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By Lisa Cirincione, Senior Resource Development Associate at Joining Vision and Action
If your nonprofit organization receives a lot of federal grants, you may want to negotiate an indirect cost rate agreement. Here is a brief summary of what you can expect from this process.
Identify your cognizant agency
The first step is to identify which federal agency is most likely to be designated as your cognizant agency. You do this by looking at which federal agency provides the largest dollar value of federal awards to your organization. This agency becomes the agency with which you will negotiate for a standard indirect cost rate.
Your cognizant agency will ultimately approve your indirect cost rate and other rates such as fringe benefit and computer charge-out rates. Once an agency is assigned cognizance for your organization, the assignment will not be changed unless there is a shift in the dollar volume of the federal awards to your organization for at least three years. You don’t have to negotiate a rate with individual federal agencies, because all other federal agencies must be given the opportunity to participate in the negotiation process. But after a rate has been agreed upon, it will be accepted by all federal agencies.
Calculate your indirect cost rate allocation
After you have identified which agency will be your cognizant agency, the second step is to calculate your indirect cost rate allocation. Appendix IV, Section B, of 2 CFR 200 explains the allocation procedures that nonprofit organizations should use to justify their allocation of indirect costs.
The complexity of the process depends on how many major functions your nonprofit has. If the organization has only one major function, it may use a simplified allocation method. If its indirect costs benefit its major functions to varying degrees, you may use a multiple allocation base method to allocate its indirect costs. Another method that is available is the direct allocation method, which is used when nonprofits treat all costs as direct costs except general administration and general expenses. Your accountant will help you determine which of these three methods is best for your organization to use.
Submit your initial indirect cost proposal
The third step is to use that allocation calculation to submit your initial indirect cost proposal to your cognizant agency. The indirect cost proposal is the documentation that you prepare to substantiate your claim for the reimbursement of indirect costs. This proposal provides the basis for the review and negotiation leading to the establishment of your organization’s indirect cost rate.
Along with your proposal, you will submit audited financial statements, a Lobbying Cost Certificate and a notice of grant award. Your executive director or chief financial officer will also sign a Certificate of Indirect (F&A) Costs, which is an assurance that the indirect cost proposal is accurate and that the costs are allowable and properly allocable to federal awards.
An HHS example
Because so many of JVA’s clients apply for grants within the U.S. Department of Health and Human Services (HHS), this article focuses on the process with that agency. Within HHS, Cost Allocation Services reviews and negotiates indirect cost rates, fringe benefit rates and special rates. While each federal agency may have its own requirements, you can see an example of a completed indirect cost proposal for nonprofit organizations to HHS at https://rates.psc.gov/fms/dca/np_exall2.html.
After you have submitted your indirect cost proposal to your cognizant agency, you will begin the negotiation process. The results of each negotiation will be formalized in a written agreement between the cognizant agency and the nonprofit organization. The cognizant agency for indirect costs will make available copies of the agreement to all concerned federal agencies.
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