Indirect Rates for Grants and Cooperative Agreements

You are putting together a proposal in response to a Funding Opportunity Announcement (FOA) for a grant or cooperative agreement. It’s pretty simple. Just estimate direct labor, equipment, other direct costs, and my indirect rates. Correct? Well, maybe, but your indirect rates can be complex.

Indirect Rates for a Recipient

2 CFR 200 requires a recipient[1] (hereinafter referred to as a pass-through entity[2]) to use indirect rates from its Negotiated Indirect Cost Rate Agreement, referred to as a NICRA. A NICRA is an approved agreement between the cognizant federal agency and the organization. Ok, I currently have a NICRA. Can you submit those rates in my proposal? That is correct.

But what if you don’t have a NICRA? Well, there are a couple of things you need to do. First, you need to determine the Federal agency with the largest dollar value of awards or FAR (Federal Acquisition Regulation) contracts at your organization. Under 2 CFR 200 and the FAR, the Federal agency with the largest dollar value of Federal awards or FAR contracts funded to the non-federal entity is designated as the cognizant agency for negotiating and approving the indirect cost rates. This article deals with the rate-setting procedures under 2 CFR 200, not the FAR.

If your work is mostly grants and cooperative agreements, you have two options under 2 CFR 200. You can either submit an indirect rate submission to the cognizant federal agency and support the negotiation and approval of the indirect rates, or you can elect to use the de minimis rate, which is 10 percent. If you elect the de minimis rate, you must apply it consistently to all federal awards and FAR contracts you receive. If you are incurring an actual indirect rate significantly higher than the 10 percent rate, it is probably not a good idea to elect the de minimis rate. So, that leaves you with the first option of submitting your indirect rate proposal to the cognizant Federal agency to negotiate indirect rates.

If the largest funding is under a grant or cooperative agreement, 2 CFR 200 Appendices III through VII address Facilities and Administrative indirect rate proposals[3] and other cost allocation plans for non-profit, state, and local Government, Institute of Higher Education, and Indian Tribes.

Will my rate be fixed for the period? Not necessarily. It depends on the organization. Some of the common rates are:

• Predetermined Rates[4] – Rates established for a current or future period, usually a Fiscal Year (FY). The rate is used for a period of two to four years, and it is not subject to adjustment.
• Fixed Rates with Carry-Forward[5] – A fixed rate negotiated in advance of a FY and over or under-recovery is carried forward as an adjustment to the rate computation in the next subsequent FY.
• Provisional and Final Rates[6] – Provisional rates are temporary rates established applicable to a specified period, usually a FY, and are used for funding and interim reimbursements until a final rate based on actual allowable costs for the period is established.
• De Minimus Rate[7] – Can be elected by a subrecipient that does not have a current negotiated rate.

Each type of organization uses one of the above rates. For example, an Institute of Higher Education may have a NICRA using fixed rates with carry forward. However, while the cognizant Federal Agency is reviewing an organization’s indirect rate submission, they may approve the use of an interim rate until the NICRA is finalized.

Indirect Rates for a Subrecipient

\So, once I get a NICRA, I am good to go with my proposal to the Federal Awarding Agency, but what if I want to include a sub-award to a subrecipient in my grant proposal? They would need a NICRA or would need to get with their federal agency and negotiate a NICRA, correct? Not so fast. Suppose the subrecipient has a NICRA that is great and smooth sailing. However, suppose they do not have a NICRA, as a recipient, when you issue a sub-award. In that case, you are a pass-through entity. 2 CFR 200 requires the pass-through entity to determine the appropriate rate in collaboration with the subrecipient, which is a negotiated indirect cost rate between the pass-through entity and the subrecipient in accordance with 2 CFR 200.332(a)(4). Not only do you have to negotiate a rate with the subrecipient, but the indirect rate needs to be included in the sub-award agreement per 2 CFR 200.332(a)(1)(xiv), which doesn’t give you a lot of time to evaluate the subrecipient’s financial information and negotiate rates. While the subrecipient can elect to use the de minimis indirect rate of 10%, the pass-through entity cannot require the subrecipient to use the de minimis rate.

What if the subrecipient is a for-profit contractor and has provisional billing rates established? FAR 42.7, Indirect Cost Rates, addresses the process used by the Federal Government to establish provisional/final indirect cost rates for for-profit entities that have FAR-based contracts. Even though this is not referred to as a NICRA, these rates fall under the category of provisional and final rates, as discussed in 2 CFR 200, and should be considered the same as a NICRA.

Indirect rates will need to be negotiated if the subrecipient is a for-profit company with only subawards/subcontracts with the Government, because there is not a cognizant Federal Agency to negotiate rates.

Pass-through entities need to ensure they understand the indirect rate process, whether they are a recipient or a pass-through entity awarding a sub-award to a subrecipient. If you are planning to award work to a subrecipient, you need to determine whether they have a NICRA early in the proposal phase. If there is no NICRA, the pass-through entity needs to ensure they include time to gather financial information and negotiate a rate unless the subrecipient elects to use the de minimis rate.

How Can Redstone Help?

Redstone Government Consulting offers comprehensive assistance to ensure grant compliance with 2 CFR 200.332. This includes drafting tailored written policies and procedures to effectively navigate the indirect rate process, whether it involves obtaining a NICRA or negotiating rates with a subrecipient. We also provide invaluable support in understanding the nuances of the indirect rate process under the FAR or 2 CFR 200 cost principles. Our services extend to conducting training sessions for your staff to enhance their understanding of indirect rates. Additionally, we offer expertise in assisting with developing and calculating subrecipient indirect rate structures, ensuring a thorough and compliant approach across all aspects of your operations.

Redstone GCI is available to assist contractors in developing accounting policies and procedures, checklists, accounting support, and reviews of invoices, Government reports for compliance with 2 CFR 200. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying the 2 CFR 200 uniform administrative requirements, cost principles, and audit requirements for Federal grants.

[1] 2 CFR 200.1 Recipient means an entity usually but not limited to non-Federal entities that receives a Federal award directly from a Federal awarding agency.
[2] 2 CFR 200.1 “Pass through entity (PTE)” means a non-Federal entity that provides a subaward to a subrecipient to carry out part of a Federal program.
[3] 2 CFR 200.1 “Indirect cost rate proposal” means the documentation prepared by a non-Federal entity to substantiate its request for the establishment of an indirect cost rate as described in appendices III through VII and appendix IX to this part.
[4] 2 CFR 200 Appendix III C.4, Appendix IV C.2.d and Appendix VII B.9
[5] 2 CFR 200 Appendix III C.5, Appendix IV C.2.e and Appendix VII B.5
[6] 2 CFR 200 Appendix III C.6, Appendix IV C.2.f and Appendix VII B.10
[7] 2 CFR 200.414(f)