4.14.1 Overview
Effective date: TBD
Cost allocation is a means of assigning a cost, or group of costs, to one or more cost objective, in reasonable proportion to the benefit provided. This process may entail assigning a cost or costs directly to a final cost objective1 or a cost or costs through one or more intermediate cost objectives.2 Allocated costs should be allowable3, treated consistently over time and within the accounting system, be necessary and reasonable, and be allocated to the grant based on the benefit received and in proportion to use.4
Recipients should utilize one of the following cost allocation methods:
- Cost allocation plan
- Negotiated indirect cost rate agreement
- De minimis rate
4.14.2 Cost Allocation Plan
Effective date: TBD
A cost allocation plan, or CAP, identifies, accumulates, and distributes allowable direct or indirect costs and identifies the allocation methods used for distribution. CAPs must be in writing, supported by formal accounting records, and signed by an authorized official. Additionally, a CAP should include a process for reconciliation and adjustment and be periodically validated and updated.
Acceptable allocation bases should:
- Be related to the types of costs being allocated;
- Provide a fair measure of cost benefit;
- Result in an equitable allocation of costs;
- Represent actual effort of cost;
- Provide a cost-effective use of available and representative data; and
- Be adjusted for variations in funding and services provided.
An allocation base is acceptable if it represents a fair measure of cost benefit, and it results in an equitable, reasonable distribution of the costs of the services provided.
Examples of acceptable allocation bases include number of employees, number of transactions, direct labor hours, and square footage of space occupied. Each base should be considered on its own merits as to the purpose for using it and the degree of equity it will achieve in allocating costs.
4.14.3 Negotiated Indirect Cost Rate Agreement (NICRA)
Effective date: TBD
A negotiated indirect cost rate, or NICRA, is an estimate of indirect cost rate negotiated between the federal government and a recipient that reflects the indirect costs and fringe benefit expenses incurred by the recipient. A NICRA is the ratio between total indirect expenses and a direct cost base used to determine what proportion of indirect costs each grant, or program, should bear.
A cognizant agency is responsible for reviewing, negotiating, and approving the recipient's indirect cost rate, as well as issuing the appropriate negotiation agreement.1 Cognizance is typically determined by the federal agency with the largest dollar volume of direct federal funding.
An initial or provisional indirect cost rate proposal must be submitted to the recipient's cognizant agency within 90 days of receiving a grant award. Final indirect cost rate proposals must be submitted within 180 days of the recipient's fiscal year end. Adjustments to indirect cost rates for unallowable costs included in the cost rate proposal may result in the reissuance of a negotiated rate agreement.2
4.14.4 De Minimis Rate
Effective date: TBD
The de minimis rate allows a recipient to charge up to 10% of its modified total direct costs (MTDC)1 to pay for indirect costs that are not directly charged to federal grants.2 While no documentation is required for use of the de minimis indirect cost rate, costs must be consistently charged as either direct or indirect costs and must not be double charged or inconsistently charged as both.3 Prior approval is not necessary to utilize the de minimis rate.
Recipients who choose to use the de minimis rate must do so consistently for all federal grants until such time it chooses to use a cost allocation plan or negotiate an indirect cost rate.
