Dear:

This responds to your recent request for indirect cost information. The following guidance is intended to help organizations properly develop their initial indirect cost proposal. 

1. Prepare a direct and indirect cost policy statement (narrative). Each organization should prepare a written policy which outlines the costs that it considers direct, the costs it considers indirect and the rationale to support those costs. A model "Cost Policy Statement" is provided as Enclosure I.*

2. Prepare a personnel costs worksheet like the one found at Enclosure II. When preparing a "Provisional Indirect Cost Proposal," current approved budget figures should be used in the preparation of the personnel costs worksheet. When a "Final Indirect Cost Proposal" is prepared, actual personnel costs should be used.*

3. Prepare an allocation plan of personnel costs. This document reflects the estimated personnel efforts for each cost objective. A column should be made for each cost objective of the organization. Then, the percentage of time per position should be spread under the appropriate cost objective, making sure that 100 percent is allocated for each position. Enclosure III provides an example.*

   In this example, each salary is prorated to the cost objective according to the appropriate percentage. The total direct salary costs for each objective are obtained by adding the salary amounts in each cost objective column. Office of Management and Budget Circular A-122, Attachment B, paragraph 6, "Compensation for Personal Services" should be adhered to concerning the maintenance of documented payrolls for salaries and wages which are either treated as direct or indirect costs on grants and contracts. *

   The organization must maintain a time distribution system for use by employees whose time is charged to one or more cost objectives. The time distribution records must be available for review by Federal cost negotiators and auditors. 

4. Prepare a statement of employee benefits. This document should contain the estimated/actual costs of the items in the employees benefit pool. An example is provided as Enclosure IV. The amounts for items should be obtained from the personnel costs worksheet.*

   Employee (fringe) benefits should follow the salary of the individual and are a consideration in the determination of the reasonableness of the compensation of the individual. Fringe benefits should be accrued in the period incurred, including accrued leave if employees have an irrevocable right to be compensated during employment or upon termination of employment. Generally, the cost of annual leave is considered a cost to the extent of actual compensation to employees.

5. Prepare your indirect cost proposal using the examples shown in the enclosed publication OASMB-5 "A Guide for Nonprofit Organizations."

6. Provide documentation supporting the proposal using our "checklist" provided as Enclosure VI.*

Normally, indirect cost rates are determined and made formal by binding agreement with the Federal government ahead of actual use. So they are largely an estimate of future indirect costs based on past experience.

Your interest in the indirect cost determination process is appreciated. If further information or assistance in this matter is required, please contact this office at (202) 377-3838.

Sincerely,

Richard T. Mueller, Director
Indirect Cost Group
Office of the Chief Financial and Chief Information Officer

Enclosures

* Please send an e-mail to Ms. Katrina McDonald at Katrina.McDonald@ed.gov if you need to request a copy of this document.

Return to Questions About Indirect Costs page

Top