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Title 2 Subtitle A Chapter II of the Code of Federal Regulations (CFR) includes Part 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (i.e., grants and cooperative agreements). 2 CFR 200.405, Allocable costs, falls under Subpart E–Cost Principles applicable to all organizations that are not commercial for-profit organizations. 2 CFR 200.405(d) states:
Direct cost allocation principles: If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost must be allocated to the projects based on the proportional benefit. If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, then, notwithstanding paragraph (c) of this section, the costs may be allocated or transferred to benefitted projects on any reasonable documented basis. Where the purchase of equipment or other capital asset is specifically authorized under a Federal award, the costs are assignable to the Federal award regardless of the use that may be made of the equipment or other capital asset involved when no longer needed for the purpose for which it was originally required. See also §§ 200.310 through 200.316 and 200.439.
Paragraph (c) in 2 CFR 200.405 simply prohibits moving allocable costs to another federal award to avoid funding limitations, any regulation, or terms and conditions of an award.
2 CFR 200.414, Indirect (F&A) costs, addresses Facilities and Administration (F&A) classification. “For major Institutions of Higher Education (IHE) and major nonprofit organizations, indirect (F&A) costs must be classified within two broad categories:”
- “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).
Interestingly, there are several categories of what many (especially those with a FAR background) would think of as indirect costs. For example: fringe benefits, indirect employee time (training, meetings with management, etc.), supplies, etc.
Under 2 CFR 200 IHE and nonprofits organizations handle fringe benefits and other costs not meeting the definitions of facilities and administration using the “direct cost allocation principles.” That means these organizations need to analysis their directly allocable costs and develop a consistent practice to make these allocations for billing and budgeting purposes.
What are the Benefits?
The big benefit is that these organizations are going to appear to have significantly lower indirect cost than the average commercial for-profit organization. This also allows many nonprofit organizations to present program costs in a format consistent with their Statement of Functional Expenses within their Financial Statements.
What are the Drawbacks?
The organization must maintain consistency in its allocations and regularly analyze its expenses and programs to ensure the allocations meet the 2 CFR 200.405(a) requirement that the costs are allocated in accordance with the relative benefits received. This can be a significant effort for an organization with most of its resources focused on the delivery of the programs it is engaged with.
Takeaway
Most Federal Awarding Agencies are looking to minimize indirect costs to the greatest extent possible – so leveraging the direct cost allocation principle is a significant benefit. Have written policies and procedures to address:
- Recurring analysis of costs fitting within the direct cost allocation principles;
- Documentation of the basis of allocation and how that basis meets the 2 CFR 200.405(a) requirement that the costs be allocated in accordance with the relative benefits received;
- Documentation of the accounting method to be used to collect the costs to be allocated;
- Consistent application of the determined allocation; and
- Verification that the allocations are trued up to support billing, fiscal year accounting, and closeout.
Redstone GCI assists organizations throughout the U.S. and internationally with understanding the Government’s requirements and supporting 2 CFR 200 requirements. We would be happy to be part of your team.
