Connections for Success

 

09.09.15

The OMB Rule on Indirect Costs: What You Need to Know
Marva M. Flanagan

The Office of Management and Budget’s Uniform Guidance (the Omni Circular) has brought sweeping changes for not-for-profits that receive federal funding. This is particularly true with the new rule requiring agencies and other entities allocating federal dollars to reimburse organizations for indirect costs (also known as administrative or overhead costs). Not-for-profit organizations need to get up to speed on their rights and responsibilities under this rule to avoid forfeiting reimbursement dollars.

Reimbursement Determination

The rule on indirect costs applies to new awards and additional funding on existing awards made after December 26, 2014. Under the guidance, federal agencies and pass-through entities that allocate federal funding, including states, local governments and not-for-profit intermediaries, must reimburse not-for-profit recipients for their reasonable indirect costs. The guidance cites several examples of indirect costs, including:

  • Depreciation on buildings and equipment;
  • The costs of operating and maintaining facilities; and
  • General administration expenses, for example, the salaries of executive officers and expenses related to personnel and accounting.

Not-for-profit organizations will be reimbursed for indirect costs under one of three methods: According to an existing federally approved negotiated rate, a new negotiated rate or a default de minimis rate of 10% of the modified total direct costs.

The ability to recover some overhead costs should relieve some of the financial pressure on not-for-profit organizations that receive federal awards and allow them to carry out a program with less impact on the overall organization. By being able to charge overhead costs to the federal grant, not-for-profit organizations are able to build infrastructure and focus on sustaining their activities.

What Should You Be Doing Now

Despite the clarity of the new reimbursement requirements, not-for-profit organizations may still encounter some obstacles to recovering their indirect costs. Grantors may not be up to speed on the requirements or may reduce other line items being funded to allow for indirect costs.

It is critical that the accounting system of not-for-profit organizations distinguish between, and closely track, direct and indirect costs. To accomplish this goal, the organization might need to make adjustments to the method they are using to account for indirect costs.

Not-for-profit organizations also may need to reach out to government agencies and pass-through entities to negotiate an indirect cost rate. In some cases, the default rate of 10% may be higher than what can be negotiated. Organizations that have an approved negotiated rate must use that rate for all federal awards and cannot opt for the default rate. If an organization has an existing negotiated rate, request for a one-time extension good for up to four years is permissible. If the extension is granted, the organization cannot request another review during that period. At the end of the period, the organization is required to reapply for a new rate or elect the default rate of 10%.

The Bottom Line

The new indirect cost reimbursement rule ultimately should improve the bottom line for not-for-profit organizations, but this may require some critical decisions, including which reimbursement method to use and potentially how to adapt their accounting system.

If you have questions about reimbursement of indirect costs or any other questions regarding your not-for-profit organization’s reimbursement requirements, contact Marva Harris at [email protected] or call her at 312.670.7444. Visit orba.com to learn more about out Not-for-Profit Group.

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