wide administrative costs Board support Strategy development Financial management HR management IT management

Forbidden cost allocation method (fed rules) May not allocate shared costs based on funding All cost centers – including those without federal funds – must receive a fair share of allocated costs

Indirect costs in Uniform Guidance pass-through agencies must: Accept your NICR* if you have one, or Either: Allow you to negotiate indirect rate with them Use a minimum flat indirect rate of 10% (of modified total direct costs) * NICR: Negotiated Indirect Cost Rate

Government agencies* cannot: Force or entice you to accept an indirect cost rate that is lower than their approved NICR or the 10% de minimis rate Cannot award points or preferences to applicants with lower indirect rates * or nonprofit pass-throughs If this is happening to you, contact CalNonprofits

Term confusion Grants? Contracts? Pass-throughs? Contractor and sub-contractor? Recipients and sub- recipients?

10% means 10% of MTDC … so first determine MTDC 4 million x 10% = 400,000

Note that the 10% de minimus rate is 10% of MTDC not 10% of total costs

MTDC Direct Cost Base excludes: Equipment & capital expenditures Rental costs Participant support costs Charges for patient care Tuition remission Portion of each sub-award in excess of $25,000 Other costs that would distort distribution of indirect costs

Option 2: Direct charging shared costs Cost allocation plan documents an allowable method to estimate the benefit of shared costs to a federal award Allocate indirect costs according to cost allocation plan and charge the appropriate portion as direct cost

Option 2: Direct charging shared costs

Cost allocation rationales for direct charging indirect costs examples: % of hours worked in each function (for non- exempt employees) % of effort expended for each function (for exempt employees) % of transactions % of participants % of units of service

Option 3: Negotiating with the pass-through government agency

Option 4: Obtaining a federal Negotiated Indirect Cost Rate (NICN) Next workshop!

Option 4: How to negotiate federal Negotiated Indirect Cost Rate (NICR) Next workshop! Must have direct federal award Basic steps 1.Find your cognizant agency and its negotiating office 2.Prepare comprehensive cost-centered annual budget 3.Identify direct and indirect costs 4.Deal with unallowable direct and indirect costs 5.Choose which method to use to compute the rate 6.Allocate shared costs not included in the rate 7.Propose and negotiate rate

Which method is best… 1.10% de minimis rate? 2.Direct charging method? 3.Negotiating rates with your pass through entities? 4.Federal Negotiated Indirect Cost Rate? for your nonprofit?

More on the OMB and 10% ??? Before you use the 10% rate Are our Indirect Costs actually less or greater than 10% of Modified Total Direct Costs? How will we handle requirements for fair allocation of indirect costs to all cost centers?

Applying Indirect Cost Rate

An indirect Rate > 10%

Applying 10% Limit

Options if your MTDC Indirect Cost Rate Exceeds 10% Obtain a negotiated indirect cost rate NICR = to your actual rate Identify indirect costs which can be redefined as direct Accept the 10% de minimis rate and identify unrestricted sources to cover the excess indirect costs

Must allocate all costs to all cost objectives that benefit Includes allocation to unallowable cost centers Example: Lobbying cost objective is generally unallowable but must be allocated its fair share of indirect & other common costs

OMB Uniform Guidance Key changes Compter < $5K now “supplies” Single audit threshold now $750K New requirements for pass-through agencies Personnel cost allocation and documentation rules Procurement procedures new Indirect costs...

Exceptions to Uniform Guidance Federal statutes override Uniform Guidance OMB has agreed to exceptions proposed by Federal Departments

Exceptions: Certain Block Grants § Only these Uniform Guidance provisions apply: § – Requirement to provide public notice of federal financial assistance programs § – Sub-recipient and contractor determinations § – Requirements for pass-through entities § – Fixed amount sub-awards

Best Approach for Your Organization?? Test the 10% Consider costs & benefits of direct charging Negotiate a NICR Speak up about overhead

Timing is Everything Talk to your funders about UG Understand their position Decide what works best for your organization as a whole Get help with funder resistance or confusion

The good news There’s a new option for overhead recovery in government contracts – it’s not perfect but it might be better for you CalNonprofits and others continue to get UG fully implemented and clarified (especially LA County initiative) Over time we can continue to work to get full recovery

Upcoming: Session 3 of 3 focused on obtaining a Federal Negotiated Indirect Cost Rate Webinars too CalNonprofits CFO Task Force

Bonus Section: Dealing with Admin Cost Limits

Statutory Limitations on Admin Costs Determine if all costs included in your indirect cost center are administrative Identify any administrative costs that you will charge as direct costs Apply the statutory limitation to determine the amount of admin costs that can be charged to award with the limitation Use unrestricted funds to cover remaining fair share of admin costs

Impact of 5% Admin Cost Limitation TOTAL Expenses Unallow indirect costs Excluded direct costsIndirect costsMTDCAward 1Award 2Award 3 Unrestricted Sources 4,450,00010,00040,000400,0004,000,0001,000,0002,100,000700,000200,000 Indirect Rate ,000100,000210,00070,00020,000 5% Admin limitation -50,000 50,000 Excluded costs 40,000 Unallow indirect 10,000 Total Costs 1,050,0002,310,000810,000280,000

Possible Strategies to Deal with Statutory Limitations Review definitions of admin costs carefully Review overall cost allocation methods Determine availability of unrestricted sources to subsidize the award with limitations