# Guidance for Establishing an Indirect Cost Rate Agreement or Cost Allocation Plan

**What are indirect costs?**

***Indirect costs*** are costs an organization incurs for common or
joint objectives, that cannot be readily and specifically identified
with a particular grant project or other institutional activity. Typical
indirect costs include the costs of operating and maintaining
facilities, equipment, and grounds; depreciation or use allowances; and
administrative salaries and supplies. These costs are usually charged to
the grant as a percentage of some or all of the direct cost items in the
applicant's budget, this percentage is called the ***indirect cost
rate***.

**Who may charge indirect costs to their TRIO grant(s)?**

"A grantee must have a current indirect cost rate agreement to charge
indirect costs to a grant. To obtain an indirect cost rate, a grantee
must submit an indirect cost proposal to its cognizant agency and
negotiate an indirect cost agreement."

Education Department General Administrative Regulations (EDGAR)

34 CFR 75.560 (b)

**Note:** Small colleges that need an indirect cost rate solely for the
purpose of charging indirect costs for a training grant may use the
simplified process for establishing an indirect cost rate.

### Simplified Process for Establishing an Indirect Cost Rate

This particular guidance applies to colleges that:

1.  Are subject to OMB Circular A-21;

```{=html}
<!-- -->
```
1.  Have no formal indirect cost rate agreement approved by a cognizant
    federal agency; and

2.  Want to, or are currently participating in a Department of Education
    grant program that is subject to an 8 percent training grant limit.

If these conditions apply to your institution, you may follow the
guidance outlined below to establish an indirect cost rate.

**First**, for OMB Circular A-21 colleges\...cognizance for cost
negotiation defaults to the Department of Health and Human Services
(DHHS), regardless of which federal agency provides direct federal
funding to the college.

**Second**, DHHS will not establish an indirect cost rate for the
college, if the college's only use for the indirect cost rate is to
justify the 8 percent application limit. This DHHS policy results from
practical workload considerations.

**Third**, knowing that in this circumstance the college is in a bind,
the college should use the OMB Circular A-21 short form in computing an
indirect cost rate for each year that indirect costs are claimed. This
calculation should confirm that the college's actual indirect cost rate
is equal to or exceeds the 8 percent limit.

**Fourth**, the college's indirect cost calculation should be verified
by an independent accounting authority and retained on file for review
by auditors, and/or federal oversight staff.

**Please note**: 8 percent means 8 percent of "modified total direct
costs "that in turn means 8 percent of total direct costs, less
equipment, contracts, and stipends.

**Fifth**, the same indirect costs that make up the numerator of the
college's rate calculation cannot be charged directly to any federal
award.

**Sixth**, the OMB Circular A-21 short form can be found at the
following website:

<http://rates.psc.gov/fms/dca/shortform1.pdf>

<http://rates.psc.gov/>

If the college plans to calculate its actual indirect cost rate
(whatever the rate may be) and use that rate for recovery of indirect
costs on Federal awards, the DHHS should be contacted to negotiate an
indirect cost rate for use on all grants, contracts, etc. As noted in
number 1 above, cognizance defaults to DHHS.

## How do I determine if my agency needs to apply for an indirect cost rate agreement from my cognizant Federal agency?

Use the following chart to determine if your agency needs to apply for
an indirect cost rate agreement from its cognizant Federal agency.

**INDIRECT COST RATES/COST ALLOCATION PLANS**

**FOR NON-PROFIT GRANTEES**

+------------------------+----------------------+----------------------+
| # Grantee Status       | # Requirement        | # Budget             |
+------------------------+----------------------+----------------------+
| One grant from one     | Must have cost       | Direct cost all      |
| federal agency --      | allocation plan      | budget items***.     |
| ***Grantee has no      | ***including a cost  | N*o** indirect costs |
| other programs or      | policy statement.*** | ***or joint direct   |
| activities and is      |                      | costs*** charged to  |
| solely organized to    | ***This              | budget***.***        |
| carryout the           | documentation will   |                      |
| activities of one      | be retained on file  |                      |
| grant.***              | for audit.***        |                      |
+------------------------+----------------------+----------------------+
| Multiple grants from   | Must have a cost     | Direct cost all      |
| one federal agency -   | allocation plan      | budget items,        |
|                        | ***or indirect cost  | ***including joint   |
| ***Grantee has no      | rate approved by the | direct costs.        |
| other programs or      | Federal cognizant    | Indirect costs, are  |
| activities and is      | agency.***           | budgeted, if a rate  |
| solely organized to    |                      | is approved***       |
| carryout the           |                      |                      |
| activities of the      |                      |                      |
| grants from one        |                      |                      |
| federal agency.***     |                      |                      |
+------------------------+----------------------+----------------------+
| Multiple grants from   | Must have an         | Use ***a***          |
| more than one federal  | indirect cost rate   | **temporary billing  |
| agency or ***multiple  | ***approved by       | rate pending the     |
| activities/programs    | its*** ***Federal*** | establishment of an  |
| from federal and       | cognizant            | approved**           |
| nonfederal sources***. | agency***.***        | provisional rate.    |
|                        |                      | ***Indirect Cost***  |
|                        |                      | Rate is limited to   |
|                        |                      | ***a maximum of* 8   |
|                        |                      | percent** ***of*** a |
|                        |                      | "modified ***total   |
|                        |                      | direct cost base***" |
|                        |                      | {34 CFR 75.562}      |
+------------------------+----------------------+----------------------+

***[ADDITIONAL INFORMATION]{.underline}:***

> ***IRS Form 990 (Return of Organization Exempt from Income Tax) can be
> used to estimate an interim indirect cost rate calculation. In Part II
> of the form (page 2), the Statement of Functional Expenses includes
> costs for program services, management and general, and fundraising.
> To estimate the rate calculation, divide the total in the management
> and general column by the total in the program services column. The
> result is a "rough" estimate of the grantee's indirect cost rate.***

The grantee's Audited Financial Statements may includes "notes"
regarding "related party transactions." If the grantee is leasing space
from a related party, the allowable lease costs are limited to the costs
of ownership such as depreciation, maintenance, taxes, etc. If a
building is owned by the grantee, depreciation costs should be reflected
in the Financial Statements and on the Form 990.

> ***The grantee's OMB Circular A-133 Audit Report should be reviewed
> for audit findings that may have an effect on direct and indirect
> program costs.***
>
> ***It is important to understand what expenses or amounts are included
> in the 8 percent indirect cost limitation. The indirect costs that
> exceed the 8 percent limitation are not allowable as direct costs.
> Each grantee's accounting system is unique and its treatment of costs
> must be appropriately considered.***
>
> **Note:** For additional information, you may contact either of the
> two Team Leaders listed on the Indirect Cost Group's Website. A link
> to this Web site is provided below.
>
> <http://www.ed.gov/about/offices/list/ocfo/fipao/icgreps.html>

#### Sample Cost Allocation Plan

Attached

###### Recent Guidance on Indirect Cost Rate Issues Provided to TRIO Grantees 

Attached