Indirect Cost Services FAQs

1. What is an indirect cost rate?
An indirect cost rate is a tool for determining 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.

2. What is an indirect cost pool?
The indirect cost pool is the accumulated costs that jointly benefit two or more programs or other cost objectives. Indirect cost pool expenditures typically include:
Administrative salaries and fringe benefits associated with overall financial and organizational administration;
Operation and maintenance costs for facilities and equipment; and,
Payroll and procurement services.

3. What is an indirect cost rate proposal?
An indirect cost rate proposal is the documentation prepared by an organization requesting an indirect cost rate.

4. What is a “Base” or “direct cost base”?
The term “Base” refers to the accumulated direct costs (usually 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 those costs.

5. What is an indirect cost negotiation agreement?
An indirect cost negotiation agreement is a document that formalizes the indirect cost rate negotiation process. This document typically contains:
The type of rate(s) negotiated;
The effective period(s) of the rate(s);
The location(s) to which the rate(s) is/are applicable; and,
The program(s) to which the rate(s) is/are applicable.

It also provides information on the base(s) used to distribute indirect costs, and the treatment of fringe benefits and paid absences.

The indirect cost negotiation agreement must be signed by both the organization‘s authorized representative and the DOI Indirect Cost Coordinator or authorized representative.

6. Is there a standard format that should be followed to compile an indirect cost proposal?
Indirect Cost Services (ICS) has created sample proposal formats, checklists, and templates to assist you in completing the proposal package. Please scroll down and select the appropriate sample proposal for your type of organization (i.e., Nonprofit, Tribal Government, etc). Following our proposal format is not required, however, it will expedite the review process because our format contains the information needed.

7. In order to initiate the negotiation process, may we send in our Financial Statement Audit Report without the indirect cost proposal and follow-up with the proposal at a later date?
ICS will not initiate the negotiation process without the indirect cost proposal and supporting documentation (including the Financial Statement Audit Report). Please do not submit the audit report by itself, as we have limited storage space and can not keep the document on file unless accompanied by an indirect cost proposal.

8. What are the different types of rates that can be negotiated?
There are four types of rates that can be requested in your proposal:
Provisional;
Final;
Predetermined; and,
Fixed (Fixed Carry-forward).

9. What is a Provisional Rate?
A provisional rate is a temporary indirect cost rate that is applied to a limited time period that is used until a "final" rate is established for that same period. Provisional rates can be used for funding, interim reimbursement, and reporting of indirect costs on Federal awards. They must be finalized by submitting an “Indirect Cost Rate Proposal for a Final Rate” once the actual costs for the specified time period are known and can be verified through audited financial statements.

10. What is a Final Rate?
A final rate is an indirect cost rate applicable to a specific time period that is based on the actual, allowable costs of that period. Once established, a final, audited rate cannot be adjusted.

11. What is a Predetermined Rate?
A predetermined rate is an indirect cost rate that applies to a specific current or future time period (usually the organization‘s fiscal year). Except under very unusual circumstances, a predetermined rate cannot be adjusted. Predetermined rates may be used with cooperative agreements and grants only. They may not be used for Federal contracts due to legal constraints. Predetermined indirect cost rates may be negotiated for periods of up to 2 to 4 years.

12. What is a Fixed (Fixed Carry Forward) Rate?
A fixed rate (also known as a fixed carry forward rate) is an indirect cost rate that applies to a specific current or future time period (usually the organization‘s fiscal year). It differs from the predetermined rate in that it is subject to later adjustment. Initially, the fixed rate is based on estimated costs for a set, future time period. When the actual costs for that period become available, a carry forward adjustment is used. A carry forward adjustment is the amount required to reconcile the difference between the estimated costs and the actual costs incurred for the agreed-upon time period.

13. Can Nonprofits use Fixed Carry Forward Rates?
For nonprofit entities, "A fixed rate shall not be negotiated if all, or a substantial portion of the organization‘s awards, are expected to expire before the carry-forward adjustment can be made; the mix of Federal and non-Federal work at the organization is too erratic to permit an equitable carry-forward adjustment; or the organization‘s operations fluctuate significantly from year to year." (2 CFR 230, Appendix A, Section E.2.e).

14. What if my organization needs a restricted rate?
Restricted rates are reviewed and approved by the Department of Education (DOE) and are applicable only to certain DOE programs. Please contact DOE for information about format and submission requirements:

Mary Gougisha, CPA
Director, Indirect Cost Group
US Department of Education
OCFO / FIPAO / ICG
830 First Street, NE, Room 21C7
Washington, DC 20202-4450
Phone: (202) 377-3835

The Department of Education has an interagency agreement with ICS in which ICS will include the approved restricted rate on DOE‘s behalf on the ICS issued negotiation agreement.

15. What typical types of distribution bases are available to calculate the indirect cost rate?
These are types of distribution bases:

1. Modified Total Direct Costs (MTDC)
2. Total Direct Salaries and Wages excluding Fringe Benefits (S&W)

Modified Total Direct Costs (MTDC) excludes capital expenditures and distorting items such as passthrough funds, major Subcontractors, etc. For nonprofit entities, MTDC includes the first $25,000 of sub grants/Subcontracts, while the remaining portion of Subgrants/Subcontracts over $25,000 is excluded.

16. What type of direct cost (distribution) base should my organization select?
The distribution base chosen should result in each award bearing a proportionate share of the indirect costs relative to the benefits received from those costs. For example, if several of your programs and grants do not pay salaries, then it might not be a good idea to use total salaries and wages as the direct cost base. If you do, those programs paying most of the salaries and wages would bear a larger, disproportionate share of the indirect costs. In this situation, it might be more appropriate to use modified total direct costs (exclusive of unusual or distorting expenditures). Please consult the ICS office if you need additional guidance.

17. What is considered adequate documentation to support the salaries and wages of personnel included in the indirect cost pool?
Federal regulations (2 CFR 225 & 230, A-87 & A-122) require that employee salaries and wages be properly documented and approved. The required documentation includes:

1) Salary and Wage Certifications: Used when employees are expected to work on a single Federal award or cost objective during the period being certified. The certifications should be:

a. Prepared at least semi-annually and
b. Signed by the employee or supervisory official with first-hand knowledge of the employees' work.

2) Personnel Activity Reports or equivalent documentation is required for employees who work on multiple activities, that is:

a. More than one Federal award or
b. A Federal and a non-Federal award or
c. An indirect and a direct cost activity or
d. Two or more indirect activities with different cost allocation bases or
e. An unallowable activity and a direct or indirect cost activity.

3) Personnel Activity Reports or equivalent documentation must meet the following criteria:

a. Prepared at least monthly;
b. Signed by the employee;
c. Account for the total activity for which each employee is being compensated; and,
d. Reflect an after-the-fact distribution of the work that has actually been completed by each employee.

As the cognizant agency, we have the right to approve substitute systems for allocating salaries and wages in place of activity reports. Substitute systems may include random sampling that meets acceptable statistical sampling standards, case counts, or other quantifiable measures of employee effort. We may accept sampling that does not fully comply with sampling standards provided that the amounts involved are minimal or would result in a lower cost.

18. Should fringe benefits be allocated between direct and indirect costs?
Fringe benefits are allowable, "provided such costs are absorbed by all organization activities in proportion to the relative amount of time or effort actually devoted to each" (2 CFR 230 (A-122), Appendix B, Section 8.g. (1)).

"Whether treated as indirect or direct costs, [fringe benefits] shall be distributed to particular awards and other activities in a manner consistent with the pattern of benefits accruing to the individual or group of employees whose salaries and wages are chargeable to such awards and other activities" (Section 8.g. (2)).

ICS interprets the above to mean that if the position is classified as a direct position, then the salary - along with applicable fringe benefits - should also be treated as direct costs. If the position is classified as an indirect position, then the related fringe benefits are to be treated as indirect costs.

19. Are fundraising and lobbying costs allowable?
No---Federal regulations (2 CFR 225 & 230) specifically list fundraising and lobbying costs as unallowable. However, 2 CFR 230 (A-122), Appendix A, Section B.3 states, "Even though these costs are unallowable for purposes of computing charges to Federal awards, they nonetheless must be treated as direct costs for purposes of determining indirect cost rates and be allocated their share of the organization‘s indirect costs if they represent activities which include the salaries of personnel, occupy space, and benefit from the organization‘s indirect costs."

In addition, "All activities which benefit from the governmental unit‘s indirect costs, including unallowable activities and services donated to the government unit by third parties, will receive an appropriate allocation of indirect costs." (2 CFR 225 (A-87), Appendix A, Section C.3.b)

20. Can we include all depreciation expenses in the indirect cost pool?
Yes---but only if these depreciation expenses are related to assets used by indirect-related personnel (i.e., accounting, human resources, etc.) and are purchased with non-Federal dollars. Depreciation related to assets used by direct personnel should be direct-charged.

21. We submitted the proposal to ICS and the funding agency wants a confirmation, what should we do?
Please have the awarding official contact:

Ms. Maria Nua
ICS Program Analyst
Phone: 916.566.7103
Email: ics@nbc.gov

Ms. Nua will confirm receipt of the proposal.

22. Can we use the negotiated indirect cost rate for all of our Federal programs?
Yes---the agreed upon rate(s) shall be accepted and made available to all Federal agencies for their use unless prohibited or limited by statute. It is our understanding that state and local agencies will also accept the Federally approved rate(s).

23. We have misplaced a copy of the signed negotiation agreement. How should we go about obtaining another copy?
Please fax a written request for a duplicate/replacement copy of your signed agreement to the fax number below. The request must be on your organization‘s letterhead and signed by an individual who is authorized to negotiate indirect cost rates.

The ICS fax line number is 916.566.7110.

24. Who do we contact to obtain clarification or interpretation on the cost principles (2 CFR 225 and 2 CFR 230, formerly OMB Circulars)?
For assistance with interpretation and clarification on cost principles, please contact:

Ms. Maria Nua
ICS Program Analyst
Phone: 916.566.7103
Email: ics@nbc.gov

For further clarification, you may also contact the Office of Management and Budget (OMB) directly. Please address your request to:

Mr. Gilbert Tran
Office of Federal Financial Management
Office of Management and Budget (OMB)
725 17th Street NW, Room 6026
Washington, DC 20503
Phone: 202.395.3052 (direct) / Phone: 202.395.3993 (main office)
Email: Hai_M._Tran@omb.eop.gov

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