Indirect Cost Rates
Indirect costs are those costs which are not readily identifiable with a particular cost objective (e.g., direct organizational activity or project), but nevertheless are necessary for the general operation of an organization. Examples of indirect costs include the salary and related expenses of individuals working in accounting, personnel, purchasing functions, rent, depreciation and utilities. Indirect costs are not normally charged directly to a Federal award, but are allocated equitably to all of the organizations activities. Indirect costs are generally charged to Federal awards through the development and application of an indirect cost rate (ICR).
In order to recover indirect costs related to Federal awards, most organizations must negotiate an ICR with the Federal agency that provides the preponderance of funding, or Health and Human Services in the case of colleges and universities. NSF is the cognizant agency and negotiates formal negotiated indirect cost rate agreements (NICRAs) for ~ 110 organizations. Organizations, for which NSF is the agency with rate cognizance, are required to regularly (typically annually) submit proposals to update their ICRs. CAAR is responsible for negotiating and issuing ICRs for NSFs cognizant awardees. CAAR does not negotiate ICRs for organizations that are not direct recipients of NSF funding (e.g. subrecipients) or for foreign organizations.
For awardees that have never received a NICRA, 2 CFR 200.414(f) allows the use of an ICR of 10 percent calculation on MTDC. Pass-through entities may also apply this rate. If this de minimis approach is chosen, the 10 percent rate must be applied consistently across all federal awards until the entity choses to negotiate an ICR.
If an organization to which NSF intends to issue a substantial award does not have a current negotiated rate agreement with any Federal agency, and does not elect to use the de minimis approach outlined above, CAAR will require the organization to support its proposed ICR by submission of an indirect cost proposal (view indirect cost proposal submission procedures). Based on various information available (e.g., historical cost information and the level of funding being requested), CAAR negotiates the funding of indirect costs, typically as a rate. Occasionally when NSF plans to issue the organization only one award or a few awards or the total intended amount is not large, CAAR may decline to negotiate an ICR but, instead, recommend an awardspecific amount.
Because indirect cost recovery can be limited on NSF awards and could require post-award adjustments, awardees should ensure they understand the limitations relating to indirect cost recovery. These limitations will be specified in the award letter or the NICRA, and include: type of rate, percentage rate, and application base.
Maximum provisional rate:
A maximum provisional rate is a temporary rate established to permit funding and reimbursement of indirect costs pending establishment of a final rate (that rate determined at the end of an accounting period using "actual" direct and indirect cost data.) This type of rate limits indirect cost recoveries to the LOWER of the maximum provisional rate established at the time of the award, or the final rate, established at the end of an accounting period.
As an example, if a maximum provisional ICR of 50% was established at the time of the award, but an ICR of 65% was determined based on actual financial data for an accounting period, indirect cost recoveries would be limited to 50%. However, if a final ICR of 40% was determined, indirect cost recovered in excess of the 40% rate would need to be removed as charges to the project.
Organizations that have awards containing maximum provisional rates are required to submit indirect cost proposals reconciled to financial statements within six months after the close of each accounting year during which it charged indirect costs to a federally-funded award.
Predetermined Fixed Rate:
A predetermined fixed ICR is a permanent rate established for a discrete period of time that corresponds to one or more of the organization's fiscal years. Organizations are permitted to charge NSF awards at the predetermined fixed rate(s) stipulated in the award document(s). However, if negotiations between the organization and NSF (or the cognizant Federal agency, if not NSF) result in changes to the organization's ICR during the award period, the organization may charge the award at the newly negotiated rate in effect when direct cost expenditures are made, subject to the provisions in NSF Award and Administration Guide V.D.
A fixed ICR set for the period covered under the funding action and is not subject to any adjustment or carry forward. Any funding action amendment to an award will be subject to the same rate(s) unless modified in writing by the NSF Grants Officer.
Fixed Dollar Amount:
A fixed dollar amount limits organizations to that "amount" of indirect costs specified in the approved budget. It is not subject to adjustment.
Note: Due to limitations of funds provided under assistance awards, grants, and cooperative agreements, additional funds will not be provided to cover increases in indirect costs regardless of the type of rate used.
Exclusions of Some Costs from Indirect Costs Recovery Calculations:
The Federal government in general, and NSF specifically, does not permit indirect costs to be recovered on certain types of costs. Commonly excluded costs include:
- Equipment and capital expenditures
- The portion of subawards or subcontracts that exceed $25,000
- Participant support costs.
Awardees must have a detailed understanding of their terms and conditions related to the ICR or award specific rates to correctly calculate indirect cost recovery charges and any potential post-award adjustments.
Once CAAR receives and accepts an awardees ICR proposal for rate negotiation, it is assigned to a CAAR Analyst to review and negotiate the ICR. The CAAR Analyst verifies that the ICR proposal complies with the applicable Federal cost principles. CAAR staff may contact the awardee if additional information is needed to resolve issues identified during the review.
After the review and negotiation is finalized, NSF sends a letter detailing the results of the negotiation, also known as a NICRA, to be signed by the awardee. Once the awardee signs and returns the rate agreement, the proposal is closed. Alternatively, CAAR may issue a recommendation to awarding branches for an award-specific rate. In this case, the type of rate, percentage rate, and application base should be specified in the award letter.
If the awardee and NSF are unable to reach agreement on an ICR, disallowed indirect cost pool expenses, or the appropriate ICR base of allocation, a unilateral rate agreement may be issued by NSF. If the awardee still disagrees and does not sign the rate agreement with NSF, then the appeal procedures should be invoked within 30 days of issuance of the unilateral rate agreement (See NSF Award and Administration Guide VII.B) or the right of appeal may be lost and the agreement is determined to be in effect.
CAAR negotiates ICRs for the organizations for which NSF has rate cognizance. CAAR also provides indirect cost advice to the Division of Grants and Agreements (DGA) and the Division of Acquisition and Cooperative Support (DACS). DGA and DACS negotiate the award agreement with the awardee organizations.
NSF awardees have the following responsibilities related to the ICR proposal review process:
- Ensure removal of any types of cost previously determined to be unallowable either by GO/CO determination or under previous ICR negotiations
- Reconciliation of total expenses included in the ICR proposal to financial statement total expenses and explanation of any reconciling items from the indirect cost pool or direct cost base
- Ensure unallowable costs are not included in the indirect cost pools; unallowable costs may need to be included in the direct cost base
- Respond to CAAR and other NSF contractor inquiries
- Provide requested supporting documentation to facilitate the proposal reviews
- Negotiate rates as responsible stewards of Federal funds
- Promptly review, sign, and return rate agreements to CAAR.
Organizations for which NSF is the cognizant agency are required to submit ICR proposals within six months after the close of each fiscal year during which the awardee has Federal award funding unless other written arrangements are made. NSF ensures that the proposal is promptly reviewed and, if accepted, that a rate is negotiated and the subsequent NICRA is sent to the awardee for signature. Awardees are expected to return the signed rate agreements to CAAR within 30 days, at which time the rate agreements are signed by the CAAR Team Lead on behalf of the Federal Government.
Topics Covered by the Review
CAAR reviews ICR proposals to ensure that the organization complies with the applicable Federal requirements contained in Federal cost principles.
CAAR reviews the following when organizations submit an ICR proposal for the first time:
- Organizational profile, which provides an understanding of the basic structure of the organization
- Cost policy statement, which establishes a clear understanding between the organization and the Federal government as to what costs will be charged directly and what costs will be charged indirectly
- ICR proposal preparation policies and procedures, which describe how the organization prepares its annual ICR proposal.
CAAR reviews the following each time an organization submits subsequent annual ICR proposals:
- Cover letter indicating the requested period(s) covered by the rate(s), the type of rate(s), the allocation base, etc.
- Any changes to the organizational profile, cost policy statement, or ICR proposal preparation policies and procedures
- Financial reports for the year under review (e.g., audited financial statements, Single Audit Report, or completed Federal tax return)
- ICR proposal detailing indirect expenses by function and cost category, detailing fund distribution of the direct cost base by function and cost category, and including a reconciliation between the proposal and the financial statements for the applicable fiscal years (all differences must be explained)
- Allocation of salaries and wages, including a schedule of positions, functions, and annual salaries for the people who charge time to an indirect cost function
- Statement of employee benefits, including a schedule showing the actual costs of applicable employee fringe benefit expenses
- Identification and description of unusual factors which affect the proposed rates, any memoranda of understanding, or any advance agreements which may affect the proposed rate(s)
- Listing of all grants and contracts that were active during the fiscal year, including total dollar amount, period of performance, and indirect cost limitations
- Completed lobbying certificate, which verifies that the organization does not include lobbying cost in indirect costs
- Completed certificate of indirect costs, signed by an organization representative who has the authority to contractually bind the organization.
Resources and References