1. Financial Management Overview
USDA/State agency Biennial Conference
November 30, 2011
Lynn Rodgers-Kuperman

2. Agenda
Financial management of the nonprofit school food service account (NSFSA)
Procurement basics
Overview of indirect costs and assessment of such costs

3. Financial Management of the NSFSA

4. So what is financial management in simple terms?
It is the management of the finances of an organization in order to achieve financial objectives
Key Elements include:
Financial Planning: Managing ones needs
Financial Control: What is being done to ensure funds are being used properly
Financial Decisions: Determining how are funds spent

5. Why is financial management important in SMPs?
Managing the financial resources of Federal school meal programs(SMPs) is critical to the success of maintaining quality standards and ensuring nutritious meals are served to children
Dollars spent by the Federal government, states and paying students added together represent a significant level of public funding

6. OMB statement -- we are stewards of taxpayers’ money
The Federal Government has a fundamental responsibility to be effective stewards of the taxpayers’ money. We must be responsible with money that comes to the government, money that is spent by the government, and money that is used in running the government itself. Decision makers and the public itself must have confidence in financial management efforts.

7. Poor financial management…

8. Transparency the New Buzz Word
Moreover, given the Federal Government’s fiscal challenges there is a significant need for transparency and control regarding
financial systems
Internal financial control
systems need to be reviewed
to ensure that they
minimizing improper payments

9. Receiving Funds in a Reimbursement Program?
In many other programs, program operators bill the Federal awarding agency for program costs for reimbursement
In the SMPs, SFAs do not bill USDA/FNS for the reimbursement of program costs
What does this mean?

10. What does this mean?
SFAs receive certain monies (rate of reimbursement) for each meal served
This is not free money, there
are strings attached:
Meals must conform to program regulations
SA and SFA must adhere to Department-wide and program-specific regulations (i.e., Federal cost principles, procurement regulations, etc.)

11. Federal regulations 7 CFR Part 210
End Hunger
SMPs operate on a nonprofit basis,
with all revenue used to support or
improve the food service operations
SFAs must establish a NSFSA in which all of the revenue from all food service operations conducted by the SFA, principally for the benefit of school children, is retained and used only for the operation or improvement of the nonprofit school nutrition program

12. Imposed controls -- restrictions placed on funds
The funds provided by FNS to the SA and in turn to the SFA for the SMPs are granted with terms and conditions
These terms and conditions are outlined in the Federal regulations and Office of Management and Budget (OMB) cost circulars (i.e., Federal cost principles)

13. OMB cost circulars
Federal cost principles are general rules for charging costs to grants, thereby billing the Government for the costs
They explain if a cost is allowable,
in other words, whether a cost
can be paid for with funds in the
NSFSA
These include, but are not limited to, being necessary and reasonable for efficient performance of the SMPs, and allocable thereto (that is, providing a benefit to the program commensurate with the cost incurred)

14. OMB cost circulars, contd.
2 CFR Part 225 (OMB Circular A-87) applies to State, local, or Indian Tribal governments
2 CFR Part 230 (OMB Circular A-122) applies to nonprofits
Note: They also describe the different allocation methodologies that can be used by the school district and the general criteria for charging or billing costs as direct or indirect (more on this in the 3rd section of this presentation)
The rules to charge costs to the Federal government

15. OMB cost circulars, contd.
Remember, all costs (direct or indirect) must be allowable
2 CFR 225 (A-87)
Appendix A provides a list of criteria for allowable costs (more general in nature)
Appendix B classifies certain costs in three categories:
allowable,
allowable with prior SA approval, or
unallowable

16. What does this mean?
Appendix B must be read in conjunction with Appendix A in order to determine whether a cost is allowable

17. General criteria for allowable costs?
Necessary;
Reasonable;
Allocable;
Legal under State and local law;
Conforms with Federal law, regulation, and grant terms;
Consistently treated as direct or indirect;
Determined in accordance with Generally Accepted Accounting Principles (GAAP);
Not included as a cost or matching contribution of any other grant (except where allowed by Federal regulations);
Net of applicable credits; and,
Adequately documented

18. In a nutshell…
SFAs follow a multi-step process to determine whether funds from the NSFSA may be used for a certain cost 1
Examine each cost by reviewing the criteria in 2 CFR Part 225; 2
Review program regulations in conjunction with historical FNS policy (which clarifies program regulations); and 3
Apply these collective principles to the specific facts and circumstances regarding each cost.

19. Procurement Basics

20. Remember earlier I mentioned financial planning, control, and decision making ? Do we use these processes in procurements?
Yes, we do!

21. But first, what is procurement?
Generally, the purchasing of goods and services
In the SMPs, this process involves:
distinct phases of planning;
drafting specifications; (decision making)
advertising the procurement;
awarding a contract; and
managing the contract (control)

22. So it makes sense that before purchasing for programs…
An SFA must plan and evaluate:
Food Service Operations
Food Service Needs
This is also called
forecasting
Before I discuss the purchasing guidelines/frameworks in more detail, I want to go over some important steps SFAs need to take before they actually begin purchasing.
These include: Evaluating food service operations, and evaluating food service needs

23. Evaluate Operations
SFAs must evaluate their schools’ current food service operations to determine their needs
Self-Op/Central Kitchen/FSMC
Storage capacity
Processing abilities
Staff resources
Food safety practices
Prior year menus
Current food inventory
Before an SFA can begin purchasing, an SFA needs to look at their current operations. Self-assessment is an important first step in even beginning to purchase any type of food or services, including local whole foods.
This may include:
-Storage capacity
-Staff resources
-Prior year menus, and other operational abilities
Specifically, when we are talking about evaluating operations for ability to handle local, fresh product, evaluation may should include:
-Capacity to process on-site
-Capability to locate and work with a processor
-Access to farmers/distributors with processed products
-Access to a famer cooperative with processing capabilities

24. Evaluate Needs
SFAs must then evaluate their school’s current food service needs
Necessary volume
Students’ preferences
Menu requirements
Required transportation and delivery needs
A second important step is that an SFA evaluate their food service NEEDS
This includes:
Needed volume; students preferences; menu requirements, and much more

25. Next step: inventory management
Inventory is the value of food and supplies on hand, whether at the food preparation site or in a central warehouse or facility
Effective inventory management is essential for managing and controlling costs
Includes effective receiving procedures, a system for accounting for items removed from inventory, effective counting of items in stock, and determining appropriate methods for calculating the financial value of the inventory

26. Understanding how much food you need
Calculating the amount of food needed to purchase, to equal the amount of food needed for a recipe or service, is an important part of meal production planning
As Purchased (AP) refers to the weight of the product as it exists when purchased. E.g., pineapples are whole with skin and the top; whole turkey have skin and bones
Edible Portion (EP) refers to the part of the product that can be consumed; Using EP conversion information is very important in determining the total amount of a product needed

27. Resource? Tip: USDA Food Buying Guide is a helpful resource(
Provides the yields, or the amount of servings obtained in a purchased unit of different products (such as canned fruits), yields from raw to cooked product (such as raw ground beef), and how to determine contributions of menu items towards the meal pattern for the National School Lunch Program (NSLP) or School Breakfast Program (SBP)
Contains very useful general information for menu planning, procurement, and food production

28. Storage area organization
Storage areas should appropriately hold goods under proper conditions to assure
quality and safety until time of use
(prevents spoilage/loss)

29. Controlling waste Order only food needed for menu production
Store food properly
Portion control
Plan to utilize leftovers
Survey students to determine menu preference
Food presented in appealing manner

30. Understanding staffing costs
Managing staffing and scheduling is a critical part of financial management
Staffing is the determination of the appropriate number of workers needed for the operation to do the work that needs to be accomplished

31. Theft & fraud prevention, contd.
Implement procedures to prevent:
Customer theft
Employee theft
Vendor theft
Implement key and lock control
Next, we will discuss procurement of goods and services, a key aspect of financial management

32. What else is key to the procurement process
What else is key to the procurement process? What is the most important principle?
Free and open competition!
Free and open competition means:
All suppliers are on the same level playing field and have the same opportunity to compete

33. Why is competition important?
Cost of products and services
Quality of products and services
If playing field is level it encourages more vendor participation

34. What regulations must SFAs follow when conducting procurements?
Program Regulations for Procurement:
NSLP: 7 CFR
SBP: 7 CFR
Uniform Administrative Requirements for Procurement:
State/local governments: 7 CFR
Non-profits: 7 CFR

35. Who created these regulations? Are they complex?

36. This skit isn’t quite accurate …..
The regulations found at 7 CFR Part 3016, Uniform Administrative Requirements for Grants and Cooperative Agreements State and Local Governments may seem complex but the regulation actually encompasses a pretty clear set of principles

37. Let’s break the regulation down by starting with procurement methods
Informal procurement
Small Purchase Threshold
Formal procurement
Competitive Sealed Bidding
Competitive Negotiation

38. Informal Procurement (small purchase threshold)
Procurement contract under $100,000 in value
States or localities may set a lower small purchase threshold (which imposes more formal procedures)
SFAs should put solicitation in writing before contacting any potential offerors (i.e. draft specs)
Recommend at least 3 sources be contacted who are eligible, able, and willing to provide the product or service

39. Formal Procurement Methods
Value of purchase exceeds Federal, State, or local threshold for small purchases
More rigorous and prescriptive:
Competitive Sealed Bidding (i.e., IFB)
Competitive Negotiation (i.e., RFP)
Allows for the identification of evaluation factors and their relative importance

40. What does this mean? Detailed specs must be developed
Technical and cost factors
Bids/Proposals must be publicly solicited
Measure and document why one company’s response to a particular criterion is better than another (lends itself to an RFP)

41. Keep in mind…
SFAs may not intentionally split purchases to fall below the small purchase threshold and avoid formal procurement methods

42. Sometimes however…
There may be instances in which a specific market supports the need to separate certain products from the overall procurement. For example, milk and bread are commonly procured separately because there are fundamental differences between them and other food products, such as shorter shelf-life, specialized pricing mechanisms, and durability.
Similarly, an SFA may find that fresh produce may be considered a separate market given that it shares similar characteristics as bread and milk, and may want to separate this procurement from their overall food procurement.
Another example may be If an SFA is participating in an activity such as a “Harvest Week” for their school lunch programs where they are trying out new vegetables and it is necessary to procure specific food items, it may make sense for the SFA to conduct a separate procurement for those specific products.

43. Do the procurement methods result in the same contract types?
For formal purchasing, an SFA must decide if their solicitation will result in a:
Fixed Price Contract (IFB or RFP)
Cost Reimbursable Contract (only RFP)

44. Fixed price contract Provides a stated price that is fixed,
without any upward
or downward
adjustment for the
duration of the contract, including for all renewal periods (Note: may contain an economic price adjustment tied to an appropriate index)

45. Fixed price contract, contd.
Provides the maximum incentive for the contractor to control costs and perform effectively
Imposes the least administrative burden on the contracting parties
-The economic price adjustments, which allow an SFA to adjust costs in the contract, must be tied to an appropriate standard or cost index. Relating the price adjustments in a contract to an index allows the SFA to ensure that increases under the contract are not without basis. For example, if fuel prices are increasing drastically, then an appropriate index—such as the Consumer Price Index—will reflect this change.
- As always, the terms of the economic price adjustment, including the appropriate standards or indices to which it will be tied, must be expressly identified in the original solicitation and contract documents.
-Vendor bears little performance risk

46. Cost Reimbursable Contract
Provides for payment of allowable costs incurred in performing the contract
Appropriate to use when uncertainties involved in contract performance will not permit costs to be estimated with enough accuracy to use fixed price
- Vendor bears little performance risk

47. Cost Reimbursable Contract, contd.
Frequently occur in the SMPs as cost plus fixed fee contract
Provides for the reimbursement of allowable costs plus the payment of a fixed fee to the contractor
For cost reimbursable contracts, SFAs must include the following provisions in all cost reimbursable contracts and in solicitation documents:
- Vendor bears little performance risk

48. Cost Reimbursable Contracts, contd.
Allowable costs will be paid from the nonprofit school food service account to the contractor net of all discounts, rebates and other applicable credits accruing to or received by the contractor or any assignee under the contract, to the extent those credits are allocable to the allowable portion of the costs billed to the school food authority [210.21(f)(1)(i)]
- Additionally, this rule requires contractors to provide sufficient information to permit the school food authority to identify allowable and unallowable costs and the amount of all such discounts, rebates, and credits on invoices and bills presented for payment to the school food authority

49. Next step: developing a solicitation
Once the decision is made regarding what goods and services are needed and the appropriate method to acquire them, a solicitation must be developed which contains specifications & all necessary contract elements
Remember, forecasting helps the SFA determines what types of goods and services it needs

50. Solicitation: clear & accurate

51. Solicitation: clear & accurate, contd.
The description and scope need to be in line with what is being procured (i.e., procuring processor, FSMC, distributor, etc.)
Identify all of the requirements that offerors must fulfill, so that changes do not need to made to the contract after award has been made

52. Solicitation: clear & accurate, contd.
Food: grading, weight, item labels, nutritional qualities, desired end product, etc.
Equipment: think about quantity and size

53. Scoring criteria
Clearly develop scoring criteria in order to evaluate all bids received
Scoring criteria should identify all evaluation criteria and their relative importance
E.g., points assigned to each criteria
Note: IFB doesn’t generally include preference points (SFA determines who is responsive based on the solicitation and awards contract to bidder with lowest price)

54. Necessary contract elements?
Ensure other needed contract elements are included in solicitation:
The return of discounts, rebates,
and applicable credits
Clear and specific time period
Clauses regarding termination for
convenience and cause
Remedies for breach (i.e., negligence)

55. Remember financial planning, controls, and decision making?
Ensuring that contract elements are clear and result from a properly written solicitation utilizes all three of the above elements.
Plan your purchases carefully, ensure controls are in place to realize the provision of your contract, i.e., rebates, discounts, and credits, and overall make appropriate decisions about your needs and how to monitor your contracts.

56. USDA Foods (i.e., commodities)
Schools participating in certain SMPs receive USDA Foods, called “entitlement” foods
Schools may choose to process USDA Foods
Food safety concerns (most items come
fully cooked)
Difficult to use food items in raw form
More varied higher quality meals
Reduction in prep time and waste
Portion control
Product consistency (i.e., getting same chicken nugget each time)
Cost (labor cost associated with processing)

57. Considerations re: USDA Foods
Procuring a processor?
Be clear -- what are my processing needs, needed delivery times, frequency of delivery, storage, etc.
Be clear about distribution agreements
Address whether bonus USDA Foods may require processing
Address possible substitutions whether involving commercial or USDA Foods

58. Crediting of USDA Foods
There are several methods to obtain value of USDA Foods with each State determining what method(s) it will allow (check with SA)
FSMC must credit SFA for value of donated foods received for use in the SFA’s meal service in a school year
Note: FSMC must provide credit even if donated foods are not used

59. What is the process for awarding a contract?
The goals of sealed bidding and competitive proposals are to obtain the best product and services at the best and lowest price
IFB is awarded through sealed bid to the lowest, responsive and responsible bidder
RFP is also awarded to the lowest, most responsive bidder after negotiations have taken place

60. IFB Contract Award
Bids are received and each one must be time-stamped and dated
Each bid is opened publicly and recorded in the presence of interested parties
The purpose of a public bid opening is to ensure that bid prices/responses are not altered after being opened

61. IFB Contract Award, contd.
Some examples of information that is read aloud for each bid is:
name of bidder
price
products offered
payment terms
delivery date
Award made to lowest, responsive and responsible bidder

62. RFP Contract Award
Price is the primary factor in the award of a contract when using competitive proposals
Technical proposals are solicited, evaluated and ranked before cost is considered
Once the SFA has identified its top-ranked offerors, the SFA enters into negotiations with these offerors
Once equivalent proposals are obtained, the SFA requests these offerors submit best and final prices
Part (d)(3)(iv) provides that when using the competitive proposal method, the award is made with “price and other factors considered”

63. RFP Contract Award, contd.
The award is then made to the offeror submitting the lowest price since all of the negotiated offers have been deemed acceptable
Part (d)(3)(iv) provides that when using the competitive proposal method, the award is made with “price and other factors considered”

64. What happens after contract award?
Contract execution!
For complex contracts, a start-up meeting should be held including the food service director, staff members, contractor, etc. to clarify contract requirements and ensure that expectations are set up front

65. SFA must manage contract
This is why the terms of the solicitation & contract are very important!

66. SFA’s contract management responsibility?
Continuously monitor that they are receiving the correct products requested in the contract
Ensure that contract terms are being enforced
Ensure accurate and timely payment of invoices, including the return of discounts, rebates, and credits

67. Additional key pieces to consider?
Geographic Preference (optional)
Buy American
Allowable Costs
Material Change
Overly Responsive
Final Procurement Rule, October 2007

68. Geographic Preference
Even if there are state or local laws for geographic preference, applying a geographic preference is prohibited in Federal procurement except where applicable Federal laws expressly permit their use.

69. 2008 Farm Bill
The 2008 Farm Bill amended the National School Lunch Act to allow institutions receiving funds through the Child Nutrition Programs to apply a geographic preference when procuring unprocessed locally grown or locally raised agricultural product.
Final Rule Published April 22, 2011
Rule became effective on May 23, 2011

70. Where to go for more procurement training?
USDA created a web-based procurement training available through The University of Mississippi’s National Food Service Management Institute (NFSMI)  at the following web address: 
State Agency Guidance on Procurement Topic 1 & 2 is now available online by registering at NFSMI’s website (available to SAs, SFAs, interested parties, etc.)

71. What else can FNS do?
Let’s discuss what more FNS can do to provide guidance to States and SFAs
What are the biggest obstacles/struggles in this arena?

72. Indirect Costs

73. Indirect Cost Guidance
Section 307 of the Healthy, Hunger-Free Kids Act of 2010, P.L required FNS to issue guidance on indirect costs
The indirect cost guidance does not contain any new regulations, it merely provides the regulations/restrictions pertaining to indirect costs in one user friendly document

74. Complementary costs
Total program costs generally include direct and indirect costs
Total Program Cost = Direct Cost + Indirect Cost
This is why direct costs must be included when discussing indirect costs

75. Direct Costs
Example:
Sugar
Lemons
Water
Plastic glasses
Signage
Labor

76. Direct Costs, contd.
Direct costs are incurred specifically for a program or other cost objective, and can be readily identified to a particular objective such as school food service
Examples of direct costs in SMPs include:
Food,
Wages and salaries of the staff working in the school food service,
Supplies specifically used in the school food service
"Cost objective" means a function, organizational subdivision, contract, grant, or other activity for which cost data are needed and for which costs are incurred.

77. Direct Costs, contd.
2 CFR Part 225 describes direct costs as, “those that can be identified specifically with a particular final cost objective”
Costs that cannot be exclusively attributable to the SMPs should generally be treated as indirect costs
Move up

78. Direct Costs, contd.
A good question to help understand “identified specifically” is -- Who benefitted from the SFA having incurred the cost (i.e., just school food service)?
Appendix B of 2 CFR Part 225 provides examples of typical direct costs chargeable to the NSFSA
Move up

79. Indirect Costs Example:
Utilities (need fridge to store lemonade and the rest of the family’s food)

80. Indirect Costs, contd.
Indirect costs are incurred for the benefit of multiple programs, functions, or other cost objectives and therefore cannot be identified readily and specifically with a particular program or other cost objective
They typically support administrative overhead functions:
Fringe benefits,
Accounting,
Payroll,
Purchasing,
Facilities management,
Utilities, etc

81. Indirect Costs, contd.
2 CFR Part 225 describes indirect costs as those: “(a) incurred for a common or joint purpose benefiting more than one cost objective, and (b) not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved”
Costs that can be allocated to multiple programs or other cost objectives are always an indirect cost
Move up

82. Examples of typical costs
Direct Costs
Indirect Costs
Wages and salaries of food service workers
Payroll services
Cost of purchased food
Human resources
Food service supplies
Workers’ compensation
Media/promotional materials relating to the food service
Procurement
Capital expenditures relating to food service (e.g., food service equipment purchases)
Gas
Electricity
Sewer
Water
Trash
Superintendent’s Office

83. Questions to help determine if a cost is direct or indirect
Does the cost benefit multiple programs or other cost objectives, or solely the school food service?
Does the cost have a direct relationship to the school food service?
What guidance do the Federal cost principles provide for this cost?
How are similar costs treated in other cost objectives of the SFA?
How has this cost been treated historically by the SFA?
Next, let’s discuss a few specific cost items and how they are treated (move up)

84. Why is understanding indirect costs and applying them correctly important?
To safeguard the limited funds of the NSFSA
The funds in the NSFSA must only be used to pay for expenses that are necessary and reasonable to provide quality meals in the SMPs
Remember that all costs (direct and indirect) must be allowable based on the Federal cost principles, program regulations & FNS policy

85. How are indirect costs assigned?
Allocation -- mathematical exercise used to assign indirect costs to particular programs and other cost objectives, such that each program or other cost objective bears a portion of the indirect costs that is commensurate with the benefit received from such costs
What does this mean?

86. How are indirect costs assigned, contd.
Allocation is a method to assign to school food service their fair share of indirect costs (i.e., portion of utility bills in kitchen and cafeteria)
This methodology normally entails applying a calculated indirect cost rate to a direct cost base (more on this later)

87. Remember…
Many times, cost can be treated either way – direct or indirect
SFA makes this determination by following the accounting and reporting principles of the State education agency (SEA) which is in accordance with the Federal cost principles
Depends on how a cost is treated in the SFA’s accounting system

88. Role of the cognizant agency?
Problem: A school district participates in many Federal programs (not just the SMPs) and needs to allocate indirect costs to all of these programs
Solution: Federal cost principles provide a uniform method of allocating shared costs to grants from each of its Federal awarding agencies
A single Federal agency, referred to as the cognizant agency, speaks for all the Federal awarding agencies in negotiating across-the-board allocation methodology with the program operator

89. Cognizant agency is the SEA
U.S. Department of Education (ED) is the cognizant agency for all State education agencies (SEA)
ED requires each SEA to negotiate an indirect cost methodology for any local education agency (LEA) under its jurisdiction that requests one
Therefore, SEA is the cognizant agency for each LEA under its jurisdiction

90. Indirect cost rate proposal
SEA generally distributes an “indirect cost rate proposal (ICRP)” form to its LEAs and uses the data collected to develop each LEA’s indirect cost rate
ICRP is a schedule documenting the formulation of the LEA’s indirect cost rate and direct cost base -- it is the LEA’s request for the establishment of an indirect cost methodology

91. Indirect cost rate agreement
Once the SEA approves the ICRP, the end result is an indirect cost rate agreement between the SEA and the LEA
Key information from indirect cost rate:
Current and approved indirect cost rate (established for a specific fiscal year); and
Corresponding direct cost base
Indirect cost rate agreement may not be issued in hard copy (i.e., web)

92. Why is this information important?
SFAs need the information in the indirect cost rate agreement (to include the base) and need to understand it correctly
SFAs shouldn’t just be given the indirect cost rate in percentage form! This is not enough. SFA needs 2 key pieces of information, indirect cost rate and corresponding direct cost base, because each is useless without the other!
Indirect cost rate can only be applied to items in the direct cost base

93. Restricted vs. Unrestricted Rates
Unrestricted Rate (negotiated rate):
Emerges from an LEA’s ICRP calculations
This rate is known as a negotiated or unrestricted rate because it is not limited by Federal restrictions and allows an LEA to recover the full cost of its Federal programs

94. Restricted vs. Unrestricted Rates, contd.
Formula generates a lower restricted rate
The LEA must use the restricted rate to determine indirect costs allocable to those Federal educational programs whose authorizing statutes include the “supplement-not-supplant” language (prevents an LEA from recovering the full cost of those programs from the State)
The LEA must absorb, from its own resources, the difference between indirect costs allocable to those programs under the restricted rate, and what those costs would have been if determined via the unrestricted rate
The intent is to assist SEAs and LEAs in achieving greater levels of benefits and services, without withdrawing their previously dedicated resources from supporting these activities. That is, Federal funding for these programs must supplement, not supplant, dedicated non-Federal resources. In order to implement this “supplement-not-supplant” requirement, ED requires SEAs and LEAs to recalculate their indirect cost rates using a formula described in 34 CFR Parts

95. Restricted vs. Unrestricted Rates, contd.
The legislation authorizing the SMPs does not contain a “supplement-not-supplant” requirement; therefore, the school district may bill the school food service at the unrestricted rate
Some LEAs have nevertheless opted to support the food service by billing at the restricted rate, which is lower (the LEA must apply the selected rate consistently throughout that period)

96. Examples of cost
The next few examples focus on determining if the cost was properly assigned as a direct or indirect cost
Key is ensuring consistent treatment of indirect costs

97. Custodial expenses
Generally includes the costs of cleaning the entire school
Some SFAs charge custodial expenses directly:
SFAs document the hours that custodians work cleaning food service areas through a time reporting system
Time reporting system provides the exact hours a custodian cleans the food service area and the rest of the school
The SFA then charges the custodial expenses for cleaning the school food service area as a direct expense

98. Custodial expenses, contd.
Some SFAs charge custodial expenses indirectly by including them in the indirect cost pool if a methodology or process for determining this item’s direct relation to the school food service operations is not available
Note: Custodial expenses may be charged as a direct or indirect cost, as long as it is treated consistently in all activities of the SFA. An SFA may not charge custodial expenses as a direct cost to the school food service (e.g., through a time reporting system) and as an indirect cost for other programs

99. Post-retirement healthcare benefits
Indirect cost methodology applied to an SFA may call for allocating the cost of providing health-care benefits for retired SFA employees on the basis of numbers of employees
This may not be fair if school food service workforce is atypical of the SFA’s general workforce
Cost item allocated to a direct cost activity, such as the school food service, on the basis of its percentage of the SFA’s total employees, or by applying a per-employee rate. 

100. Post-retirement healthcare benefits, contd.
Result maybe overcharging the school food service if part-time employees, who are not eligible for post-retirement health-care benefits, comprise a disproportionate share of the school food service staff
The amount charged to the school food service for post-employment health-care costs would then be unreasonable based on the benefit the school food service received from this cost item

101. Post-retirement healthcare benefits, contd.
Possible remedies:
Changing the allocation basis for this cost item from “number of employees” to “number of full-time employees” 
Shifting the SFA’s overall indirect cost methodology to the multiple allocation base method
Shifting the SFA’s overall indirect cost methodology to the multiple allocation base method. This method is preferred when different direct cost activities benefit to significantly differing degrees from the same indirect cost activity (human resources, accounting, purchasing, payroll, audit, etc.).  The SFA would first distribute the cost of each such administrative function or office to benefiting direct cost activities on a basis that fairly measures the benefit each direct cost activity received.  For example, the cost of the purchasing function could be distributed on the basis of numbers of purchase orders issued.  The total indirect costs allocated thereby to each direct cost activity are then totaled and a separate indirect cost rate calculated for each direct cost activity.  The outcome would be one indirect cost rate for food service, another for instruction, etc.  This is covered in 2 CFR Part 225, Appendix A, section F.1.; in Appendix E, sections C.1.b. and C.3; and in DHHS Publication ASMB C-10, section (pages 6-8 through 6-12).      

102. How does the school district recover indirect costs from the SFA?
A school district generally has two options to recover the indirect costs benefiting the school food service, yet paid from the general fund:
Directing the general fund to rely on its own allotments, or
Billing the school food service

103. How does the school district bill food service for indirect costs?
The general fund often bills the school food service for its share of the indirect costs by applying the State-approved indirect cost rate to the school food service’s direct cost base
The billed amount generated is the amount of indirect costs properly allocable to the school food service (as long as there are no errors, more on this later)

104. SFA must not overpay!
School food service is not allowed to pay any amount in excess of the properly billed indirect costs (the portion of costs that do not support the operation or improvement of the food service) with funds from the NSFSA
Remember: No matter how seemingly appropriate a cost appears to be (i.e., utilities, trash collection, janitorial services, etc.), costs may be billed to the NSFSA only with appropriate documentation

105. How to avoid incorrect indirect cost charges?
Errors can occur for a variety of reasons:
Mathematical error
User assessment
Stewards of the NSFSA must be provided the necessary tools to verify and validate costs when necessary

106. SFA needs the necessary tools
Compare the approved indirect cost rate proposal (ICRP) and the approved indirect cost rate agreement
Remember this can only be done if the SFA is provided this information from the SEA (these are the necessary tools the SFA needs!)

107. SFA needs the necessary tools, contd.
If the approved indirect cost rate and direct cost base are used, the SFA should compute the amount of indirect costs chargeable to the school food service and compare this result with the actual amount of indirect costs billed to the school food service to ensure no mathematical errors have occurred
For example, if you hire a contractor to build you a deck, it makes sense to review the original estimate she gave you with the actual invoice

108. Retroactive billing
Many school districts have never billed indirect costs to the NSFSA, because the general fund contained enough funds to cover such costs and they wanted to support school food service
There is no Federal requirement that prohibits a school district from changing its internal fiscal policy regarding the recovery of indirect costs (i.e., originally chose to absorb all indirect costs and then later felt it couldn’t keep paying for indirect costs out of general fund)

109. Retroactive billing, contd.
It is unallowable to bill the NSFSA for indirect costs that were paid from the general fund in prior years unless an agreement exists to show that the district had been “loaning” the NSFSA funds to cover the indirect costs in one or more prior years
Proper documentation needed -- an official “inter-fund” transaction had been posted to the accounting records of the general fund and the school food service each year that such a “loan” had been made

110. Error found?
Steps an SFA should take if indirect costs charged to the nonprofit school food service account result from mathematical error or user assessment:
The appropriate officials should be notified and the ICRP and indirect cost methodology corrected as soon as possible;
If there is a disagreement between the SFA and the appropriate officials, the SA or SEA should be contacted to discuss the issue; and

111. Error found, contd.
The SFA should not pay for any costs resulting from the mathematical error or user assessment until the issue has been appropriately remedied
Note: The SA or SEA should seek FNS’ guidance, if needed, by contacting the appropriate FNS Regional Office

112. Additional Information?
Indirect cost guidance issued by FNS on July 8, 2011 available at
Policy-Memos/2011/SP _os.pdf

113. Questions?