Nonprofits Guide to Applying and Negotiating an Indirect Cost Rate

Nonprofits Guide to Applying and Negotiating an Indirect Cost Rate

In the previous article, we learned “Why Your Organization Needs A Negotiated Indirect Cost Rate?” As mentioned, in this post, we are going to share how your nonprofit can apply and negotiate an indirect cost rate proposal so that you can have a higher return on your grant programs. This particular blog will focus on various types of indirect cost rates, who will receive your proposal, who is your cognizant agency, and different methods of cost allocation plans. Let’s begin.

Four Types of Indirect Cost Rates

1. Provisional rate -  A temporary rate which is only applicable for a specified time period and is subject to adjustment pending the establishment of a final rate. .

2. Predetermined rate - This is applicable to a specified current or future periods which is usually the organization’s fiscal year and is based on an estimate of costs to be incurred during the period.  Predetermined rates are not subject to adjustment.

3. Fixed rate - This bears the same characteristics as a predetermined rate except it is subjected to an adjustment. The difference between the estimated base period indirect costs and actual indirect costs is carried forward as an adjustment to the rate computation of a subsequent period.

4. Final rate - This is applicable to a specified past period which is based on the actual costs of the period. Final rates are not subject to adjustment.

The Cognizant Agency Receives Your Proposal, Who? 

The cognizant agency will receive your completed indirect cost rate proposal to further negotiate a rate for your nonprofit. Per 2 CFR 200, cognizant agency is defined as the Federal agency who is responsible for receiving, reviewing, negotiating, and approving indirect cost proposals.

Who Is Your Cognizant Agency

The Federal agency from whom your nonprofit receives the largest dollar value of Federal awards will be designated as your cognizant agency to negotiate and approve your indirect cost rate. Cognizant agencies for indirect costs may not necessarily be the same as the cognizant agency for the audit.  See 2 CFR 200.19 for further information on identification of cognizant agencies for indirect cost rate negotiations.

Methods for Calculating Indirect Cost Rates

The three methods for calculating indirect costs per 2 CFR 200 are as follows: 

1. Simplified Allocation Method

2. Multiple Allocation Base Method

3. Direct Allocation Method

A proper analysis of your grant programs will help you decide what method is best for your nonprofit. For an organization whose major programs benefits from its indirect costs in similar proportions, the simplified allocation method may be best. In the simplified allocation method, there is one distribution base for calculating the indirect costs rate.  Both the indirect and direct costs must exclude capital expenditures and unallowable costs. Nonprofits who receive more than $10 million in direct Federal funding in a fiscal year,  must breakout components into two broad categories “Facilities” and “Administration”. 

 According to 2 CFR 200, “Facilities” is defined as depreciation on buildings, equipment, and capital improvement, interest on debt associated with certain building, operations and maintenance expenses. “Administration” is defined as general administration and general expenses such as the director’s office, accounting, personnel, and all other types of expenditures not listed under “Facilities”. 

The multiple allocation base method is generally used when an indirect cost benefit nonprofits major functions in various proportions. With this method, indirect costs must be gathered into separate costs groupings such as depreciation, interest, operation and maintenance expense, general administration and general expenses. 

The direct allocation method is used by nonprofits when they treat all costs as direct costs except general administration and general expenses. In most cases, the nonprofits split their costs into three basic categories described below: 

1. General Administration & General Expenses

2. Fundraising

3. Other Direct Functions which includes projects funded with grants

Costs, such as rent, depreciation, maintenance, in this method are allocated as direct costs to each category and federal award utilizing a base that is most appropriate for the cost being pro-rated (e.g. square footage)

Negotiations and approval of rates

According to 2 CFR Appendix IV, a nonprofit organization which has not previously established an indirect cots rate with a Federal agency must submit its initial indirect cost rate proposal immediately after the organization is notified that a Federal award will be made. Per the guidelines, the proposal must be prepared and submitted no later than three months after the effective date of the Federal award. 

On the other hand, nonprofit organizations who have previously established indirect cost rates must submit a new indirect cost rate proposal to the cognizant agency within six months after the close of each fiscal year.

Negotiated Indirect Cost Rate Agreement

The indirect cost rate approval will be formalized by a rate agreement signed by the Director of the Cognizant agency and authorized representative of the organization. The agreement will include: 

1. The approved rate and information that pertains to the rate such as type of rate, effective period, and base.

2. The treatment of fringe benefits direct vs. indirect or an approved fringe rate. 

3. The agreement will include general terms and conditions along with any special remarks. 

We hope your organization will benefit from this post and provide you some guidance on how to go about negotiating an indirect cost rate proposal. If you need further assistance or guidance, please reach out to us. Thank you