Indirect Cost Toolkit for Continuum of Care and Emergency

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Indirect Cost Toolkit for Continuum of Care and Emergency

Transcript Of Indirect Cost Toolkit for Continuum of Care and Emergency

Indirect Cost Toolkit for Continuum of Care (CoC) and Emergency Solutions Grants (ESG) Programs
Released March 2021 This toolkit is current as of November 2019 and does not include recent changes to the final Uniform Administrative Requirements
U.S. Department of Housing and Urban Development (HUD)
This resource is prepared by technical assistance providers and intended only to provide guidance. The contents of this document, except when based on statutory or regulatory authority or law, do not have the force and effect of law and are not meant to bind the public in any way. This document is intended only to provide clarity to the public regarding existing requirements under the law or agency policies.

1. Introduction _________________________________________ 1

1.1 About This Toolkit


1.2 How to Use This Toolkit


2. What are direct and indirect costs? _______________________ 4

2.1 Examples of Costs


2.2 Allowability of Costs


3. What are the options for the reimbursement of indirect costs? _ 12

3.1 The 10 Percent De Minimis Rate


3.1.1 Eligibility Criteria for the 10 Percent De Minimis Rate


3.1.2 Modified Total Direct Cost (MTDC) for the 10 Percent De Minimis Rate


3.2 Indirect Cost Rate Agreement


3.3 Cost Allocation Plan


3.4 Allowable Cost Allocation Methods


3.4.1 Simplified Allocation Method


3.4.2 Multiple Rate Allocation Method


3.4.3 Direct Allocation Method


4. Which option is best for my organization? _________________ 31

4.1 Considerations for Selecting an Indirect Cost Rate Option


4.2 Pros and Cons of Different Indirect Cost Rate Methods


4.3 Steps for Choosing an Indirect Rate Methodology


5. How are indirect cost reimbursement options calculated? _____ 36

5.1 Calculate and Use the 10 Percent De Minimis Rate


5.1.1 ESG De Minimis Rate Indirect Cost Calculation Example


5.1.2 CoC De Minimis Rate Indirect Cost Calculation Examples


5.2 Negotiate and Use an Indirect Cost Rate


5.2.1 Submission of Proposal


5.2.2 Approval of Proposal


5.2.3 Disputes


5.3 Prepare and Use a Cost Allocation Plan


6. Frequently asked questions ____________________________ 45

7. Definitions _________________________________________ 50

1. Introduction
1.1 About This Toolkit
This Toolkit has been developed to assist recipients and subrecipients under the Continuum of Care (CoC) and Emergency Solutions Grants (ESG) programs to better understand indirect costs—such as facility or administrative costs—and how they can be calculated and charged under these programs. Recipients can use this Toolkit to make an informed decision concerning the best method for computing and seeking reimbursement for indirect costs under ESG and CoC program grants. Please note that CoC program grants include all awards made under the Youth Homelessness Demonstration Program (YHDP) and can be used relative to those awards.
In 2014, the United States Office of Management and Budget (OMB) released final regulations on indirect costs under the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 Code of Federal Regulations [CFR] Part 200), also referred to as the Uniform Administrative Guidance. These regulations explain that a recipient or subrecipient’s indirect costs are legitimate expenses that may need to be reimbursed for the organization to be sustainable and effective.
Non-federal entities administering federal funds are not required to seek recovery and reimbursement for indirect costs related to their federal awards. However, when non-federal entities decide to seek reimbursement for indirect costs, the Uniform Administrative Guidance requires passthrough entities (that is, the direct recipients of federal funds, or “grantees”—typically states and local governments) and all federal agencies to reimburse a recipient’s or subrecipient’s indirect costs.
All federal pass-through entities (recipients or grantees) are also required to ensure that all subrecipients of federal funds document and use one of the methods allowed under 2 CFR §200 for determining indirect cost rates (2 CFR §200.331(a)(1)(xiii)) as part of the sub-awarding of federal funds.
There are several methods for determining, allocating, and charging indirect costs. These methods are the subject of this Toolkit. In particular, this

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Toolkit helps ESG and CoC recipients and subrecipients understand the requirements for the different ways they can charge the grant for indirect costs for each of their programs.
This Toolkit does not replace the regulations contained in 2 CFR Part §200, 24 CFR §576 (ESG), 24 CFR §578 (CoC), and subsequent amendments, notices, and any other applicable federal, state, and local laws and ordinances; it simply details requirements for indirect cost reimbursement under ESG and CoC programs. It also does not replace guidance and regulations that govern federal awards and allocations issued prior to the effective date of 2 CFR §200 (as found in 24 CFR §84 and §85). Recipients and subrecipients should always refer to applicable regulations and their grant agreements, and work with their local HUD Field Office to determine what is allowable under their program and how indirect costs can be reimbursed.
Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (“Uniform Administrative Guidance”): ► OMB issued final guidance on December 26, 2013 which became effective
December 26, 2014. Generally, this means that: • 2014 Grant Year and subsequent grant year ESG Awards and on are covered by 2 CFR §200. • 2015 Grant Year and subsequent grant year CoC Awards and on are covered by 2 CFR §200. (Note: this later effective date for CoC Awards was a result of the procurement cycle of CoC Awards and their underlying appropriation dates.)
► Regulations are found at 2 CFR §200, and resources on the Uniform Administrative Guidance are found on the Council on Financial Assistance Reform website.
► For more information about effective dates and HUD’s Transition Rules, review Notice SD-2015-01: Transition to 2 CFR §200, specifically “General Transition Rules” on page 15, and Notice CPD 16-04: Additional Transition and Implementation Guidance.

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1.2 How to Use This Toolkit
This Toolkit is organized into the following sections:
1) Introduction 2) What are direct and indirect costs? 3) What are the options for the reimbursement of indirect costs? 4) Which option is best for my organization? 5) How are indirect cost reimbursement options calculated? 6) Frequently Asked Questions 7) Definitions
This document contains general information regarding the treatment of direct and indirect costs. The determination and allocation of direct and indirect costs at the program and agency levels is dependent on multiple factors, such as the size of the organization, the nature of its programs, the complexity of its structure, and the organization’s overall approach to financial management. Given this, the Toolkit cannot and does not address every possible situation or question that the reader might have. In fact, the document purposely does not include details of how to implement direct and indirect cost allocation methods in a program or organization. In all cases, HUD encourages recipients and subrecipients to develop cost allocation methods, policies, and procedures in consultation with an accountancy professional familiar with federal cost principles.

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2. What are direct and indirect costs?
Before exploring the methods available through the Uniform Administrative Guidance for recovering indirect costs, let’s first take a quick look at what we mean by direct and indirect costs.

The Uniform Administrative Guidance (2 CFR §200.413) defines direct costs as “those costs that can be

Cost objective means a program, function, activity, award, organizational subdivision, contract, or work unit for which cost data are

identified specifically with a particular final cost objective.” For ESG and CoC programs, most expenses

desired and for which a provision is made to accumulate and measure the cost of processes, products, jobs, capital projects, etc.

are direct costs and are

exclusively used for that program (e.g., case manager salary, rental

assistance for clients, purchase of food for shelter meals).

In contrast, indirect costs (2 CFR §200.56) are costs “incurred for a common or joint purpose benefiting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted.” These costs are shared by more than one program.

Understanding the distinction between direct and indirect costs is essential to this entire resource. In general, most, if not all, costs incurred by an organization performing activities under the CoC or ESG programs will be direct program costs. That is, in most or all cases, a dollar spent can directly be identified as being spent on a program objective or activity. A dollar spent would only be indirect if it cannot be easily associated with a particular CoC or ESG activity. For example, if an organization had only one source of funding, a single ESG grant, then 100 percent of its expenses would be direct, because all costs are solely and clearly tied to an ESG award and related activities. On the other hand, if an organization had more than one funding source and had multiple programs in its portfolio, then some costs— such as administrative costs and overhead costs like facility rental and utilities—will be hard to tie to a single funding source and activity, and are thus shared or indirect costs.

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When costs are shared and thus likely indirect, the Uniform Administrative Guidance (2 CFR §200.414) further classifies indirect costs as being limited to administrative and facilities costs (A&F). The Guidance defines facilities as “depreciation on buildings, equipment and capital improvement, interest on debt associated with certain buildings, equipment and capital improvements, and operations and maintenance expenses.” It defines administrative as “general administration and general expenses such as the director’s office, accounting, and personnel.” Indirect costs will fall into one of these two buckets: administrative or facilities. Under the Uniform Administrative Guidance, all indirect costs are either facilities costs or administrative costs.
It is important to pause here and add some important qualifications to the broad discussion in this document, especially around the use of the terms direct and indirect costs and facilities and administrative costs. There is no one-size-fits-all use of any of these terms. In fact, a key takeaway from the Uniform Administrative Guidance in 2 CFR §200 regarding these terms is that the federal government recognizes a wide diversity of organization types and structures, ranging from the smallest nonprofit to large nonprofit conglomerates (such as hospital groups or multi-state organizations like the American Red Cross) and local and state governments. The federal government allows for a diversity of cost accounting methods in response to the diversity of organizational types and structures.
Given this, care should be taken with the terminology in this document. For example, it is the case that a program cost that is charged as a direct program cost by one organization may be—with complete legitimacy— charged as an indirect program cost by another organization, based on the organizations using different, but sanctioned, methods for allocating and charging costs and depending on how their program funding is structured. It is also the case that, though 2 CFR §200 discusses cost types such as facilities and administrative as general categories, particular federal programs such as the CoC or ESG programs will have their own definitions of what costs are allowable within these particular cost categories.
Therefore, this Toolkit aims to provide broad information about these indirect and direct costs, focusing on the various cost accounting methods available to determine how such costs will be categorized and treated. Our objective is to broadly present the various methods available for direct and

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indirect cost allocation that allow non-federal entities to recover indirect costs through their grant awards, with particular attention on the de minimis method that was new with the issuance of 2 CFR §200.
2.1 Examples of Costs
Administrative costs are typically recovered by non-federal entities as an eligible activity on their grant. Both the CoC (CoC, 24 CFR §578.59) and the ESG (ESG, 24 CFR §576.108) programs allow “project administrative costs” as an eligible activity. Program regulations include specifics for each program regarding eligible program administrative costs. Any CoC or ESG program administration costs charged to an award will need to be eligible under the particular program’s regulations. The CoC program caps project administrative costs at 10 percent of awarded funds, and the ESG program caps project administrative costs at 7.5 percent. As long as CoC and ESG recipients are charging administrative costs under this eligible activity (as defined by each program), CoC and ESG providers are already recuperating at least some of their potentially recoverable indirect costs.
Though CoC and ESG regulations define eligible administrative activities and set caps under each program, it can be challenging sometimes to determine the line between when a cost is administrative and when it should be directly charged to a particular activity. For example, a program director’s time and office overhead (space, supplies, equipment, etc.) may fit in either category. If a program director spends time compiling annual reports, working on program budgets, and engaging in similar administrative activities, that time (and the associated share of overhead facilities costs) would be administrative and, if the position was responsible for multiple programs, then such costs would be shared (and, thus, likely treated as indirect). But, if that same program director also spent time (say, in their office) providing direct supervision and oversight to program staff or working on program policies, procedures, and programmatic documentation, then that would not be an administrative cost but a direct program activity cost.
The costs that fall under facilities can present a similar challenge for nonfederal entities. For example, an organization may own or lease a single facility where they engage in both administrative and direct program delivery activities. Furthermore, they may have equipment such as copiers,

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internet and phone systems, and furniture that are shared by both administrative and direct program functions. Finally, the facility may have only a single account for services such as electricity, internet and phone service, and security.
Given the complexity of sorting out direct and indirect costs and determining how to categorize personnel and overhead costs into administrative and facilities categories, organizations can easily make common errors of conflating different types of costs. This may unnecessarily limit their opportunities to have legitimate program costs reimbursed as part of a CoC or ESG award. Consider, for example, a program that provides ESG rental assistance in the form of rent payments to property owners. The organization rents a single office building for its administration and direct program staff. There are frontline persons who work with participating households, determine program eligibility and levels of assistance, and approve units for rental assistance. There is also a program director who supervises the staff and manages the budget and reporting, and finance personnel who handle payroll and manage payments to vendors and landlords. There are supplies, utilities, and equipment that are purchased or leased to support the entire operation. Finally, the organization has Housing Opportunities for Persons With AIDS (HOPWA) funding to perform similar activities, and the same staff manage that program.
Which expenses are direct? Which are indirect? The organization buys equipment (e.g., desks, chairs, phones, binders) in bulk and office cleaning services that are shared by all parts of the organization. According to the definition of facilities costs above, these would all be facilities costs and thus likely are indirect costs. They are all not easily assigned to a single function at the organization (such as administration, HOPWA, or ESG only). Since all indirect costs are either administrative or facilities costs, does that mean that the organization must cover these costs under the 7.5 percent ESG admin cap (or the similar 7 percent HOPWA admin cap)? Similarly, for the program director, do all of his or her costs fall under administration? How about the shared cost of leasing the building?
Unfortunately, many organizations conflate all shared or indirect costs with administrative costs and try to shoehorn costs that may be shared (including personnel, like the program director, or facilities costs, like office rental and

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equipment) into the single bucket of administrative costs. As we have seen, the program director performs both administrative tasks (reporting, budgeting, and signing invoices and mileage sheets) and direct program tasks (supervising employees, reviewing and discussing client files, and reviewing client-related documentation); the latter should not be considered administrative but rather direct program costs. Similarly, a computer purchased for someone in accounting would be an administrative cost, but a computer purchased for use by a caseworker in the rental assistance program would be a direct cost. The same would be true with the renting and maintenance of the organization’s office space; some portion would be administrative, but some portion should be charged directly to the ESG and HOPWA awards, using some proportionate means of determining the allocation of these costs among different areas and departments.
These examples demonstrate how some costs can fall into the gray area where they could be classified either as direct or indirect costs. Every organization will need to determine the method best suited for classifying and recovering these costs, should codify its method for classifying costs in a set of written financial policies and procedures, and should consistently apply this method across all programs. It is crucial that no cost be allocated and charged more than once, so every expense will need to be clearly classified as either direct or indirect and booked and charged accordingly.
This brief journey through direct, indirect, administrative, and facilities costs leads us to the point of this Toolkit and frames the discussions that follow. Let’s summarize:
► Direct costs can easily be assigned to a cost objective and directly charged on an award (assuming eligibility of costs).
► Indirect costs are not easily assigned to a single cost objective, usually because it is paid for by multiple sources (like the program director above), or it is used to support multiple programs (like the office building above).
► All indirect costs will either be administrative or facilities costs. ► However, administrative and facilities costs may not necessarily be
indirect (e.g., only the HOPWA caseworker is issued a cellphone and thus this equipment cost is not a shared cost).

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