Indirect costs are those that have been incurred for common or joint
purposes. These costs benefit more than one cost objective and cannot be
readily identified with a particular final cost objective without effort
disproportionate to the results achieved. After direct costs have been
determined and assigned directly to Federal awards and other activities as
appropriate, indirect costs are those remaining to be allocated to benefitted
cost objectives. A cost may not be allocated to a Federal award as an indirect
cost if any other cost incurred for the same purpose, in like circumstances,
has been assigned to a Federal award as a direct cost.
Indirect costs include (a) the indirect costs originating in each
department or agency of the governmental unit carrying out Federal awards and
(b) the costs of central governmental services distributed through the central
service cost allocation plan (as described in Attachment C) and not otherwise
treated as direct costs.
Indirect costs are normally charged to Federal awards by the use of
an indirect cost rate. A separate indirect cost rate(s) is usually necessary
for each department or agency of the governmental unit claiming indirect costs
under Federal awards. Guidelines and illustrations of indirect cost proposals
are provided in a brochure published by the Department of Health and Human
Services entitled "A Guide for State and Local Government Agencies: Cost
Principles and Procedures for Establishing Cost Allocation Plans and Indirect
Cost Rates for Grants and Contracts with the Federal Government." A copy of
this brochure may be obtained from the Superintendent of Documents, U.S.
Government Printing Office.
Because of the diverse characteristics and accounting practices of
governmental units, the types of costs which may be classified as indirect
costs cannot be specified in all situations. However, typical examples of
indirect costs may include certain State/local-wide central service costs,
general administration of the grantee department or agency, accounting and
personnel services performed within the grantee department or agency,
depreciation or use allowances on buildings and equipment, the costs of
operating and maintaining facilities, etc.
This Attachment does not apply to State public assistance agencies.
These agencies should refer instead to Attachment D.
"Indirect cost rate proposal" means the documentation prepared by a
governmental unit or subdivision thereof to substantiate its request for the
establishment of an indirect cost rate.
"Indirect cost rate" is a device for determining in a reasonable
manner the proportion of indirect costs each program should bear. It is the
ratio (expressed as a percentage) of the indirect costs to a direct cost base.
"Indirect cost pool" is the accumulated costs that jointly benefit
two or more programs or other cost objectives.
"Base" means the accumulated direct costs (normally either total
direct salaries and wages or total direct costs exclusive of any extraordinary
or distorting expenditures) used to distribute indirect costs to individual
Federal awards. The direct cost base selected should result in each award
bearing a fair share of the indirect costs in reasonable relation to the
benefits received from the costs.
"Predetermined rate" means an indirect cost rate, applicable to a
specified current or future period, usually the governmental unit's fiscal
year. This rate is based on an estimate of the costs to be incurred during the
period. Except under very unusual circumstances, a predetermined rate is not
subject to adjustment. (Because of legal constraints, predetermined rates are
not permitted for Federal contracts; they may, however, be used for grants or
cooperative agreements.) Predetermined rates may not be used by governmental
units that have not submitted and negotiated the rate with the cognizant
agency. In view of the potential advantages offered by this procedure,
negotiation of predetermined rates for indirect costs for a period of two to
four years should be the norm in those situations where the cost experience and
other pertinent facts available are deemed sufficient to enable the parties
involved to reach an informed judgment as to the probable level of indirect
costs during the ensuing accounting periods.
"Fixed rate" means an indirect cost rate which has the same
characteristics as a predetermined rate, except that the difference between the
estimated costs and the actual, allowable costs of the period covered by the
rate is carried forward as an adjustment to the rate computation of a
"Provisional rate" means a temporary indirect cost rate applicable to
a specified period which is used for funding, interim reimbursement, and
reporting indirect costs on Federal awards pending the establishment of a
"final" rate for that period.
"Final rate" means an indirect cost rate applicable to a specified
past period which is based on the actual allowable costs of the period. A final
audited rate is not subject to adjustment.
"Base period" for the allocation of indirect costs is the period in
which such costs are incurred and accumulated for allocation to activities
performed in that period. The base period normally should coincide with the
governmental unit's fiscal year, but in any event, shall be so selected as to
avoid inequities in the allocation of costs.
a. Where a governmental unit's department or agency has only one
major function, or where all its major functions benefit from the indirect
costs to approximately the same degree, the allocation of indirect costs and
the computation of an indirect cost rate may be accomplished through simplified
allocation procedures as described in subsection 2.
b. Where a governmental unit's department or agency has several
major functions which benefit from its indirect costs in varying degrees, the
allocation of indirect costs may require the accumulation of such costs into
separate cost groupings which then are allocated individually to benefitted
functions by means of a base which best measures the relative degree of
benefit. The indirect costs allocated to each function are then distributed to
individual awards and other activities included in that function by means of an
indirect cost rate(s).
c. Specific methods for allocating indirect costs and computing
indirect cost rates along with the conditions under which each method should be
used are described in subsections 2, 3 and 4.
a. Where a grantee agency's major functions benefit from its
indirect costs to approximately the same degree, the allocation of indirect
costs may be accomplished by (1) classifying the grantee agency's total costs
for the base period as either direct or indirect, and (2) dividing the total
allowable indirect costs (net of applicable credits) by an equitable
distribution base. The result of this process is an indirect cost rate which is
used to distribute indirect costs to individual Federal awards. The rate should
be expressed as the percentage which the total amount of allowable indirect
costs bears to the base selected. This method should also be used where a
governmental unit's department or agency has only one major function
encompassing a number of individual projects or activities, and may be used
where the level of Federal awards to that department or agency is relatively
b. Both the direct costs and the indirect costs shall exclude
capital expenditures and unallowable costs. However, unallowable costs must be
included in the direct costs if they represent activities to which indirect
costs are properly allocable.
c. The distribution base may be (1) total direct costs
(excluding capital expenditures and other distorting items, such as
pass-through funds, major subcontracts, etc.), (2) direct salaries and wages,
or (3) another base which results in an equitable distribution.
Multiple allocation base method.
a. Where a grantee agency's indirect costs benefit its major
functions in varying degrees, such costs shall be accumulated into separate
cost groupings. Each grouping shall then be allocated individually to
benefitted functions by means of a base which best measures the relative
b. The cost groupings should be established so as to permit the
allocation of each grouping on the basis of benefits provided to the major
functions. Each grouping should constitute a pool of expenses that are of like
character in terms of the functions they benefit and in terms of the allocation
base which best measures the relative benefits provided to each function. The
number of separate groupings should be held within practical limits, taking
into consideration the materiality of the amounts involved and the degree of
c. Actual conditions must be taken into account in selecting
the base to be used in allocating the expenses in each grouping to benefitted
functions. When an allocation can be made by assignment of a cost grouping
directly to the function benefitted, the allocation shall be made in that
manner. When the expenses in a grouping are more general in nature, the
allocation should be made through the use of a selected base which produces
results that are equitable to both the Federal Government and the governmental
unit. In general, any cost element or related factor associated with the
governmental unit's activities is potentially adaptable for use as an
allocation base provided that: (1) it can readily be expressed in terms of
dollars or other quantitative measures (total direct costs, direct salaries and
wages, staff hours applied, square feet used, hours of usage, number of
documents processed, population served, and the like), and (2) it is common to
the benefitted functions during the base period.
d. Except where a special indirect cost rate(s) is required in
accordance with subsection 4, the separate groupings of indirect costs
allocated to each major function shall be aggregated and treated as a common
pool for that function. The costs in the common pool shall then be distributed
to individual Federal awards included in that function by use of a single
indirect cost rate.
e. The distribution base used in computing the indirect cost
rate for each function may be (1) total direct costs (excluding capital
expenditures and other distorting items such as pass-through funds, major
subcontracts, etc.), (2) direct salaries and wages, or (3) another base which
results in an equitable distribution. An indirect cost rate should be developed
for each separate indirect cost pool developed. The rate in each case should be
stated as the percentage relationship between the particular indirect cost pool
and the distribution base identified with that pool.
Special indirect cost rates.
a. In some instances, a single indirect cost rate for all
activities of a grantee department or agency or for each major function of the
agency may not be appropriate. It may not take into account those different
factors which may substantially affect the indirect costs applicable to a
particular program or group of programs. The factors may include the physical
location of the work, the level of administrative support required, the nature
of the facilities or other resources employed, the organizational arrangements
used, or any combination thereof. When a particular award is carried out in an
environment which appears to generate a significantly different level of
indirect costs, provisions should be made for a separate indirect cost pool
applicable to that award. The separate indirect cost pool should be developed
during the course of the regular allocation process, and the separate indirect
cost rate resulting therefrom should be used, provided that: (1) the rate
differs significantly from the rate which would have been developed under
subsections 2. and 3., and (2) the award to which the rate would apply is
material in amount.
b. Although this Circular adopts the concept of the full
allocation of indirect costs, there are some Federal statutes which restrict
the reimbursement of certain indirect costs. Where such restrictions exist, it
may be necessary to develop a special rate for the affected award. Where a
"restricted rate" is required, the procedure for developing a non-restricted
rate will be used except for the additional step of the elimination from the
indirect cost pool those costs for which the law prohibits reimbursement.
a. All departments or agencies of the governmental unit desiring
to claim indirect costs under Federal awards must prepare an indirect cost rate
proposal and related documentation to support those costs. The proposal and
related documentation must be retained for audit in accordance with the records
retention requirements contained in the Common Rule.
b. A governmental unit for which a cognizant agency assignment
has been specifically designated must submit its indirect cost rate proposal to
its cognizant agency. The Office of Management and Budget (OMB) will
periodically publish lists of governmental units identifying the appropriate
Federal cognizant agencies. The cognizant agency for all governmental units or
agencies not identified by OMB will be determined based on the Federal agency
providing the largest amount of Federal funds. In these cases, a governmental
unit must develop an indirect cost proposal in accordance with the requirements
of this Circular and maintain the proposal and related supporting documentation
for audit. These governmental units are not required to submit their proposals
unless they are specifically requested to do so by the cognizant agency. Where
a local government only receives funds as a sub-recipient, the primary
recipient will be responsible for negotiating and/or monitoring the
c. Each Indian tribal government desiring reimbursement of
indirect costs must submit its indirect cost proposal to the Department of the
Interior (its cognizant Federal agency).
d. Indirect cost proposals must be developed (and, when
required, submitted) within six months after the close of the governmental
unit's fiscal year, unless an exception is approved by the cognizant Federal
agency. If the proposed central service cost allocation plan for the same
period has not been approved by that time, the indirect cost proposal may be
prepared including an amount for central services that is based on the latest
federally-approved central service cost allocation plan. The difference between
these central service amounts and the amounts ultimately approved will be
compensated for by an adjustment in a subsequent period.
Documentation of proposals. The following shall be included with each
indirect cost proposal:
a. The rates proposed, including subsidiary work sheets and other
relevant data, cross referenced and reconciled to the financial data noted in
subsection b. Allocated central service costs will be supported by the summary
table included in the approved central service cost allocation plan. This
summary table is not required to be submitted with the indirect cost proposal
if the central service cost allocation plan for the same fiscal year has been
approved by the cognizant agency and is available to the funding agency.
b. A copy of the financial data (financial statements,
comprehensive annual financial report, executive budgets, accounting reports,
etc.) upon which the rate is based. Adjustments resulting from the use of
unaudited data will be
recognized, where appropriate, by the Federal cognizant agency
in a subsequent proposal.
c. The approximate amount of direct base costs incurred under
Federal awards. These costs should be broken out between salaries and wages and
other direct costs.
d. A chart showing the organizational structure of the agency
during the period for which the proposal applies, along with a functional
statement(s) noting the duties and/or responsibilities of all units that
comprise the agency. (Once this is submitted, only revisions need be submitted
with subsequent proposals.)
Required certification. Each indirect cost rate proposal shall be
accompanied by a certification in the following form:
CERTIFICATE OF INDIRECT COSTS
This is to certify that I have reviewed the indirect cost rate
proposal submitted herewith and to the best of my knowledge and belief:
All costs included in this proposal [identify date] to establish
billing or final indirect costs rates for [identify period covered by rate] are
allowable in accordance with the requirements of the Federal award(s) to which
they apply and OMB Circular A-87, "Cost Principles for State and Local
Governments." Unallowable costs have been adjusted for in allocating costs as
indicated in the cost allocation plan.
All costs included in this proposal are properly allocable to
Federal awards on the basis of a beneficial or causal relationship between the
expenses incurred and the agreements to which they are allocated in accordance
with applicable requirements. Further, the same costs that have been treated as
indirect costs have not been claimed as direct costs. Similar types of costs
have been accounted for consistently and the Federal Government will be
notified of any accounting changes that would affect the predetermined rate.
Indirect cost rates will be reviewed, negotiated, and approved by the
cognizant Federal agency on a timely basis. Once a rate has been agreed upon,
it will be accepted and used by all Federal agencies unless prohibited or
limited by statute. Where a Federal funding agency has reason to believe that
special operating factors affecting its awards necessitate special indirect
cost rates, the funding agency will, prior to the time the rates are
negotiated, notify the cognizant Federal agency.
The use of predetermined rates, if allowed, is encouraged where the
cognizant agency has reasonable assurance based on past experience and reliable
projection of the grantee agency's costs, that the rate is not likely to exceed
a rate based on actual costs. Long-term agreements utilizing predetermined
rates extending over two or more years are encouraged, where appropriate.
The results of each negotiation shall be formalized in a written
agreement between the cognizant agency and the governmental unit. This
agreement will be subject to re-opening if the agreement is subsequently found
to violate a statute, or the information upon which the plan was negotiated is
later found to be materially incomplete or inaccurate. The agreed upon rates
shall be made available to all Federal agencies for their use.
Refunds shall be made if proposals are later found to have included
costs that (a) are unallowable (i) as specified by law or regulation, (ii) as
identified in Attachment B of this Circular, or (iii) by the terms and
conditions of Federal awards, or (b) are unallowable because they are clearly
not allocable to Federal awards. These adjustments or refunds will be made
regardless of the type of rate negotiated (predetermined, final, fixed, or
Fringe benefit rates. If overall fringe benefit rates are not
approved for the governmental unit as part of the central service cost
allocation plan, these rates will be reviewed, negotiated and approved for
individual grantee agencies during the indirect cost negotiation process. In
these cases, a proposed fringe benefit rate computation should accompany the
indirect cost proposal. If fringe benefit rates are not used at the grantee
agency level (i.e., the agency specifically identifies fringe benefit costs to
individual employees), the governmental unit should so advise the cognizant
Billed services provided by the grantee agency. In some cases,
governmental units provide and bill for services similar to those covered by
central service cost allocation plans (e.g., computer centers). Where this
occurs, the governmental unit should be guided by the requirements in
Attachment C relating to the development of billing rates and documentation
requirements, and should advise the cognizant agency of any billed services.
Reviews of these types of services (including reviews of costing/billing
methodology, profits or losses, etc.) will be made on a case-by-case basis as
warranted by the circumstances involved.
Indirect cost allocations not using rates. In certain situations, a
governmental unit, because of the nature of its awards, may be required to
develop a cost allocation plan that distributes indirect (and, in some cases,
direct) costs to the specific funding sources. In these cases, a narrative cost
allocation methodology should be developed, documented, maintained for audit,
or submitted, as appropriate, to the cognizant agency for review, negotiation,
Appeals. If a dispute arises in a negotiation of an indirect cost
rate (or other rate) between the cognizant agency and the governmental unit,
the dispute shall be resolved in accordance with the appeals procedures of the
Collection of unallowable costs and erroneous payments. Costs
specifically identified as unallowable and charged to Federal awards either
directly or indirectly will be refunded (including interest chargeable in
accordance with applicable Federal agency regulations).
OMB assistance. To the extent that problems are encountered among the
Federal agencies and/or governmental units in connection with the negotiation
and approval process, OMB will lend assistance, as required, to resolve such
problems in a timely manner.