Mark Stout is one of two Branch Chiefs at the U.S. Department of Interior, Interior Business Center, Office of Indirect Cost Services (ICS) in Sacramento, CA.
Why are indirect cost rates such an important topic for tribal governments to know more about?
You don’t have to be an economist to know that administering a program costs money. But there’s something called an “indirect” cost which should also factor into your understanding of the total costs involved in running the program. A direct cost can be tied to a specific program or final cost objective. On the other hand, anindirect cost benefits multiple programs. Through the indirect cost rate, you are able to allocate an appropriate share of the indirect cost pool to each benefiting program.
The calculation of an indirect cost rate is pretty straightforward—take the numerator (indirect cost pool) divided by the denominator (direct cost base). The result is a percentage which reflects the ratio of indirect to direct; or rather, for each dollar spent on running a program, there is a percentage of indirect costs that should be applied to it.
So, why is it important to compute the indirect cost rate? Well, it’s based on actual costs incurred. Sure, maybe not when it’s first negotiated (since rates projected for a future year may be based on estimates), but there will be a reckoning when the actual costs are determined and a final indirect cost rate is computed. Computing the indirect cost rate allows the non-Federal entity to recover a portion of their facilities and administrative costs associated with running the Federal program.
Note that an organization’s total costs, regardless of the source of funding, are included in the indirect cost rate computation. While the negotiated indirect cost rate is primarily used in Federal grants and awards, the indirect costs are spread to all benefiting activities—whether they are funded by Federal grants and awards, the Tribe’s own funding, or state and other funding.
An organization that has never negotiated an indirect cost rate has the option of accepting the 10% de Minimis rate which limits the recovery of facilities and administrative costs to 10% of modified total direct costs. The Bureau of Indian Affairs may recognize an up to four-year old indirect cost rate, or they will compute a lump sum amount of indirect contract support. Some funding agencies have no other policy other than “no rate, no indirect.” So, for the Tribe who wishes to recover all of the available funding, it is important to know what an indirect cost rate is, how it is used, how it is negotiated, and why it’s important.