Need to learn more about indirect costs and cost allocation for your nonprofit organization? Check out our guide where we answer your most frequently asked questions:
What is the U.S. Department of Health and Human Services (HHS) Salary Limit (SRL) impact on indirect rates?
The U.S. Department of Health and Human Services (HHS) Salary Rate Limit (SRL) of $225,700 per individual was effective beginning January 1, 2025. This cap applies whether HHS pays for all or just a portion of those salaries, both directly and indirectly. Consequently, when calculating indirect cost rates, organizations must exclude salaries above the SRL from their indirect cost pool for HHS awards. This adjustment helps prevent inflated indirect cost rates and ensures compliance with HHS regulations.
For non-HHS federal awards that do not have SRL limits, organizations can request a companion Negotiated Indirect Cost Rate Agreement (NICRA) rate to recover full indirect costs. When preparing a NICRA, it is crucial to use the SRL for the specific year you are preparing. If your fiscal year does not match the calendar year, use the SRL in effect for the calendar year in which the fiscal year ends. Proper documentation and adherence to these guidelines are essential for maintaining accurate and compliant financial practices.
For reference, historical salary rate limits for preceding years can be found on the HHS website. This information is available in the Salary Rate Limitation section, which includes details on the limits for prior years. Here is the link to the relevant page: Historical HHS Salary Caps.
Does my nonprofit need to document Bid & Proposal (B&P) costs?
Yes, your nonprofit needs to document Bid & Proposal (B&P) costs, and these costs are considered indirect expenses. According to the Federal Acquisition Regulation (FAR) 31.205-18, B&P costs are the expenses incurred in preparing, submitting, and supporting bids and proposals on potential government and non-government contracts. These costs must be properly identified and accumulated in accordance with Cost Accounting Standards (CAS) 420.
Since B&P costs are not directly tied to a specific contract, they are allocated as indirect expenses over the general and administrative (G&A) base. This means they are spread across the contractor’s total business activity rather than being charged to a single project.
Additionally, the Office of Management and Budget (OMB) Uniform Guidance at 2 CFR part 200 sets forth principles for determining the costs applicable to work performed by nonprofit organizations under contracts, grants, and other agreements with the government. Proper documentation ensures compliance with these regulations and helps with the accurate allocation of costs.
What is the U.S. Department of Housing & Urban Development (HUD)’s $35 million Indirect Proposal Rule?
- This rule applies to funding from ALL Federal agencies, not just HUD.
- Nonprofit organizations receiving more than $35 million in direct federal funding annually must apply for a NICRA with their cognizant agency for negotiation and approval. They are not eligible to use the de minimis indirect cost rate.
- Organizations receiving $35 million or less in direct federal funding have the option to either use the 15% of MTDC de minimis rate or apply for a NICRA with their cognizant agency.
How does my nonprofit handle indirect costs for “Fee for Service” Programs?
- If a funder bans indirect/admin costs:
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- Directly allocate shared costs (like technology or utilities) using:
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- Square footage used by the program.
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- Staff time dedicated to the program.
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- Any other base that fairly and equitably attributes shared costs to the various cost centers of your organization.
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Is there an 8% overhead limit on federal training grants?
Yes, there is an 8% overhead limit on federal training grants. According to 34 CFR 75.562, this regulation applies to educational training grants provided by the U.S. Department of Education.
The indirect cost reimbursement on a training grant is limited to the lesser of the recipient’s approved indirect cost rate or 8% of the modified total direct cost (MTDC) base. MTDC includes direct salaries and wages, fringe benefits, materials and supplies, services, travel, and subawards/subcontracts up to the first $25,000 (or $50,000 for awards made on or after October 1, 2024) of each.
However, MTDC excludes equipment costing $10,000 or more, capital expenditures, patient care charges, rental costs of off-site facilities, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward or subcontract in excess of $25,000/$50,000. This regulation ensures that a significant portion of the grant funds are used directly for training activities rather than administrative costs.
How should my nonprofit treat fundraising costs?
Fundraising expenses, even if minimal, must be treated as direct costs. This means that all costs associated with fundraising activities should be directly attributed to those activities rather than being included in the general overhead or indirect costs of the organization. Fundraising costs are not allowable costs for inclusion in an indirect cost pool.
Additionally, the indirect cost rate is applied to fundraising costs, ensuring that these costs draw their own share of indirect costs and do not distort the overall indirect cost rate. It’s important to note that in the Statement of Functional Expenses, fundraising costs are sometimes labeled as “supporting costs,” even though they cannot be included in the indirect cost pool. This distinction helps prevent confusion and ensures compliance with financial regulations.
According to IRS guidelines, fundraising expenses must be properly identified and reported separately from program and management expenses. This ensures transparency and accountability in how funds are used.
By treating them as direct costs, nonprofits ensure that their indirect cost rates remain accurate and fair. Additionally, treating fundraising expenses as direct costs allows for a more accurate allocation of resources, which helps to determine the true cost of fundraising activities and evaluate their effectiveness.
How can my nonprofit allocate expenses by funding source?
To effectively categorize and allocate expenses by funding source, your nonprofit should implement a robust fund accounting system. This system allows you to track revenue and expenses separately for each funding source, ensuring compliance with donor restrictions and regulatory requirements. Begin by setting up a detailed chart of accounts that includes a specific category or dimension for each funding source. This will help you accurately allocate expenses and maintain transparency in financial reporting.
When allocating expenses, apply the Proportional Benefit Rule by splitting costs based on exact usage. For example, if 30% of an expense benefits Grant A and 70% benefits Grant B, allocate the costs accordingly. If exact tracking isn’t feasible, use the Interrelationship Rule, which allows you to allocate costs based on a reasonable basis, such as staff time or other relevant metrics. Always document the cost splits and the bases used for these allocations to ensure accuracy and facilitate audits.
Regularly review and reconcile accounts to ensure that funds are being used appropriately and in accordance with donor intentions. By maintaining clear and organized financial records, your nonprofit can demonstrate accountability and build trust with donors and stakeholders.
Are clerical/secretarial workers’ salaries included in G&A? What about fundraising tools like MailChimp?
- For the most part executive assistants, office managers and secretarial salaries are included in the General and Administrative costs pool. Sometimes the case can be made to charge part of their salaries to program or fundraising costs if they spend significant time supporting those functions.
- Costs for fundraising tools like MailChimp, Constant Contact and HubSpot typically are included in fundraising costs. The only allowable advertising costs are the costs of recruiting ads and advertising costs included in an approved budget for a federal award. If they are approved for that award, they are allowable for that award only.
The YPTC Federal Awards Team is here for you as you navigate indirect costs and cost allocations for your organization. Reach out to use with further questions at federalawards@yptc.com.
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