By Troy Rector, CPA
7/30/2021: This article has been updated since its original publishing date to reflect changes to the Uniform Guidance.
The lack of indirect cost recovery from Federal grants is nothing new for not-for profit organizations (NFPs). This has been especially true for those NFPs who do not have a federally negotiated indirect cost rate as they receive all, or predominant amounts, of Federal grants from pass-through entities. The Office of Management and Budget’s (OMB) Uniform Guidance recognizes that NFPs do indeed incur indirect costs and, when originally implemented, the Uniform Guidance makes available use of the de minimis rate.
The updates to the Uniform Guidance released in fall 2020 had several clarifying provisions over the de minimis rate that could be beneficial to NFPs. This article will cover those updates and also provide a reminder of what the de minimis rate is, internal controls to consider when using the rate, and what to expect when the recovery is audited as part of the Single Audit.
Uniform Guidance Updates – De Minimis Rate
Previously, the Uniform Guidance had a provision that, in order to utilize the de minimis rate, the NFP must not have previously had a Federally negotiated indirect cost rate. This was especially challenging for NFPs that may have had a Federally negotiated indirect cost rate years ago, only to have it lapse because of no longer receiving a direct Federal award.
Well, good news. That condition has now been removed from the Uniform Guidance. As long as the NFP does not have an active Federally negotiated indirect cost rate, the de minimis rate can be used.
In addition, the Uniform Guidance updates explicitly state that “no documentation is required to justify the 10% de minimis indirect cost rate.” The existing COFAR FAQs stated that a reconciliation to actual costs was not needed to substantiate the de minimis indirect cost rate. The inclusion of this language in the Uniform Guidance now makes it even more official. NFPs are not to support use of the de minimis indirect recovery with specifically identified costs.
The De Minimis Indirect Rate Defined
The de minimis rate can be charged at 10% of Modified Total Direct Costs (MTDC). MTDC is defined at 2 CFR 200.68 as being:
“All direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $25,000 of each subaward (regardless of the period of performance of the subawards under the award). MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs and the portion of each subaward in excess of $25,000.”
The first $25,000 of subawards can be taken when each subaward is initially issued, separately negotiated, or renegotiated over the Federal grant’s period of performance (i.e. not $25,000 for each entity’s fiscal year). Some NFPs have found it helpful to have two separate subaward general ledger accounts: one account that tracks the first $25,000 of subawards and another account that records costs in excess of the first $25,000.
The NFP will want to ensure that direct costs of the Federal grant do not already include recovery of indirect costs (double charging) when using the de minimis rate. This type of issue is most prevalent when the NFP’s Federal grant supports a large majority, if not all, of the activities of the NFP. It could also occur, however, if the NFP has historically recovered indirect costs from Federal grants by means of what is defined in the Uniform Guidance as the direct allocation method. The NFP must also be consistent in how direct and indirect costs are charged to Federal grants.
Should the NFP enter into Federal grants that allow for use of the de minimis rate, it is important that the NFP establish a system of internal controls over the calculation of the de minimis rate. It is also important that the NFP monitor the calculation when invoicing the grant. Miscalculation will most often occur when those costs identified in the above definition (rental costs, subawards, etc.) are not properly deducted from total direct costs for purposes of calculating the de minimis recovery.
NFPs may be able to automate calculation of the de minimis recovery in their accounting systems to reduce the risk of error. Alternatively, the NFP could develop a form to document the calculation of the de minimis recovery. This form would ensure that the grant billing preparer takes all deductions that arrive at the MTDC into consideration. It would also allow for easy review of the de minimis calculation prior to grant billing submission.
Auditing the De Minimis Recovery
It is not surprising that indirect costs recovered from a Federal grant would be subject to audit as part of the Single Audit (if required). The OMB has outlined the following suggested audit procedures, as noted in OMB’s Compliance Supplement, be performed over the de minimis recovery:
- Determine that the non-Federal entity has not previously claimed indirect costs on the basis of a negotiated rate. Auditors are required to test only for the three fiscal years immediately prior to the current audit period.
- Test a sample of transactions for conformance with 2 CFR section 200.414(f).
- Select a sample of claims for reimbursement of indirect costs. Verify that the de minimis rate was used consistently, the rate was applied to the appropriate base, and the amounts claimed were the product of applying the rate to a modified total direct costs base.
- Verify that the costs included in the base are consistent with the costs that were included in the base year, i.e., verify that current year modified total direct costs do not include costs items that were treated as indirect costs in the base year.
- For a non-Federal entity conducting a single function, which is predominately funded by Federal awards, determine whether use of the de minimis indirect cost rate resulted in the non-Federal entity double-charging or inconsistently charging costs as both direct and indirect.
Auditors will be performing these audit procedures, or a version of these procedures, so be prepared. A miscalculation could easily result in an over recovery of indirect costs and questioned costs being reported as a Single Audit finding.
Other Options for Indirect Recovery
The de minimis rate is just one of several options for recovering indirect costs. In addition to the de minimis option, NFPs may negotiate a Federal indirect cost rate or negotiate an indirect cost rate with the pass-through entity in accordance with Appendix IV to Part 200.
For a NFP to negotiate a Federal indirect cost rate, it typically takes a direct relationship (direct award) with a Federal awarding agency and where that Federal awarding agency believes it to be worthwhile to negotiate a rate. Often times, a NFP has a federally negotiated indirect cost rate because it was required by a Federal funding agency, either currently or in the past.
Pass-through entities have the option of negotiating indirect cost rates greater than the de minimis rate with subrecipients, but they are not required to do so. However, pass-through entities are not allowed to force or bribe a subrecipient into accepting an indirect cost recovery below the de minimis rate unless it is limited by the Federal program’s statute.
A Step Forward
The de minimis rate can be a good start for NFPs to get paid for at least a portion of indirect costs incurred on Federal grants. In cases of limited Federal funding, NFPs may want to evaluate what is easier to fundraise and find other sources for – a shortfall in direct costs, or a shortfall in the recovery of indirect costs.
The de minimis rate is a bright spot within the Uniform Guidance and deserves careful consideration by NFPs, though appropriate internal controls must be in place when the de minimis rate is being used.
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