Financial Management Workshop for CILs…Regulations and Beyond
IL-NET presentation on May 25-27, 2016
Module 5.1: Indirect Cost Rate Proposals


JOHN HEVERON: Some of the other new rules that came out with the Uniform Guidance, we want to highlight.

Obviously not everything, but these we think are sort of a big deal.

The first of them is that it's now acceptable for your records to be maintained in an electronic- only format.

When I say that, that's what Uniform Guidance says.

I don't know whether your state funders are going to buy into that.

Anybody all electronic now including invoice copies and everything?

I do think we're moving in that direction.

There are some software programs, including programs that interface with your QuickBooks that will scan a copy of the check of the invoice and associate it with the check you have written.

And those fulfill the requirements for a complete set of records now, at least under Uniform Guidance.

Another new thing, fines and penalties from violations and alleged violations are not an allowable cost.

Hopefully they will get penalized for alleged violations though.

Rental costs for sale and lease back arrangements are limited to what would have been paid if the property wasn't sold.

I always hate it when you learn about a loophole after they've already closed it.

So if you didn't know about this transaction, some organizations will have a separate company own their headquarters and then lease it back to the operating organization.

And in some cases, they did that after the building had been fully depreciated so they didn't have much left to claim as a reimbursement, and thought this was a good way to increase the reimbursements.

That is not allowable anymore.

Home office rent is not allowable, if your director works from a home office they can't charge rent to the organization, or it's not allowable as a cost.

Temporary dependent care resulting directly from travel to conferences may be allowable.

Entertainment is allowable only with a program purpose and with federal preapproval.

Health and welfare costs incurred for improving working conditions, employee employer relationships, employee health and employee performance are allowable.

But I say allowable, they need to be in your budget, like anything else it simply means it's eligible for inclusion in your budget.

This is a good one to know.

If you receive donated equipment, you can request reimbursement based on fair value, I'm sorry, reimbursement of depreciation based on fair value or you can use the item to meet matching requirements but not both.

And you need to disclose in writing any conflicts of
interest and any violations of federal criminal law
that potentially affect your awards.

There's a specific requirement for that now.

So the final thing I wanted to show you are a couple references.

One to Uniform Guidance.

They actually changed this website now.

It used to be great.

You'd go to this website and Uniform Guidance
was right there.

I think we do have some other links on the main page, main educational support page here.

But this page also provides a lot of resources about Uniform Guidance.

Questions and answers.

Some trainings.

And then there's also a link to two different sets of internal control regulations.

We're going to work together to develop your internal control manual or that's all in these, or double check where it needs to be if that's all it needs, but it's nice to know what and where these two things are.

Okay.

Now we're going to, I'm going to jump to this next section, go to indirect cost rates.

So this section starts out asking, who.

Asking who might not need to submit an Indirect Cost Rate Proposal?

And the answer is organizations with only cost objective, even if there are multiple funders for that cost objective.

PAULA MCELWEE: One of the caveats, though, is if you do fund development you have two cost objectives.

And you're required to do fund development by Title 7.

It's a requirement, so you ought to have costs for that identified.

If you are a SILC it is not required but it's allowed, and so you should have costs for that identified.

So fund development becomes the second category, under your regular operations cost.

So even if you have one funding source, one fund objective, what we call a fund objective that you have been working on, this issue of fund development is a real one.

JOHN HEVERON: Different populations.

PAULA MCELWEE: And then different populations.

That's the other thing.

Some of the audits, federal audits that have happened at centers have identified that if you have two grants that are coming down from, let's say from the feds, and they are both Part C grants, I'll deal with Part B in a second, and you have two different grants, probably those grants are for two different populations.

We've seen them done several different ways.

Most of the time that's geographic.

So most of the time first grant this three counties and then you added two counties when you wrote the second grant.

Well, then you have to separate out your time, which is your biggest cost, on your Personnel Activity Report you have to say when you're working
in the first three counties and when you're working in the first three counties and when you're working in the second two counties.

And you have to actually separate that out.

So if you have more than one funding source, it's probable that they do not serve the same population, and whatever that division is, you have to make that same division in your Personnel Activity Report so that you can say whether it's one grant or the other.

Because you've got to separate it out.

Justify it back based on that funding source.

You can combine those funding sources if it's the same population.

So that's where your Part B, your state money comes into play.

A lot of times you are getting state money for the same population as your federal money.

If that's the case, then that can be combined.

You don't have to separate it out.

But if your state money was to serve this unserved area over here, then it has to be separated just like the federal does.

Seeing some shaking heads.

Got it?

Don't like it?

JOHN HEVERON: I'm going to make them like it, Paula.

PAULA MCELWEE: All right, you make them like it.

JOHN HEVERON: It's my job.

The other organizations that don't have to do that are organizations that allocate every single item to each program.

But the head of the indirect cost unit at HHS says they're going to have to prove that to me and I doubt that exists.

Then, finally, organizations that are eligible to elect and do elect 10% deminimis rate, we already talked about one bad side of that, is that you indirect is probably more than 10%.

So you're going to lose money if you do that election.

And you may not even be eligible.

If you've ever had an indirect cost rate in
the past, you're not eligible.

I don't know whether it's clear with Cost Allocation Plans we really haven't received a ruling on that, but it wouldn't surprise me if they consider you ineligible if you had an approved Cost Allocation Plan in the past.

So basically that doesn't leave a lot of choices.

That does not leave a lot of exemptions.

In fact, I'm not sure anybody in this room is going to be.

PAULA MCELWEE: I think probably everyone had either a cost allocation or an indirect cost rate.

At least we have been telling you for years you're supposed to.

So I'm hoping it's true.

So you already had indirect cost rate or a Cost Allocation Plan.

One of the things, comments this morning was, why do we have to even go with indirect cost rate?

It was always preferable with the use of federal funds to have indirect cost rate, but in Department of Education, they did not require it, and actually, the centers were the exception.

And for some reason, from the time it was set up, a lot of centers opted for a Cost Allocation Plan instead.

It's the same methodology, the difference is you are applying it constantly instead of getting a set rate for a year.

You're constantly applying your cost allocation to figure out how your costs are allocated.

Stopping time and doing it once a year is really less work in the long run.

If you do it that way.

But I know it doesn't seem like it, it is something new, it is a little less work.

So you know, you really probably do fit under this, you've already had one so you have got to do it.

You may not be eligible for your deminimis.

I can never say it, deminimis.

I even took Latin in high school.

JOHN HEVERON: Can I ask, how many are familiar with the book, Who Moved My Cheese?

Good.

A lot of people.

Can somebody tell me in one word what that book is about.

Change.

And what's the consensus?

We don't like it.

The only person who likes change is a baby with a dirty diaper.

The rest of us, no way.

So and that that really is the bad part of direct cost rate because believe me, everything else is good.

Let me give you another cheese example.

Let's say I have what is it, a wheel of cheese?

So we've got a wheel of cheese, and we cut it up into 200 pieces and we're going to directly allocate it to each of my three departments here.

Now, this department gets 50%.

This department gets 37%, and this department 34.

This department gets 17, and yeah, I know, I am a little off on my math, but this is the only way I can make it work.

So I'm going to take this these 200 pieces of cheese, and you get one every time.

So you get one, but you're not ready cause you're only half of what they are.

So now you get a second one, and now you get one.

Now you get a third one, and fourth one.

You get one and now you get one.

And this is how I'm going to dole out my 200 pieces of cheese, is piece by piece in each of my departments here.

My other option is to take my wheel of cheese, cut it in half, you get the 50%, cut a third off, you get the 1/3, you get the 2/3 remainder.

I'm done.

That's what Cost Allocation Plan does.

It is pure simplification.

Once you get over this, it is way easier than any method you may have thought of following.

It's different.

That's where the change thing comes in.

But it's really much better for you.

Now, I say it's better for you, we talked about this in preparing for your indirect cost rate.

It's better as long as you do exactly what you said you were going to do, as long as you build it right into your accounting system, so that it happens automatically.

So that you're collecting together all of your indirect costs and then all you need to do is this two slices of cheese, not 200, doling them out one at a time.

So that's really what it's about.

PAULA MCELWEE: That is the difference between a Cost Allocation Plan, one at a time and indirect cost rate, a set rate.

Does that make sense?

I'm not sure, John.

Okay.

JOHN HEVERON: Okay, indirect cost rate is similar to a Cost Allocation Plan, but it does have that additional requirement, to calculate a preliminary or provisional rate and of course, you did that with your proposal but you'll do it again near the beginning of each year as you do the final reporting on last year's cost allocation.

So that's really the biggest difference between a Cost Allocation Plan and an indirect cost rate.

Costs are classified as direct, benefiting one, two, or more of your programs.

Or other activities, fundraising being as a program or indirect, benefiting all programs.

For most of you, as we said, general and administrative is going to be the same thing as indirect.

Excuse me while I okay.

So general and administrative expenses would include your receptionist costs, your auditor, your general insurance and somebody raised an issue with that we're going to talk about that later, but any of these types of expenses that benefit all of your programs.

By the way, if you don't have an indirect cost rate, and you don't elect the 10%, as we said before, you can't get approval for any indirect cost.

Everything you would request reimbursement for would be direct.

Now some funders may still require you to break out cost by funding source, even if services and out cost by funding source, even if services and consumers are the same.

We've seen a variety of reactions from different funders.

You might also have a state funder that says, we need not just that 17 or 19% indirect cost, we need it by the Executive Director and their overhead.

Well, you haven't lost any of that information.

You've combined it.

But you can get it back in most any accounting system these days, certainly in QuickBooks or anything like that.

So if you need more detail because one funder won't accept things exactly that way, you still got the detail.

But it becomes so much easier to just combine and allocate everything based on a percentage.

Allowable and unallowable costs.

So only costs that are allowable within Uniform Guidance, and they are they are recited for us are allowed.

This is a link you can go to.

But it's really a piece of Uniform Guidance.

It's an alphabetical list of costs.

It has a lot of things that are allowable, but have special requirements to them.

I mentioned earlier audit costs.

But it also identifies things that are unallowable.

So bad debts would not be allowable because they really are unrelated to these programs.

Certain advertising is allowable.

Certain advertising isn't.

So advertising that might really have an element of soliciting contributions wouldn't be allowed.

Advertising that is just general about your organization wouldn't be allowed.

But advertising for employees would be.

Advertising service availability would be.

So that's why you want to just scroll down to these costs.

If you have any questions about them, there are really very clear language, explanations, of what's allowable, what's unallowable and what has special requirements.

Contributions you make are not an allowable deduction.

PAULA MCELWEE: I once saw a group of centers from the same state and they all decided they were going to give each other donations so they could pass federal money around.

It's not okay.

You can't give donations to all the other centers and then have them give it back to you.

Not okay.

JOHN HEVERON: Certain entertainment, we talked about circumstances where entertainment is allowed when it has a program purpose and preapproved as part of a federal grant.

Other than that, entertainment wouldn't be allowed.

Fines and penalties we said aren't allowed.

Lobbying, it's allowable but not cost reimbursable.

Do I have that right Paula?

PAULA MCELWEE: You can do it but not with federal dollars.

But in our case, we have some advocacy responsibilities, we'll go over that in a little more detail later.

Entertainment is where the food question comes up, under that category of entertainment.

So if you were wondering, well can we buy food or can't we that's where it shows up and it's very limited in what you can buy and can't.

You can't just feed groups of people for no reason or to have a party or whatever your reason.

JOHN HEVERON: Today's lunch was entertaining but was accompanied by a program purpose and preapproved, I am sure.

Okay.

So these unallowable costs cannot be charged to programs.

They can't be included in indirect.

They're just unallowable.

PAULA MCELWEE: I hear a lot of buzz.

Are there questions about this?

Are you struggling with what we just said?

There's a lot of kind of background conversation.

Do you have questions about it?

I figured it was probably where the questions are coming from.

AUDIENCE MEMBER: Simply speaking, as long as it has program purpose, so if you are, say you have a fundraiser event, which is targeted at generating revenue for home modification as a purpose, so then your associated cost with that event it could include entertainment or it included costs, how would that be treated?

JOHN HEVERON: If this is part of a federal program, and that revenue is used to offset the expenses, the federal share of expenses, I think it's allowed.

Is that your understanding?

PAULA MCELWEE: Usually, we suggest if there's any question that you run it by your Program Manager at ACL, at the Independent Living Administration.

So if you're not sure of a food expense, you probably want to get prior approval.

It needs to be in your budget when it was approved, then you may want to clarify it as well.

Because it can get really get really controversial.

Is this truly a program purpose or isn't it?

Well are you wining and dining donors, or are you bringing people together to understand housing, and what is the difference and can you make the case, you know.

And there really is a difference between the two, so you've got to do some sorting on how you can justify that.

AUDIENCE MEMBER: I guess it is really confusing why we are mandated to do fundraising yet we can not use any money to do fundraising.

We can't advertise, we can't buy food.

How does that work?

PAULA MCELWEE: You can use all kinds of money for fundraising.

You can hire a Director of Development.

Use money to develop materials that tell about your organization.

You can use funds for outreach, but fundraising activities are expected to pay for themselves.

So if you're doing a dinner, for a fundraiser, and you are getting word out to the public as part of this dinner.

Maybe you're doing some awards for people like raising awareness, bringing in a speaker, whatever you're doing.

You need to carefully consider all of those costs, and the income from that event should pay for the costs of that event.

And plus, make you, hopefully, make you money in addition to that.

But you should keep that separate.

The same is true when you create a new business model.

You can pay for some of those services that are allowable services under independent living, but if you do that, your income is restricted to the same purposes as the rest of your grant.

Where if you do your fundraising with its own pot of money, then that pot of money is self-sustaining and that income is free.

That income is, it doesn't count.

It's not restricted in the same way it might be if you raised the money with the Title 7 funds.

Does that make sense?

JOHN HEVERON: Just a couple more comments about fundraising for organizations who haven't done it or haven't done to any extent yet.

There are some standards, from charity leadership organizations that say the cost of raising funds shouldn't exceed roughly 1/3.

33% to 35% of what it raises.

And that's a not to exceed.

That's not an average or a best practice.

So you should expect to get back about to get back about three times as much as you invested.

The other reality though, is when you get into a fundraising program or increase the level of activity, the cost are there right away.

The revenue isn't.

The revenue comes more slowly.

In fact, some of your revenue will come years down the road.

In some cases, people will make changes to their wills, and the truth is nonprofits only know about roughly 50% of these designations.

They're not aware of about half of these planned gifts, as they're called.

So that's just something you need to understand.

You might have to explain to your staff, your board, your funders, that as you embark on a fundraising program, the costs happen more quickly than revenue.

Should come into balance within a few years.

That's a reasonable expectation.

So on allocating costs, the Executive Director's time, salary, and fringe may be both direct and indirect.

If they aren't, if they're only one, I would think indirect, because the Executive Director is involved in management.

But I would expect in most of your organizations, the Executive Director performs both program administrative and possibly fundraising responsibilities.

PAULA MCELWEE: John, one of the things we notice in Uniform Guidance, there is a preference that administrative salaries be 100% included in the indirect, and so that is actually something that they recommend in the Uniform Guidance as well.

JOHN HEVERON: So direct costs are shared between the benefiting cost objectives, maybe my programs A and B, and based on actual time records here.

A Program Manager's time, salary and fringe are shared between the cost objectives based on actual time records and general and administrative salaries, the receptionist, accounting staff and a portion of the Executive Director salary will be indirect.

 Executive Director salary will be indirect. 

So I know you've done this, and my apologies if this seems redundant, but we're going to talk about developing an indirect cost proposal, but I'm going to give this a little bias towards making sure that yours is going  to work for you in the future. 

And a couple of questions here that I would like that enlightened me a little bit I wasn't expecting, so we're going to address those as well to make sure these really work for everybody.

AUDIENCE MEMBER: I have a question when you said that about 100%.

When I did mine, coming from having done the Cost Allocation Plan, I did based kind of on that, because I do receive funding from a state grant for a program for our deaf individuals, and part of my salary goes on that grant, 30% of my salary goes on that grant, based on the amount of time I spend. 

So based on that, I put half my salary on the IL grant and 30% on that and 20% on indirect. 

And then based on our audit yearly, we come in way under the 10%. 

So I don't know how to go about this when you said put all my salary, how will I bill that state grant part of my salary if I'm going that direction? 

PAULA MCELWEE:  So you are describing a situation where your actual budget is where you've been allocating, based on your budget. 

And now we are saying you have, and the actual time.

See, that's the trick, is that you're required to do an after the fact allocation of time, based on the records that you keep. 

And after the fact allocation of time may very well vary from your budget and if it varies from your budget, then you do have to figure out what you're going to do to reconcile that difference. 
 
JOHN HEVERON: Exactly right.

We talk about approval of indirect cost rate. 
 
The rate isn't approved.

The mathematical formula you developed to calculate that rate is all that is approved. 
 
It's dividing this group of things by that group of things that's approved. 
 
Not the rate.

The rate is a byproduct of it.

The rate will virtually always be wrong

but hopefully not by a lot.

Is that comforting or is that still?

PAULA MCELWEE: Does that help at all?

JOHN HEVERON: A little more than a year from now.

PAULA MCELWEE: if you're stuck on that, lets do continue to talk about this.

Is that something that a lot of you are feeling confused about? 
 
Maybe we could back up and you could restate it to them so it makes more sense to them than what I said. 
 
One of the things she asked, what can she do with state grant?

What should she put in that budget? 
 
One of the things you need to think about is, are your grants combined? 
 
But you're saying state budget is a different population so it has to be separate. 
 
JOHN HEVERON: So we're talking about actual now.

You have got your indirect cost rate proposal approved.

You look at your actual time and you've got 50% on the federal program.

You thought you'd have 30% on the state.

PAULA MCELWEE: She says she is going from historical numbers.

JOHN HEVERON: You do have 30%.

Now you have 20% in indirect.

That is the way you would prepare your final indirect cost rate report, based on how that time was actually spent, and is this going to be different from what your plan was?

AUDIENCE MEMBER: That is how I went forward with determining this and then took 20% of my rent space and did all that to come up with what our part would be, and then of course, put all of our accounting and all those things into indirect.

But as far as like, you know, percentages of the insurance and all of that was based on using those numbers, and that's why we came up under the 10% because I did not put all my salary in there.

Cause I did not know how I would bill that.

PAULA MCELWEE: Where did you put all your salary?

AUDIENCE MEMBER: Well, I put 30% of it into direct, I mean I put it into direct, because I had to put it into the state funded grant, and then I put the other part into the federal direct.

And then left the 20%, which is fundraising and I mean I know kind of where it goes, but I put it into indirect.

JOHN HEVERON: Okay.

AUDIENCE MEMBER: And I don't have a lot of indirect staff.

JOHN HEVERON: This might make more sense, we're going to go through an example in several slides here, so it might make more sense because what seems like an inconsistency to you may not really work out to be one.

Having said that, I talked to a couple of people who have raised some issues with Indirect Cost Rate Proposals they've already submitted, and we're going to address those as well.

So we'll really get into the mathematics of how you've done this or how you are doing this on the front end and then also what's going to happen down the road.

And then we're going to try to get feedback from you as your proposals are approved or approved subject to some changes, and really try to be somewhat of a resource.

We share our combined experiences here so we know how best to proceed.

PAULA MCELWEE: One variable, just so you all know, if you haven't done this directly, the indirect cost rate proposals are not approved by the same body of people.

So one of the realities is, you're sending it to a regional office, we're working with the national person on what we're seeing.

But you may run into a glitch someplace, where something is somewhat different than what the national person is saying.

We want to assist you with that.

Please tell us if your indirect cost rate proposals are approved.

What your rate looks like.

What questions they had if it was not approved.

Because we need to keep on top of the field and you are our best resource for that.

Because we can't keep on top of every regional office.

So please, please, please drop us a note.

Just tell us what's happening with your indirect cost rate so that we can continue to update the knowledge of the field.

JOHN HEVERON: Okay, so with apologies to people who have already submitted this.

For those who haven't, let me just go through all the key components of the indirect cost rate proposal.

It contains an introduction to your organization with background information, an explanation of how you allocate costs, a schedule of the federal moneys you receive, a schedule of payroll and related costs.

We are going to look at examples of all of these.

A schedule of direct and indirect costs with a calculation of the indirect cost rate percentage.

A reconciliation either to your financial statements or to your 990.

A certification about the accuracy of the proposal, and a lobbying cost certificate.

And again, if you haven't done this, you should know that these are all required to be submitted electronically in two separate files.

One includes everything that I just listed, and the other one contains the supporting information, the audited financial statements or the 990, whichever you reconcile to.

And we've got a link here, so you can find which regional office you will send your proposal to.

PAULA MCELWEE:  Didn't see it.

It disappeared again.

JOHN HEVERON: One size doesn't fit all.

So here's an example that may be appropriate 
for your organization.

I'm feeling more empowered, even though we developed this ourselves it was different from the example that was online.

Now that we've got some approvals it is really.

And by the way, before we even put out the training on indirect cost rate proposals, we sent this to the head of the HHS indirect cost unit for their approval.

They gave us a couple of comments but really gave us very positive feedback about it.

But now having seen that they work, we're going to tell you, we think this is a pretty good format.

Change it to make it yours, but other than that, you can follow it fairly closely.

This example uses the simplified allocation method, which is appropriate when your cost objectives benefit to approximately the same degree from your indirect costs.

And it also follows the direct allocation method, which creates all costs as direct, except your general and administrative.

The introduction, there is really no format for that.

This is something we developed, but when Paula and I looked at several of these proposals, some people did a really nice job.

So you can follow this or if you want to see an example of really nice job, I bet you they'd be willing to share it.

Some really gave some nice statistics, personalized it.

What you're doing here, might not sound too terribly different from what you might send to a large potential donor.

Says this is who we are and where we are and what we do and how long we've been around and how big we are and where we're going.

That's really the introduction.

Next is a description of how costs are allocated.

And you need to accurately describe how you allocate costs and you can change this.

But be sure you have got solid reasons for the change here, so following fairly closely wouldn't be a bad idea.

So we are saying this organization follows U.S. generally accepted accounting principles and uses the accrual method of accounting and the general approach to allocate costs is that all allowable costs are directly charged to cost objectives, programs, grants and activities.

If an allowable cost, direct cost, benefits more than one cost objective, it is assigned to those cost objectives, based on the level of benefit they receive.

And of course, for payroll, which would be, which pretty much drives everything, it's based on your actual time worked.

I just want to remind you, if you say this, do this.

Because the problems we had with those audits that we worked with years ago, in most cases, were problems with not following the procedures.

So you do upgrade things when you have a nice policy.

But that's not enough.

You've got to be right on track with that policy.

It is going to mean some changes for your accountant.

All other allowable costs, costs that benefit all cost objectives and can not be identified to a specific cost objective are pooled and combined and allocated to cost objectives based on direct costs for each cost objective.

When I say based on direct cost, a lot of organizations base it on total direct cost assigned to program A, B, C.

Some do it based on payroll.

Some do it based on payroll and payroll overhead.

Those two, by the way, should give you the exact same result, because payroll overhead is usually allocated based on payroll.

So really is a practical matter.

You can either do this based on total direct costs or on payroll.

Why just payroll?

Because payroll, is people, is where, what drives all of your other costs and what causes you to need an office and insurance and a payroll service and all of the other things.

So payroll really truly is the driver with most organizations.

The downside and only downside with using payroll, is it results in a higher rate.

Simply because you have a smaller base.

If you divide 20 by 80, then your rate is 25%.

If you divide 20 by 100, your total direct cost, so now it's 20%.

So just be aware of the fact that if you do base it on payroll, the rate will be larger, or higher, because of that.

You need to communicate that internally to your board and to your funders, if that's what you use.

But there's nothing wrong with that.

In fact, I think in some cases it's preferable.

So again, continuing with the example, the following summarizes our procedures.

Payroll and related costs are documented with timesheets and Personnel Activity Reports showing the time distribution for all employees.

Payroll costs are assigned to cost objectives based on actual work done.

Payroll is charged directly to the cost objective for which services have been performed.

Payroll costs that benefit all cost objectives are pooled and allocated as explained above.

Sounds beautiful, but it isn't always that easy, is it?

Because it's one thing to track your payroll.

How does it get into your accounting system?

I think that's why you raised the question, is there a good automated payroll allocation system?

And we haven't even used the paychecks one yet.

We did go through a demo of it and it looks like that would do it.

The payroll needs to be tied right into your general ledger for this to work easily.

You can still do it through a separate journal entry.

You can still have a totally standalone program for payroll that allocates payroll to each of your programs and indirect and then a standard journal entry that you put in paychecks every pay period.

But the very best thing would be to have something that directly allocates your payroll so you're actually doing what you said you did with a minimal amount of effort.

AUDIENCE MEMBER: Unfortunately I have so many questions but right now, what is the best way to pay your payroll?

I mean biweekly, twice a month, once a month, to make it flow most easily with your PARs, reconciliation, everything else like that.

JOHN HEVERON: The best way to?

PAULA MCELWEE: To make sure that your payroll schedule flows with other expenses and works smoothly.

And so, a lot of places do it on a bimonthly basis for that reason.

But even if you do it every two weeks, as long as your PAR matches that schedule, it will flow okay.

PAULA MCELWEE: Tim, over here.

AUDIENCE MEMBER: We submitted our indirect cost plan by December 31.

About two months later, I got a call from a gentleman by the name of Dustin that was in the indirect cost center in Texas somewhere.

And we were discussing our plan, and he said that based on what I had submitted that we were eligible and I sent everything that they had asked for, a copy of our Cost Allocation Plan, everything.

And he said based on what he was seeing that we were eligible for the 10%.

And I said, well, that's great.

He said once you choose the 10%, you don't have to do anything else.

And he says, but if you ever request a cost allocation or indirect cost rate then you can't go back to a 10%.

So I said, what do I do next?

He says, just send me an e- mail saying you have elected to go with 10% and that's all you have to do.

So that's what I did.

JOHN HEVERON: What was your rate as you calculated it?

AUDIENCE MEMBER: There was no rate.

I sent in our budgets.

And when you look at see, our federal money is 22%, of overall budget, so our indirect cost on those federal budgets are low because these other programs share in a lot of the cost.

So I think it was I think the rate came to somewhere around 15% or something like that.

And so he said, you're eligible for the ten.

So that's what I did.

And I got e- mails back and forth from this gentleman that's all I had to do.

PAULA MCELWEE: I believe what you are saying is what he said.

But we are baffled.

So I would love to see what you sent the first time.

You actually did a calculation that came up to something around 15%, is that what you are saying?

Usually in the proposal, one of the things you do is actually calculate it.

So you did the same things you did with the Cost Allocation Plan, but you come up with a calculation on okay, our overall indirect is whatever percentage it is and most of the ones we have been working with, I think the lowest we worked with is 18.

So most of them highest was way up there.

So you know, it's one of those things where it's hard for us to imagine that 10% would be sufficient.

Especially if you think, okay, I take 10%, but then I have to remove all of my indirect expenses from my other billing, because 10% covers it.

I can't double bill for it.

So that's where you know if where the rubber meets the road is, does my 10% cover all those things I'm going to have to remove from my billing before I bill for it, or ask for reimbursement.

That's where I get nervous.

AUDIENCE MEMBER: I sent him everything according to what they were asking for.

PAULA MCELWEE: We are not disbelieving you, we are disbelieving him.

AUDIENCE MEMBER: But that's what he said.

I'd be happy to send - -

PAULA MCELWEE: Send it to me, if I did not give you my card, I will and make sure to let us take a look at it with you.

Because you may want to make that change.

JOHN HEVERON: The good news is, you can go from the 10% to the indirect cost rate.

You can't go back.

You can't go the other direction, but you're not locked into that.

But I agree, Paula, it sounds like you wouldn't be fully funded and I do not understand why they would recommend that if you have a higher rate.

I mean, clearly, you can do that, but it's not good for your agency.

PAULA MCELWEE: It is regional.

That's an example of there is this one person in Texas who gave you this advice and what we're hearing from his boss in DC might be different.

You know, so there may be some work we need to do with him.

AUDIENCE MEMBER: I had submitted this based on the e- mail that I had gotten from DHHS with all the instructions.

So I don't know how he got it assigned in Texas.

PAULA MCELWEE: That's very interesting and we don't have an answer for you today.

See what you have.

One more question and then we need to move on.

AUDIENCE MEMBER: So on the cost allocation for payroll for Executive Director, I'm attending this meeting for three days of my time.

There is no way to distinguish out who is benefiting the most or what percentage for attending this meeting.

How do we do that?

When we keep talking about separating my time out, there many things just like this, that there is no way to say, well, this program benefited 80%, this one 10%, this one 2%.

PAULA MCELWEE: You will not have any trouble from HHS if 100% of the Executive Director salary is indirect.

You will not have any problem with HHS if 100% of you fiscal person, your receptionist, unless you used them for some of your information and referral.

All of those positions that are indirect, that we have been mentioning, they can be 100% indirect.

On your PAR, you can put 100% of your time in that indirect column.

JOHN HEVERON: Even if that isn't the case normally, you're absolutely right, there's no way to distinguish, and that is the classic definition of an indirect cost.

It benefits all of the programs.

That doesn't mean it's not important.

I'd like to think it is important, but it benefits all programs, so it just goes in through a different porthole.

PAULA MCELWEE: I said no more, but we will do one more before we jump back in.

AUDIENCE MEMBER: Okay, so while we are right here.

100% of my time is indirect.

But I have a Part C grant.

I have a Part B grant.

I have this.

I have that.

How do I then allocate my time so I can request my reimbursement from all of those grants?

JOHN HEVERON:  Through the indirect cost rate.

So this time, for these three days, goes into indirect and it gets charged to those programs based on the indirect cost rate.

So if one of those programs is a third, you know, the direct cost direct payroll 1/3 of your agency total, then 1/3 of this, and every other element of administration, will be charged to that.

That's how it's done.

PAULA MCELWEE:  That's why it's simpler in the long run.

You don't have to do the kind of detail that you were doing on your PAR.

JOHN HEVERON:  Remember the cheese roll.

It is a part of the big cheese roll.

About the allocation.

So the allocation is going to be, first pass, that time goes into the big cheese ball.

That time goes into that pool of indirect.

Then when she determines her direct cost for each of the programs, if this program she's asking about is 1/3 of her agency's direct cost, it's also going to absorb 1/3 of her indirect, and we don't have to go into much detail about what's included there.

We just say, total indirect for the year is 87,000.

You get a third of that.

You know.

One big large easy to move chunk of cheese.

Or cost.

PAULA MCELWEE: Hold any other questions you have on that, write them on the sticky note. 

And we will come back right at the end of this session, but we don't have quite enough time to get through everything here.

So let us get through it, and then ask it.

JOHN HEVERON: Go through an example too, which will help you a little bit, I think.

PAULA MCELWEE: Did we warm you up over there?

JOHN HEVERON: I told Paula it is cold enough in here that if anybody falls asleep, they wouldn't fall over.

PAULA MCELWEE: That's because some were complaining how cold it was and so they made it warmer.

I remember how cold this room was last year, this hotel was last year, so I tried to wear a long sleeve shirt, kind of tucked up under my sleeves.

I gave it up.

My fashion statement is, it's cold in here.

JOHN HEVERON: Let me continue with this.

We're going to move in just a few minutes into an example and really try to focus in on the questions that are so bothersome and I get that. 

So again, this is just the language that you put into your Indirect Cost Rate Proposal or will.

So payroll and related, payroll taxes and fringe costs.

PAULA MCELWEE: Slide 80, if you're not sure where we are.

JOHN HEVERON: Payroll taxes and fringe costs, such as unemployment, workers' compensation, are assigned in the same manner as salaries and wages.

In other words, we'll see an example of this, but we just pool all those and divide them by payroll.

Direct and indirect in this case.

Same deal with vacation, holiday, and sick pay or leave time as you call it.

Rent and utilities, sometimes rent utilities, building insurance, your occupancy costs basically are charged based on square footage.

Sometimes based on payroll.

Square footage seems most logical, although I have somebody say there's really no practical way because of the interaction of the programs, fine, then don't even attempt to do that.

What you don't want to do is to say we're doing it based on square footage and actually do it actually based on payroll.

It's easiest to do it based on payroll, just do it based on payroll.

And then other, allowable costs that benefit one or more cost objectives are directly assigned to those cost objectives.

Costs that benefit all cost objectives are included in the big ball of cheese.

And by the way, one thing about HHS as opposed to Department of Ed and other departments is they don't seem to be asking us to do an awful lot of detail.

In the past we would say this is how we allocate, office supplies and copies and everything else.

They're not looking for a lot of detail on this, and they are approving them with this level of detail.

So you don't need to go through every cost category, not even everyone that seems significant, if they're all being treated the same way.

Schedule of federal funding.

Easy enough.

Just who the granter or funder is.

If it's a pass through, who that is.

You should have the catalog federal domestic assistance number.

If not, ask your funder for that.

I don't know why we use the year 2014 there, but there's the dollar total and the expenditures, and the period of performance.

In other words, the period covered by the grant.

PAULA MCELWEE: Go ahead.

This one just gets a lot of questions, because you want to put all of your funding sources in here.

You're not required to.

Then the total won't match up with your total revenue.

That's why.

We get a lot of questions around this.

A schedule only of federal funding.

You don't have to put all of your funding sources on this page.

Later, you'll make something else reconcile.

This isn't where you do it.

So you can put only your federal funds here.

You don't have to put the county money and the state money and the other things you get.

Only your federal grants go here.

And it doesn't matter that the total of those federal grants isn't going to match your revenue figure when we get to it.

This is not for the purpose of reconciling anything.

They just want to know your federal awards.

JOHN HEVERON: And also keep in mind, if the funding you're receiving from a state agency is partly federal then it gets listed.

Okay.

This next schedule looks a little miserable, and I don't know whether you can even read it up here.

But this is going to be pretty pivotal for you here.

With all the questions, I wished I'd done one thing just a little differently.

Let me go through this, and if it's easier, read it on your sheet.

Here we have the people listed, Richard, Sally, Brenda, Stephanie, multiple, in this case we have a few people doing the same thing.

Four as counselor advocates, three as case managers.

Then an accountant and a receptionist.

We have total salaries.

We break them down by Title 7B, Title 7C, a local program, fundraising, and then general and administrative.

We list our different payroll overhead items, FICA which is Social Security.

State unemployment.

Disability and compensation insurance, health and life insurance.

We get a total.

We calculate that our payroll overhead is 15.63% of payroll.

And you can't see my formula, my formula simply says, 15.63 times this guy here.

And if they're wrong, blame it on Excel.

I don't think they are though. Okay.

Now let me start answering some of your burning questions.

How do I get well, you know what?

We let me do one more slide first.

And then I'm going to back up to this one.

So then I'll answer your questions.

First of all, I'd like to point out that in these indirect and direct categories, the payroll and payroll overhead came from the prior page.

See the indirect of 122,750 and the overhead of 19,183?

Prior page.

122,750 for G&A 19,183.

And the same with indirect.

So those costs came right from that payroll sheet.

And then I just listed everything else.

You'll notice I don't have a great level of detail.

Maybe 15 different categories.

Even less for my direct.

And so now I've got all of my indirect costs, payroll and everything else.

I've got my total direct costs, and I calculate dividing one by the other, that my indirect cost rate is 21.9%.

Now, getting back to your question, how do I allocate my time today to to a particular program? 

So your time today, up here where you see Executive Director, some of your Executive Director cost is in general and administrative.

That adds up to the 122,750 and the 122,750 is in here, and therefore in here, and therefore in this 21.9%.

And so now, I am going to allocate my all of my indirect costs based on 21.9% of my direct program cost.

I wish I had done one thing differently here because I didn't show the percentages, number one and number two, it would have been just payroll anyway, but that's the process.

Does that make a little more sense now?

Let me get you a mic.

AUDIENCE MEMBER: Let's say 15% of our revenue comes from IL, and 20% comes from nursing home transition and, you know, this percent comes from Part C.

And how do I do that 21% over all those grants, so that I'm not underspending on my IL grant and overspending on my nursing home transition grant.

JOHN HEVERON: Here's the rub there.

You can't do this based on where your money comes from.

Remember I said in the old days, that's what we would do.

This grant has some money and therefore I'm going to charge some of the salary there.

You have to charge based on the time actually worked, and the other assignment of direct costs and allocation of indirect costs.

The whole premise of Uniform Guidance is that the Federal government didn't want to pay more than their fair share.

Along with that comes a pretty strong mandate for them to pay their full fair share but they don't want to pay anymore, and this is the vehicle to assure that they only pay based on the work that was actually performed, so in your case, you may end up with some underfunded programs. 

Actually, a number of organizations are going to learn that some programs aren't fully funded, and your boards are going to have to look at this and say, do we have the money to subsidize the unfunded part of these other programs or do we have to discontinue them?

You know, which ironically means when the base becomes smaller the Federal government will end up paying more, but that's that's not the direction they're going.

They're saying, doesn't make any difference how many other programs you had, whether you add them or delete them.

We will pay our fair share based on your total actual programs.

But if you have another program that's not fully funded, we're not going to pay any part of it.

It has to be based on the calculated cost of performing it, not the funding you received for it.

PAULA MCELWEE: A big change for us, isn't it.

AUDIENCE MEMBER: I don't think, it is not that it is not fully funded, but if you look first line for instance.

So Richard's general administrative for the year, 35, 50.

Somehow I have to determine how much of that is Part B and how much Part C, right?

JOHN HEVERON: No, you're putting it into the big cheese ball.

AUDIENCE MEMBER: I still have to get reimbursed from Part B separate from Part C.

So I have to figure out how much of that indirect per paycheck goes to that.

PAULA MCELWEE: We have a really interesting thing there and I don't know if this is the time to go into it or not.

The term cost objective, remember we said it was for the same population, for the same core services.

If you are Part B and your Part C are for the same population, same geographic area, they can be a single cost objective and you can divide those costs any way you want to between the two of them, as long as the percentage of the total for that cost objective agrees with your rate.

I know, I just blew some more minds.

JOHN HEVERON: You're right, so in a case like that, if you have the same services for the same population and two funders, you can split the cost up based on the revenue.

That's different.
 
PAULA MCELWEE: Make arbitrary decision if it's the same cost objective.

AUDIENCE MEMBER: I could say, based on how much I am getting Part B and Part C, split it proportionally.

JOHN HEVERON: Right.

AUDIENCE MEMBER: Okay.

PAULA MCELWEE: Back in the back.

I'll stay up here.

AUDIENCE MEMBER: So in Minnesota, we have 14 counties using state funding we can serve any one of those counties and that's where part of my salary comes from.

We also have a Part C grant, we can serve eight of those counties.

There's overlap off the state grant, not necessarily overlap on Part C grant.

I'm funded under the state grant.

And we look at it as being okay.

PAULA MCELWEE: So they can not be the same cost objective because you're serving a different area.

So your state money and your federal money have to be treated as separate cost objectives for that reason.

So that's your first point of fact, right?

Separate cost objectives.

So you have to apply the indirect cost rate.

If you're 100% administrative, you have to apply your indirect cost rate to each of those funding sources and that's where the money goes.

If that takes some looking back at how you're doing your books, you may need to do that.

How you're charging things, how you are allocating things, you may have to have a real looksy on that.

JOHN HEVERON: You have a complicated allocation of cost, but you need to have an accounting system that makes it as simple as possible.

This makes it different.

This doesn't complicate it, the indirect cost allocation doesn't really complicate it, assuming you were at the right level before.

Assuming you were doing what you should have been before.

If you just did all of your allocation based on revenue, then it is a lot more complicated.

PAULA MCELWEE: Question here.

AUDIENCE MEMBER: Many of us, some of the contracts that we have were negotiated before we knew this was coming down.

For instance, using specific example.

Coming to this event, I'm doing this because of the change of the funding sources at the federal level.

So the other grants and contracts, they could care less that I'm at this event.

Do you see what I'm saying?

I have a negotiated contract.

I cannot charge my time to be at this event, nor my travel related to this event to those other grants and contracts.

So as it relates to that type of specific example, which I could name dozens, that's where I'm having trouble getting my head around how this translates into specific expenses that we have already through a cost allocation methodology have handled it in a different manner all together.

JOHN HEVERON: So first of all, let me acknowledge this is the same question that came up before, but a different fact.

You told me that there's no way for me to say it benefits this program more than that program.

But now you're telling me that it benefits only the federally funded programs.

Different situation, different answer.

Now this adds complexity, and I hope you don't have to do this, but there is another way to do your indirect cost allocation, where you don't say administrative is equal to indirect.

You say, administrative is equal to indirect except these particular administrative costs get directly allocated.

It is okay direct equals administrative only for convenience.

But that's not a requirement.

For much larger organizations, they will have directly assigned administrative costs.

And they will also pool direct costs.

In fact you all will.

Let me give you an example.

I mean, if you wanted to, you could track every copy you made, and I think in the day a lot of organizations did.

You had tracking devices, this department had 40 copies, and this department had 300.

And you break down your copy costs based on that.

Miserable process.

Really didn't improve the quality of the allocation, but it was a direct cost.

It is direct.

For administrative ease, I think everybody agrees now that we can pool those sort of direct costs and treat them as indirect.

Likewise, when there are indirect or administrative costs that really benefit just your federal programs, you can treat them as a direct.

You could do that.

But keep in mind what you're signing up for, and also keep in mind that because of the nature of indirect cost rate, you're not just committing yourself to that, but your future executive or finance directors, because the methodology can't change, the numbers will.

But the methodology you develop you need to stick with.

So push for simplicity for yourself.

Don't burden yourself unnecessarily, work with the accountant.

But you're absolutely right in your analysis, and you can do this.

PAULA MCELWEE: Here's one of the mind blowing things about it.

You won't all do this the same way.

There is not only one way to do it.

And that's part of what I hear you struggling with.

And what you're saying is, wait a minute, how are we going to do this at our center and what's going to work best for us and you have to be able to define that for yourselves and justify it and have your notes together and know your methodology achieves these goals for an Indirect Cost Rate Proposal and still is the best for your center, and that does take some real hard thinking sometimes.

About exactly how this is going to work best.

As we mentioned earlier, some, with the occupancy cost, some centers do it based on square footage, other centers based on salary, you can pick.

There are a lot of things like that, that have changed.

Used to be only one way to do everything.

And now that's changed, and that is sometimes a difficult adjustment to make because suddenly we have more choices and we have some general things we have to meet but we don't have to do it in only one way.

You had a question?

AUDIENCE MEMBER: If I could go back to the base that you're selecting for each center selecting to allocate indirect funds.

If you are using salaries as a base, you said salaries, base salaries, overhead, as a base.

Any way you are charging the same amount of indirect fund source, which makes sense and it shouldn't really matter, except that your rate would be higher cause you have a smaller base.

You said that's the only down fall of choosing just salaries.

My question is, why is that a down fall?

Why is it a down fall?

JOHN HEVERON: The rate looks higher, and quite honestly, I helped a client prepare an Indirect Cost Rate Proposal 15 years ago and we sent it in and he said, the reviewer said, you ought to do it based on total direct cost and I said, why?

And he said because the rate is lower.

And I have not stopped shaking my head in however many years it's been.

It is illogical.

But I heard a federal reviewer say that so and there's no other way.

I think it's a better way.

PAULA MCELWEE: Carry it forward with us don't we.

JOHN HEVERON: That's right.

PAULA MCELWEE: All our prior reviews.

AUDIENCE MEMBER: I'm going to blow everybody's mind with what I am about to admit to.

Because, given what you just said earlier about having there being an allowance for directly assigning administrative costs, all right?

And the advise I think we got from same gentleman, unfortunately my accounting person couldn't be here, related in Texas, we only have like a two and a half percent indirect cost rate.

JOHN HEVERON: On your financial statements?

AUDIENCE MEMBER: Yes.

As it correlated with the audited financial statements because we so closely follow our Cost Allocation Plan, just about everything was directly allocated.

JOHN HEVERON: Passing out cheese to everybody.

Cheese slices.

I'm glad you brought that up.

It's the next big thing I wanted to discuss today.

I heard like three people now say that, and actually Paula and I, when we were reviewing these proposals, saw that in some cases, the financial statements had an unrealistically low number for indirect, and at least one case, I was told that the reviewer of the indirect cost rate said, well, you have to use that lower number.

And that's crazy, because I asked for an example, and one example was general insurance was directly allocated.

Went to this, this, this, and this department and then a little bit to G and A, which now gets spread out another time.

That's not what the rule says.

The flaw was with the financial statements, okay?

With all due respect, the auditors around the world were all imperfect, myself included, and sometimes we're not cognizant of that.

I mean it sure looks great, it sure looks like you're very efficient.

But it is not a realistic picture.

Now you're back to passing out pieces of cheese instead of cutting the cheese roll.

So I don't know exactly how we're going to do this.

But we are going to try to help with the people that are reviewing your reports, going forward, if you haven't received feedback yet, and somebody is telling you to do that catch Paula or me.

We'd like to intervene, we'd like to see consistency in this process and we want to pull the misery out of your accounting and your cost allocation.

The only way we can do it is to fully allocate all of your truly administrative costs.

Anything that benefits all of the programs.

PAULA MCELWEE: Let's talk about timeline for just a second.

You submitted hopefully your indirect cost rate for March because we came up with that March 31 date.

By looking at your application process for your next grant that starts in October.

You're talking about some things that may require you to look at your chart of accounts and do them differently, which you will do at the beginning of your next fiscal year.

You're not going to do it mid- year, probably.

So same thing is true with this whole discussion about what are your actual costs and what aren't they in how are things classified and what are your processes?

You're going to really look at how you will do this as you do your budget for next fiscal year, which you're going to be doing next month.

Yeah, next month or shortly after.

By the end of July.

So you're going to be doing those grant applications, you need to sort this out before then because you have to have an approveable indirect rate that is in your application that by October 1 you can prove was approved.

So those are your time pressures, but also think about that.

It gives you a chance to make next fiscal year exactly how it needs to be.

And so you need to really think in those terms of how can we, October 1, if your fiscal year runs July 1, I'm sorry, I don't have quite as much time, you know, how can we make this so that it's accurate and it's to the best benefit of our organization?

It's as simple as we can make it and how can we sort this out, and that does take some thinking, because this is different than what we've done before.

But we've got to step back and learn that thinking.

AUDIENCE MEMBER: I applied for and received my indirect cost rate for this year.

I got it last June.

When do I have to apply again or can I just let it go for the next four years, or until dramatically changes and I want to change it?

JOHN HEVERON: Well, in theory it will never change.

PAULA MCELWEE: That isn't true.

JOHN HEVERON: That's really how indirect cost rate works.

Now the rate itself will change, probably every year.

Like I said, it will always be wrong, hopfully not by a lot.

But what structure you created to do the calculation won't change.

So if you did this on a spreadsheet, sort of like what I did on the next slide here, you're just going to fill that out with new numbers year after year, and 21.9% will be recalculated each year based on the new numbers.

But once approved, you're done.

All you're going to do is to report your actual rate at the end of the funding year, when you first used the rate, and then request your provisional rate for the coming year, which most often would be the same rate but there may be circumstances where it will be changing, either you discontinued or added a program or things of that nature.

PAULA MCELWEE: You mentioned a provisional rate, the rate you're getting is provisional.

You will have to do some reporting end of year a about whether or not it was accurate and how it looks in retrospect as far as your actual indirect costs and that will be part of the process.