Direct Costs
To understand indirect costs, it is always best to understand direct costs. Below is a comparison of the definition of direct cost in the Federal Acquisition Regulations (FAR) and 2 Code of Federal Regulation (CFR) 200. FAR Part 31 provides the cost principles for commercial for-profit organizations and 2 CFR 200 Subpart E provides the cost principles for all other organizations (e.g., non-profits and educational institutions).
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“(a) No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Direct costs of the contract shall be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.” |
“(a) General. Direct costs are those costs that can be identified specifically with a particular final cost objective, such as a Federal award, or other internally or externally funded activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect (F&A) costs. See also § 200.405.” |
While using somewhat different wording, we believe both the FAR and 2 CFR 200 expect that any cost that can be identified with a final cost objective (i.e., contract or grant) be treated as a direct cost and the treatment of that cost as direct be consistently applied to all final cost objectives. 2 CFR 200.413 Direct Costs does refer to 2 CFR 200.405 Allocable Costs which we will address below.
Indirect Costs
So now that we understand direct costs and see that both the FAR and 2 CFR 200 have similar expectations related to the treatment of direct costs, we need to understand indirect costs. Below is a comparison of the definition of indirect cost in the Federal Acquisition Regulations (FAR) and 2 Code of Federal Regulation (CFR) 200.
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“(b) After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to intermediate or two or more final cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective.” |
“(a) Facilities and administration classification. For major Institutions of Higher Education (IHE) and major nonprofit organizations, indirect (F&A) costs must be classified within two broad categories: “Facilities” and “Administration.” · “Facilities” is defined as depreciation on buildings, equipment and capital improvement, interest on debt associated with certain buildings, equipment and capital improvements, and 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 specifically under one of the subcategories of “Facilities” (including cross allocations from other pools, where applicable)…” |
The FAR is pretty clear all costs that are not direct costs are indirect costs. However, under 2 CFR 200.414 there are only two categories of indirect costs “Facilities” and “Administration.” While the Appendix III and IV to Part 200 do add complexity and some additional subcategories, we do believe there is a gap between the FAR and 2 CFR 200. While the FAR does not define categories within indirect cost, throughout the FAR cost principles it does discuss overhead and General and Administrative (G&A) costs. The Cost Accounting Standards (CAS) introduce these categories more fully. CAS 410-30(a)(6) defines G&A as “any management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole. G&A expense does not include those management expenses whose beneficial or causal relationship to cost objectives can be more directly measured by a base other than a cost input base representing the total activity of a business unit during a cost accounting period.” We believe this aligns fairly well with the 2 CFR 200 category of “Administration.” Even CAS does not provide a specific definition of overhead. Based on our reading of the CAS and FAR, overhead is all indirect cost that does not meet the definition of G&A. So, if 2 CFR 200 defines “Administration” as G&A then “Facilities” must be part of overhead – so, what is missing from the 2 CFR 200 side of things? Just a few examples of the types of expenses that may fall into this gap are employee indirect time (i.e., training not related to a specific federal program, etc.), information technology (IT) resources, and supplies. So, under 2 CFR 200 how do these expenses get charged to final cost objectives? This is where 2 CFR 200.405(d) direct cost allocation principles come into play.
2 CFR 200.405(d) Direct Cost Allocation Principles
2 CFR 200.405(d) provides that a cost benefiting two or more programs should be allocated between the programs based on the proportional benefit or any reasonable documented basis. We will be issuing a BLOG addressing 2 CFR 200.405(d) in the near future.
The Impact
The difference between the FAR and 2 CFR 200 cost principles places organizations that do not leverage the direct cost allocation principles at a potential disadvantage when it comes to proposing on potential grants opportunities. The direct cost allocations are presented in the grant budget form (SF 425) as direct costs. This makes for-profit organizations appear to have greater indirect costs that many grant officials see as nonproductive to the federal program.
Redstone GCI assists organizations throughout the U.S. and internationally with understanding the Government’s requirements and supporting FAR and 2 CFR 200 requirements. We would be happy to be part of your team.
