Indirect Cost Determination Guidance for State and Local Government Agencies

Q-1. Is 2 CFR 200 Uniform Guidance mandatory to determine allowable costs for state and local governments?

A-1. Yes. The Uniform Guidance states that these principles will be applied by Federal agencies must apply subparts A though F of this part to non-Federal entities unless a particular section of this part or Federal statute provides otherwise. Federal agencies may apply subparts A through E of this part to Federal agencies, for-profit organizations, foreign public entities, or foreign organizations as permitted in agency regulations or program statutes, except when a Federal agency determines that the application of these subparts would be inconsistent with the international responsibilities of the United States or the laws of a foreign government. Subpart F only applies to non-Federal entities as defined in the Single Audit Act Amendments of 1996 (31 U.S.C. 7501-7507). Federal agencies should apply the requirements to all recipients in a consistent and equitable manner to the extent permitted within applicable statutes, regulations, and policies.

Q-2. Are Local Education Agencies (LEAs) under the same guidelines as state and local governments and subject to 2 CFR 200 Uniform Guidance?

A-2. The standards for local education agencies are included in 2 CFR 200.

Q-3. Will the indirect costs, determined by applying the approved indirect cost rate or cost allocation plan to federal programs, be reimbursed to state and local governments?

A-3. The indirect costs will be reimbursed as part of the total cost of the federal programs, except where restricted or prohibited by regulation or law. Also, subject to availability of funds. (34 CFR §75.564 and 34 CFR §76.562) The cost allocation plan and indirect cost rates are determined by the cognizant agency for indirect costs (2 CFR 200.1 “Cognizant agency for indirect costs”).

Q-4. Can another federal agency question the costs included in a central service cost allocation plan submitted to and approved by the cognizant agency?

A-4. Approved central service costs are set in a negotiation agreement, signed by the representatives of the state or local government and the cognizant federal agency. However, in restricted indirect cost rate calculations, occupancy and maintenance costs and other statewide costs unallowable per 34 CFR §76.565-569, are adjusted from the approved central services costs. Other similar adjustments include, but are not limited to:

• Legal costs related to tort cases, tort settlements, and legal proceedings related to the organization's mission, rather than its internal management. For example, legal costs for a school district boundary dispute, or for advice on educational activities, are unallowable. Legal costs related to the organization's personnel system or related procurement activities are allowable.
   
• State auditor costs related to non-federal activities are unallowable.

Q-5. Where can states and local governments receive additional information or clarification on the implementation of 2 CFR 200?

A-5. Federal agencies assigned cognizance for cost allocation plans or indirect cost rate proposals can provide guidance. 

Q-6. Is there is a form called a "Federally Negotiated Indirect Cost Rate Agreement (NICRA)"?

A-6. The Negotiated Indirect Cost Rate Agreement (NICRA) provides indirect cost rates to a state or local department/agency to claim allowable indirect costs under federal programs. The Agreement covers specific periods and must be re-negotiated as required. The Agreement is issued by the cognizant agency for indirect costs (2 CFR 200.1 “Cognizant agency for indirect costs”). The Agreement is signed by both the recipient organization and the cognizant agency for indirect costs.

Q-7. Who is responsible for the approval of state and local central service cost allocation plans and indirect cost proposals?

A-7. The United States Department of Health and Human Services - Program Support Center  approves state and local government's central service cost allocation plans.

Q-8. How will a central service plan be used?

A-8. The central service plan is used to distribute allowable central service costs to each of the individual government departments. The costs are allocated and included in the appropriate state agency's indirect cost proposal. (see also Appendix V to Part 200, Title 2)

Q-9. Our Local Education Agency (LEA) receives direct federal grant funds. Who approves the indirect cost rate?

A-9. LEA indirect cost oversight is delegated to the State Education Agency (SEA). Contact the business office at the SEA to obtain information about the approved rate. (see 34 CFR §75.561(b) and 34 CFR §76.561(b))

Q-10. How can a grantee distinguish between a direct cost and an indirect cost?

A-10. There is no universal rule for classifying certain costs as direct or indirect costs. A cost may be direct for some specific service or function but indirect for the Federal award or other final cost objective. Therefore, each cost incurred for the same purpose in like circumstances must be treated consistently either as a direct or an indirect cost to avoid possible double charging of Federal awards. Guidelines for determining direct and indirect costs charged to Federal awards are provided in 2 CFR 200 Subpart E.

Cost must be classified based on the benefit received by the entity incurring the expenditure. 

Cost objective(s): a program, function, division, activity, award, contract, or other work unit against which costs can be incurred. 

2 CFR §200.414 Indirect costs are: 

• Incurred for a common purpose. 
• Equitably beneficial to multiple cost objectives 
• Not readily assignable to a specific cost objective

2 CFR §200.413 Direct costs:

• Can be identified specifically with cost objective(s)
• May be charged directly to the program (except for supplement- not- supplant restrictions - 34 CFR §76.565-569) 

Q-11. Is it permissible to allocate costs (either directly or indirectly) based on revenue or based on funds available under federal grants or contracts?

A-11. No. The allocation of costs by either of these methods is unacceptable. Cost must be allocated based on a reasonably documented basis 2 CFR §200.405(d). Please see some examples of allocated costs and common allocation bases below: 

Q-12. Do we need to follow the time reporting requirements of 2 CFR 200 for the salaries, wages, and fringe benefits of employees that are used for matching requirements on federal awards?

A-12. Salaries and wages of employees used in meeting cost sharing or matching requirements must be supported in the same manner as those claimed as allowable costs on federal awards (2 CFR §200.306, 2 CFR §200.430, and 2 CFR §200.431).

Q-13. If a grantee hires an individual to perform speech pathology services to students in the school, is the service considered a subaward?

A-13. No, this is a professional service providing an auxiliary expertise normally provided in-house. The costs would not be treated as a subaward and are not subject to the exclusion of amounts over $25,000 (up to over $50,000 - for award on or after October 1, 2024, with updated approved indirect cost rate agreement).

Q-14. Would a school nurse that only provides medication (not an instructor) to students in the classroom be considered a subaward?

A-14. No, this is a professional service providing an auxiliary expertise normally provided in-house. The costs would not be treated as a subaward and are not subject to the "exclusion of amounts over $25,000"(up to over $50,000 - for award on or after October 1, 2024, with updated approved indirect cost rate agreement). 

Q-15. If a grantee contracts with a software vendor to provide technical support and enhancement of existing business software, would this be considered a subaward?

A-15. No, if this cost is for organization-wide support, then it is an indirect cost. The costs could also be direct administrative if the software benefits federal or non-federal programs. 

Q-16. Are the costs of significant software projects allowable as charges to federal awards?

A-16. Federal programs benefitting from such projects should be charged only for amortization of the capitalized costs once the projects are implemented and in use by federal programs. The costs should be amortized over the useful life of the intangible asset.

Q-17. May estimates be used when calculating provisional or fixed rates?

A-17. Provisional and fixed indirect cost rates should be based on the most currently available audited actual cost data or estimates supported by appropriate documentation and deemed reasonable by the cognizant agency for indirect costs. Supportable estimates may be more appropriate than a prior year's cost in circumstances where expected changes are not reflected in the actual cost data. Regarding the fixed rate, estimates may be included in the part of a fixed rate calculation reflecting the current proposed rate (not the part of the calculation with the comparison of the previous year's recovery to the actual rate).

Q-18. Must a grantee have an approved indirect cost rate to charge indirect costs to programs?

A-18. ED requires grantees charging indirect costs to programs to obtain a federally approved indirect cost rate or cost allocation plan (34 CFR §75.560 and 34 CFR §76.560). Local Education Agencies (LEAs) obtain approve indirect cost rates from their respective State Education Agency (SEA) via the authorization provided by ED via Delegation Agreement to SEAs (34 CFR §75.561(b) and 34 CFR §75.561(b)) . ED grant officers may approve a temporary indirect cost rate of 10% of direct salaries and wages, for grantees receiving ED awards and who do not have a federally approved rate  34 CFR §75.560(d)  and  (34 CFR §76.560(d)). However, a grantee must submit an indirect cost rate proposal to its cognizant agency within 90 days of the grant award notice.

Q-19. May a grantee apply an approved restricted rate to unrestricted programs?

A-19. Grantees have the option to use the restricted rate for indirect cost claims under all federal programs that permit reimbursement. The rate must be current, however, meaning it is approved and covers the period coincident with grant activities.

Q-20. What is the background on the restricted indirect cost rate?

A-20. Many large educational entitlement programs that provide funds to state and local jurisdictions were created by legislative statute that require federal funds be used to "Supplement and not supplant" ongoing educational services. This means state and local agencies have tax revenue or other financial resources of their own to finance education without the "supplement does not supplant" provision, states could simply reduce their support of educational services to the extent of the newly available federal funding or could substitute federal money for tax revenue already generated to fund schools.

Q-21. Are discretionary programs subject to supplement not supplant requirements restricted indirect cost rates?

A-21. Yes, some ED discretionary programs have a supplement not supplant statutory requirement and must utilize a restricted indirect cost rate. Grantees must follow the steps in 34 CFR §76.564 - 76.569 to calculate the restricted indirect cost rate, in order to comply with statutory requirements. 

Q-22. I am a subaward recipient of a supplement not supplant grant. Do I need to utilize a restricted indirect cost rate?

A-22. Yes, a restricted indirect cost rate is required for supplement not supplant programs awarded to subrecipients. The requirements of pass-through entities (2 CFR §200.332 (a)(xiv)and 2 CFR §200.332(a)(4)) are to provide the required information for the indirect cost rate applicable to the Federal award and follow the appropriate steps for indirect cost rate determination. 

Q-23. May a grantee use a De minimis indirect cost rate on a program that has a statutory supplement not supplant requirement? 

A-23. The De minimis rate is not allowed on programs that have supplement not supplant statutory requirements. Education Department Administrative Regulations (EDGAR), which is more restrictive and takes precedence over the Uniform Guidance, states in  34 CFR §75.563 “If a grantee decides to charge indirect costs to a program that has a statutory requirement prohibiting the use of Federal funds to supplant non-Federal funds, the grantee shall use a restricted indirect cost rate computed under 34 CFR §76.564 – 76.569.” 

Q-24. Is there an option similar to the De minimis indirect cost rate within Education Department General Administrative Regulations (EDGAR)?

A-24. A grantee that is not a State or local government* under a program that contains supplement-not-supplant provisions may elect to utilize a restricted indirect cost rate of 8% modified total direct costs (MTDC) if the restricted indirect cost rate, calculated under 34 CFR §75.563 and 34 CFR §76.564 – 76.569, is not less than 8% modified total direct costs. The grantee must maintain documentation that it has an indirect cost rate of at least 8% MTDC.

*Note that a State-funded institution of higher education is not considered a “State government” for these purposes.

Q-25. What are restricted rates?

A-25. Restricted rates incorporate the provisions of program legislation that bar supplanting. The restricted indirect cost rate formula is described at 34 CFR §76.564 – 76.569. The formula limits the general management costs that can be included in the indirect cost pool (numerator) and requires adjustments to the MTDC base (denominator).

Q-26. What is the practical effect of the restricted indirect cost rate formula?

A-26. The formula results in a marginal distribution of administrative costs required to implement federal assistance. The calculation of the restricted indirect cost rate is viewed as a funneling process. The first step requires the state and local units of government to segregate the accounting of costs between indirect and direct with full cost reimbursement in mind. The

restricted indirect cost rate determination further filters costs that are incurred by the state or local units of government. Rules in 34 CFR §76.565 allow only costs for the "direction and control" of the grantee to be considered general management costs.

Costs associated with activities under organizational units that are not for department-level management also are not considered general management costs. Therefore, in a restricted rate setting, indirect costs are purged to include only "organization-wide" general management costs at the grantee level (e.g., bookkeeping, accounting, payroll, auditing, procurement, and

personnel). The general management costs are refined again to exclude costs of the chief executive officers, their immediate officers, component officers, and related costs. Related costs include applicable fringe benefits, travel, space costs, and other associated costs. These costs are then reclassified from indirect to the MTDC base.

Q-27. Who are the chief executive officers?

A-27 The chief executive officer exercises overall responsibility for the operation and management of the organization. The chief executive officer's immediate office includes any deputies or similar offices, along with the immediate support staff. It is important to emphasize that the chief executive officer of the grantee is not the governor or member of an elected or appointed board. Expenses for these positions are already unallowable as general government expenses.

Q-28. What are component costs?

A-28 Generally, components are organizational units for both indirect and direct functions existing one level below the chief executive officer unit. Depending upon the organization, there may be circumstances where component costs would properly be accounted for in the indirect cost pool. However, organizational structures cannot shield chief financial officers, chiefs of information technology, chiefs of general counsel, chief internal auditors, and chiefs of human resources. If any of these positions has significant staff reporting to them, then an intermediate manager cannot serve as a substitute for these component heads. The grantee’s organizational structure is considered in determining adjustments for components.

Q-29. What does the term “organization-wide” mean in the restricted indirect cost rate determination?

A-29. The term organization-wide means those departmental level direction and control functions that all grantees have in common. The regulations describe accounting, payroll, and personnel management as examples of organizational disciplines. Often, cross-cutting educational activities (e.g., curriculum development, pupil data, library services, evaluation services, and school services) are mistaken for indirect cost functions. They are not for

direction and control of the organization but rather to provide services to schools or students.

Those cost centers are program service functions, even if they have system-wide impact. The restricted indirect costs include activities related to maintaining operations as a business concern, but not the delivery of services that the state or local government provides as part of its specific mission.

Q-30. May costs for divisional administration be billed directly to federal programs?

A-30. Generally, such costs are the obligation of the state and local government. An exception would be granted if the program official decides that the costs are specifically required for the award.

Q-31. Space type costs are accepted in a usual indirect cost environment. How are they accounted for in the restricted indirect cost formula?

A-31. Occupancy and space maintenance costs as described at 34 CFR §76.568 are included in the direct cost base (denominator) for the restricted indirect cost rate determination. However, if the grantee can identify the portion of space that supports allowable indirect cost personnel, then the costs may be included with allowable general management costs.

Q-32. May the space costs that are reclassified to the other direct cost base be recovered through direct billings?

A-32. These costs may be charged directly to affected programs only to the extent that statutory supplanting prohibitions are not violated. This reimbursement must be approved in advance by the Secretary.

Q-33. When occupancy costs are part of the approved statewide costs, how are they treated for restricted rate purposes?

A-33. Occupancy costs are disallowed, except where allowable under 34 CFR §76.568 (b). The disallowed statewide costs are not included in the base, because these costs are not incurred by the grantee.

Example 1 - Organization Chart Assessment of Restricted Rate Adjustments

For Illustration purposes only* The Salaries, Wages, Fringe Benefits, and associate costs of the employees below would be removed from the indirect cost pool and classified to the direct cost base resulting in a restricted indirect cost rate.