SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION 

2530 Crystal Drive • Arlington, Virginia 22202 

October 28, 2011 

LETTER FOR ADMINISTRATOR, U.S. AGENCY FOR INTERNATIONAL 

DEVELOPMENT 

SUBJECT: Indirect Costs of Managing Private Security Contracts in Iraq (SIGIR 12-002) 

This letter addresses the Special Inspector General for Iraq Reconstruction’s (SIGIR) concerns 

regarding the U.S. Agency for International Development’s (USAID) approval of the indirect 

costs that nonprofit organizations charge for managing their Iraq private security contracts. In 

three previously issued audit reports, SIGIR found that some nonprofit organizations had used 

different methodologies for calculating indirect costs for managing their private security 

contracts, resulting in questionable charges.1

 Because private security costs generally account 

for a large portion of a nonprofit organization’s total expenditures in Iraq, it is critical that the 

costs to manage these contracts are reasonable and kept to a minimum to allow as much money 

as possible to be spent on program implementation. 

In this review, SIGIR examined six nonprofit organizations to determine the indirect costs they 

charged for managing their private security contracts. We found that the organizations charged 

widely varying indirect costs for managing security contracts in Iraq that SIGIR believes require 

a similar level of effort. For some organizations, the indirect costs charged may be unreasonable 

relative to the actual administrative costs necessary to support the Iraq program. For example, 

SIGIR found that one organization charged $5,225 for managing its $3.18 million Iraq security 

contract, while another charged $915,794 to manage its $5.39 million security contract. 

USAID reviewed a draft of this letter, and it concurred with SIGIR’s recommendation that the 

agency should more closely review the indirect costs associated with security contracts in order 

to ensure that they are reasonable and equitably charged to the Iraq program. The agency’s 

comments are provided in their entirety in Appendix D. 

SIGIR performed this audit under the authority of Public Law 108-106, as amended, which 

incorporates the duties and responsibilities of inspectors general under the Inspector General Act 

of 1978. We conducted our work during May 2011 through October 2011 in Arlington, Virginia. 

Background 

Since 2003, the U.S. Department of State (DoS) and USAID have spent billions of dollars in Iraq 

to achieve a variety of objectives such as improving the capacity of national government 

 

1 The Iraq Community Action Program: USAID’s Agreement with CHF Met Goals, but Greater Oversight is 

Needed, SIGIR-11-014, 4/27/2011; National Democratic Institute Grant’s Private Security Costs and Impact 

Generally Supported, but Department of State Oversight Limited, SIGIR 11-001, 10/13/2010; Improved Oversight 

Needed for State Department Grants to the International Republican Institute, SIGIR 10-022, 10/29/2010. 
2 

institutions, strengthening the effectiveness of local government, expanding private sector 

economic opportunities, and ensuring open and fair electoral processes. DoS and USAID 

provide funding through contracts, grants, and cooperative agreements (referred to as “awards” 

hereafter) to nonprofit organizations in order for them to implement various programs. 

When receiving these awards, the nonprofit organizations use the funding to pay for direct and 

indirect costs incurred to implement programs. Direct costs are those that specifically support a 

program’s activities or services. Those costs may include the salaries, fringe benefits, and travel 

costs of those who directly implement the program; supplies and equipment; and contractors’ 

services. Indirect costs, on the other hand, are those that are incurred for common or joint 

purposes and not readily identifiable with a particular award.2

 Examples of indirect costs include 

office space, utilities, clerical and managerial staff salaries, and contract management that are 

shared and applied equitably across all of an organization’s activities. To the extent that indirect 

costs are reasonable, allowable, and allocable under federal guidelines, they are legitimate costs 

of doing business and payable under a federal award. 

Determining Indirect Cost Rates and Resulting Indirect Costs 

Nonprofit organizations negotiate indirect cost rates, that is, the percentage of an award that can 

be used to pay for indirect costs, with the federal agency that provides it with the largest value of 

awards (also known as the cognizant agency). An indirect cost rate is a standardized method of 

charging individual awards for their share of indirect costs that the organization incurs to manage 

their activities. The rate is expected to determine fairly and conveniently, what proportion of 

indirect costs each award should bear. Indirect cost rates are calculated by dividing the 

organization’s total allowable indirect costs by some direct cost base3

 and are expressed as a 

percentage. Figure 2 shows how an indirect cost rate is computed. 

 

2

 Indirect costs are also often called “overhead costs.” 3

 The direct cost base is also referred as the distribution base or the application base. The objective of choosing an 

appropriate base is to distribute indirect costs equitably and in accordance to the benefits received by the different 

programs and projects generating direct costs. There are three commonly used direct cost bases. The Modified 

Total Direct Cost base includes all direct costs incurred by the organization with the exception of items such as 

capital expenditures, subcontracts, flow through funds, etc. The Salaries and Wages base includes only the direct 

salaries and wages incurred by the organization. The Salaries and Wages plus Fringe Benefits base includes only 

the direct salary and wages and the direct fringe benefits incurred by the organization. 
3 

Figure 2―Methodology to Compute an Indirect Cost Ratea, b 

Note: 

a In this example, the organization has identified the Total Direct Cost as the appropriate base of allocating its indirect costs. b Sometimes, more than one indirect cost rate is used when a single indirect cost rate for all activities of a nonprofit organization may not be 

appropriate because it may not take into account different factors which may substantially affect the indirect costs applicable to a particular 

award. Typically, the indirect cost rates for USAID grantees include fringe benefits, and one or more overhead rates. 

Source: SIGIR. 

Once the negotiated indirect cost rate is established and formalized through the Negotiated 

Indirect Cost Rate Agreement, it is binding on all Federal awards, not just those the cognizant 

agency provides.4 That is, if the cognizant agency determines that a nonprofit organization 

warrants an X% indirect cost rate, this rate applies to all awards that the nonprofit organization 

receives from the federal government. To determine the amount of indirect costs of individual 

awards, the indirect cost rate is multiplied by the applicable direct cost base of that award. 

The Office of Management and Budget Circular A-122 

The Office of Management and Budget (OMB) Circular A-122 “Cost Principles for Non-Profit 

Organizations” establishes the principles for determining costs that can be charged to awards 

with nonprofit organizations. The purpose of the circular is to: 

(1) ensure that the federal government bears its fair share of costs, 

(2) identify allowable and unallowable costs for determining the actual cost of federal 

programs, and 

(3) establish policies and procedures for indirect costs allocation. 

To this end, during the indirect cost rate negotiation, the cognizant federal agency attempts to 

ensure that indirect costs are distributed equitably across all the nonprofit organization’s awards 

and programs. To do this, the cognizant federal agency determines whether the direct cost base 

the nonprofit is using in the calculation of indirect costs will result in an equitable distribution. 

For example, if an organization has an award (e.g., for work in Iraq) that has a disproportionate 

amount of direct costs (such as security contract costs), the amount of indirect costs that is 

allocated to that award could be considerably higher and therefore distorted. In such a case, 

OMB Circular A-122 authorizes the cognizant federal agency to exclude some costs in the direct 

cost base in order to equitably distribute indirect costs. 

 

4

 The Negotiated Indirect Costs Rate Agreement contains both final rates for past periods and provisional rates for 

current and future periods. The provisional rate is established for use in reimbursing indirect costs under costreimbursement contracts and grants until a final rate can be established. A final indirect cost rate is established after 

the close of the contractor's fiscal year and, once established, is not subject to change. 
4 

Private Security Costs Make Up a Significant Part of Some Nonprofit Organizations’ 

Expenditures in Iraq 

The six nonprofit organizations that SIGIR reviewed together paid about $40.16 million for their 

private security contract costs, out of nearly $185.82 million in federal funds they spent in Iraq in 

FY 2010. Organization C paid $8.01 million in private security contract costs in FY 2010, or 

about 52.74%, of its total federal expenditures in Iraq. Organization E’s private security contract 

costs were also significant, totaling about $13.71 million, or 44.10% of its total federal 

expenditures for the year. Table 1 provides a summary of private security contract costs incurred 

by the six nonprofit organizations in SIGIR’s review. 

Table 1—Nonprofit Organizations’ Private Security Contract Costs for FY 2010 

Total Federal 

Expenditures

Total Private Security 

Contract Costs 

Percent of 

Total

Organization A $27,626,116 $1,020,574 3.69%

Organization B 27,811,842 5,387,024 19.37%

Organization C 15,189,252 8,011,282 52.74%

Organization D 56,747,876 3,175,585 5.60%

Organization E 31,093,486 13,713,278 44.10%

Organization F 27,348,162 8,848,635 32.36%

Total $185,816,734 $40,156,378 

Source: SIGIR’s analysis of data provided by the non-profit organizations. 

The other four organizations’ private security costs are also significant, but make up smaller 

percentages of their overall expenditures. Several reasons explain the differences. For example, 

Organization A contracts with four to five individuals to provide private security needs rather 

than one single contractor (i.e., a company). Their officials informed us that contracting with 

individuals rather than companies reduces costs and allows them more flexibility in managing 

their private security needs. Organization B’s private security costs are lower because it 

contracts for only transportation (i.e., “dynamic” or “mobile”) security, rather than for both 

dynamic and static (i.e., guarding its compound) security. In addition, some nonprofit 

organizations work in less-volatile provinces than other organizations where more, and therefore 

more costly, protection is required. Lastly, some types of activities that the nonprofit 

organization conducts (such as monitoring elections) require a higher level of security. 

Because costs of private security in Iraq are generally significant, the indirect costs associated 

with their management could potentially be high and distort the distribution of indirect costs, 

especially if the nonprofit organizations include the total value of these contracts in the direct 

cost base used in calculating indirect costs. 
5 

Nonprofit Organizations Calculate Indirect Costs for Managing 

Private Security Contracts Differently, Resulting in Varied and 

Seemingly Unreasonable Costs 

SIGIR’s review showed that the six nonprofit organizations charged widely varying amounts of 

indirect costs associated with managing their security contracts in Iraq that SIGIR believes 

requires a similar level of effort. For some organizations, the amount charged under the Iraq 

program seems unreasonably high. To illustrate, one organization spent about $5.39 million in 

security contract costs and charged $915,794 as the cost of managing the contract, while another 

organization paid about $3.18 million on security contracts but charged only $5,225 as the cost 

of managing those contracts. Such a vast difference occurred because organizations used 

different bases on which to apply the approved negotiated indirect cost rate to determine the 

dollar value of their costs of managing these contracts. Table 2 shows the costs of private 

security contracts and the indirect costs that the six nonprofit organizations charged the 

government. 

Table 2—Indirect Costs Charged for Private Security Contract Management in FY 

2010 

Total Private Security 

Contract Costs

Indirect Costs 

Chargeda 

Percent

Organization A $1,020,574b $334,243 32.75%

Organization B 5,387,024 915,794 17.00%

Organization C 8,011,282 132,987 1.66%

Organization D 3,175,585 5,225 .16%

Organization E 13,713,278 108,593 .79%

Organization F 8,848,635 61,470 .69%

Total $40,156,378 $1,558,312 

Note: 

a SIGIR used the organization’s provisional indirect cost rate for FY2010 when the final rate was not available. b This figure excludes the cost of the security manager for his time in managing these security contracts. 

Source: SIGIR’s analysis of data provided by the non-profit organizations. 

As stated above, the way an organization determines the direct cost base affects the amount of 

indirect costs. To illustrate, Table 3 shows that Organizations A, B, and C included the entire 

value of their private security contract costs in their direct cost base. Organization D, on the 

other hand, included only $25,000 of their security contract costs—and for the entire year—

while Organization E included $25,000 each month for two of its private security contracts. 
6 

Table 3—Base Costs Used for Calculating Indirect Costs of Private Security 

Contracts Administration in FY 2010 

Nonprofit Organization Direct Cost Base Elements Included 

Organization A $1,020,574 Total value of private security contracts 

Organization B $5,387,024 Total value of private security contracts 

Organization C $8,011,282 Total value of private security contracts 

Organization D $25,000 $25,000 for the year 

Organization E $572,944 $25,000 each month for two of its private 

security contracts 

Organization F $300,000 $75,000 each task ordera

Note: 

a Organization F issued task orders to its security contractor. Each task order was considered a separate contract that varied in length from three 

to six months. Its Negotiated Indirect Cost Rate Agreement allowed the organization to include up to $75,000 of the value of each of its task 

orders in the direct cost base for calculating indirect costs. For FY 2010, Organization F applied the $75,000 limit to four task orders. 

Source: SIGIR’s analysis of data provided by the non-profit organizations. 

For these organizations, the inclusion of all, or a large portion, of their private security contracts 

costs in the direct cost base resulted in indirect costs that appear unreasonably high and 

inequitably distributed to the Iraq awards. Specifically, charging the Iraq awards from $108,593 

(Organization E) to $915,794 (Organization B) to manage security contracts seems unreasonable 

relative to the $5,225 that Organization D charged for what appears to be comparable efforts. 

Furthermore, once the indirect cost rate is applied to the unusually high cost of security, the Iraq 

awards could be absorbing more of the nonprofit organization’s total indirect costs. The ultimate 

effect of such accounting is that there is less funding for program implementation. 

USAID Approved Indirect Costs Charged 

Nonprofit organization officials argued that the USAID Office of Acquisition and Assistance’s 

Overhead, Special Costs, and Closeout Branch―the cognizant federal agency―had already 

approved indirect cost rates that they can charge on all their federal awards. These officials 

stated that in the negotiation process, USAID officials reviewed and approved the methodologies 

that they use to determine the base for calculating indirect costs. In all cases, USAID had 

approved of the amount of Iraq security contract costs that were included in the base of 

calculation. For some nonprofit organizations, this meant that they could charge indirect costs 

on the entire value of their security contracts. For others, USAID had approved of alternate 

methodologies to determine the direct base costs in which to apply the indirect cost rate. Thus, 

the nonprofit organizations officials argued that they are charging only the total allowable 

indirect costs they incur on all their federal awards. 

According to USAID officials, they rely on the nonprofit organizations’ audited financial 

statements to assist them in the indirect cost rate negotiation process.5

 In these audits, USAID 

 

5

 The six organizations in SIGIR’s sample are required by OMB Circular A-133, Audits of States, Local 

Governments, and Non-Profit Organizations, to have annual audits conducted on their financial statements by 

independent auditors. 
7 

officials stated that the independent auditors review the calculations that would ensure an 

equitable distribution of indirect costs. Barring any gross distribution or material deficiencies, 

USAID usually accepts the results of these audits. 

Conclusions 

Ensuring that nonprofit organizations charge only appropriate and reasonable indirect costs 

across all, and each individual, federal award is an important goal. Doing so best assures that the 

maximum amount of funding is available for program implementation, and that an individual 

award does not shoulder an unwarranted burden of an organization’s indirect costs. Given the 

insecure conditions in Iraq, nonprofit organizations’ security costs are higher than those they 

experience elsewhere in the world. On this fact alone, it would be expected that organizations 

could charge a greater share of their Iraq award costs as indirect costs. However, Federal 

regulations sought to ensure that this did not occur. The intent of OMB Circular A-122 was that 

individual awards would not be burdened by indirect costs significantly higher than other 

awards, but that these costs would be more equitably shared among all of an organization’s 

awards. Thus, all awards would more equitably pay for managing the totality of programs. 

However, our focused review of six nonprofit organizations demonstrates that there is a large 

disparity in the amount the organizations charged for indirect costs in managing security 

contracts of similar scope. For some nonprofit organizations, such disparity led to an inordinate 

amount of award funds in Iraq being used to pay for indirect costs, rather than for direct program 

activities. Notwithstanding the limited scope of the review in which SIGIR focused only on 

security contract costs, and the complexity of the indirect cost rate determinations, the disparity 

and amount of indirect costs charged for managing these contracts warrants a closer review. 

Recommendation 

We recommend that the USAID Office of Acquisition and Assistance’s Overhead, Special Costs, 

and Closeout Branch more closely review the indirect costs associated with security contracts in 

order to ensure that they are reasonable and equitably charged to the Iraq program. 

Management Comments and Audit Response 

USAID provided written comments on a draft of this letter and concurred with SIGIR’s 

recommendation. In its response, USAID noted that indirect costing is not a uniform process, 

and individual organizations have wide latitude under the governing OMB Circulars to choose a 

methodology that best allocates costs to all its final cost objectives and not just those in one 

country or for one program. While current OMB Circulars allow for different methodologies to 

allocate costs, the non-profit organizations’ chosen methodologies may not ensure 

reasonableness of those costs charged to the Iraq programs. SIGIR believes that USAID’s 

review of the indirect costing practices will help ensure both reasonableness and equitable 

allocation. 

- - - - 
8 

We appreciate the courtesies extended to the SIGIR staff. For additional information on the 

report, please contact Glenn D. Furbish, Assistant Inspector General for Audits (Washington, 

DC), (703) 604-1388/ glenn.furbish@sigir.mil, or Jim Shafer, Principal Deputy Assistant 

Inspector General for Audits (Washington, DC), (703) 604-0894/ james.shafer@sigir.mil. 

Stuart W. Bowen, Jr. 

Inspector General 

cc: U.S. Secretary of State 

U.S. Ambassador to Iraq 

U.S. Secretary of Defense 
9 

Appendix A—Scope and Methodology 

In May 2011, the Special Inspector General for Iraq Reconstruction (SIGIR) initiated Project 

1110 to examine the indirect costs that nonprofit organizations were charging the government for 

managing their private security contract costs in Iraq. SIGIR judgmentally selected six nonprofit 

organizations based on factors such as the amount of total federal funding received, the amount 

of funding used to pay for private security contracts, and the availability of data from prior 

audits. These nonprofit organizations included: 

 ACDI/VOCA 

 Cooperative Housing Foundation 

 International Relief and Development, Inc. 

 International Foundation for Electoral Systems 

 National Democratic Institute for International Affairs 

 International Republican Institute 

We obtained data from these six nonprofit organizations on their total federal expenditures in 

Iraq for fiscal year 2010, the amount of those funds spent on private security contracts, and the 

amount included in the direct cost base used for calculating indirect costs. We also obtained 

their Negotiated Indirect Cost Rate Agreements with the U.S. Agency for International 

Development (USAID) Office of Acquisition and Assistance’s Overhead, Special Costs, and 

Closeout Branch in order to determine the indirect cost rates applicable to the management of 

security contracts. Lastly, we interviewed senior officials from the nonprofit organizations, 

USAID, the U.S. Department of State, and the Office of Management and Budget to gain a better 

understanding of the indirect cost rate negotiation process and federal guidelines regarding 

indirect costs. 

The audit was conducted in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

We performed this audit under the authority of Public Law 108-106, as amended, which also 

incorporates the duties and responsibilities of inspectors general under the Inspector General Act 

of 1978. SIGIR conducted its work during May 2011 through October 2011 in Arlington, 

Virginia. 

Use of Computer-processed Data 

We did not use computer-processed data in this report. However, we reviewed audits conducted 

on the nonprofit organizations’ financial statements which may have been computer-processed 

data. 
10 

Internal Controls 

In conducting the audit, we spoke with officials from USAID Office of Acquisition and 

Assistance’s Overhead, Special Costs, and Closeout Branch on their processes for ensuring that 

the data provided to them from the nonprofit organizations are accurate. 

Prior Coverage 

We reviewed the following reports by SIGIR and the Government Accountability office. 

Special Inspector General for Iraq Reconstruction 

The Iraq Community Action Program: USAID’s Agreement with CHF Met Goals, but Greater 

Oversight is Needed, SIGIR-11-014, 4/27/2011. 

National Democratic Institute Grant’s Private security Costs and Impact Generally Supported, 

but Department of State Oversight Limited, SIGIR 11-001, 10/13/2010. 

Improved Oversight Needed for State Department Grants to the International Republican 

Institute, SIGIR 10-022, 7/29/2010. 

Government Accountability Office 

Treatment and Reimbursement of Indirect Costs Vary among Grants, and Depend Significantly 

on Federal, State, and Local Government Practices, GAO-10-477, 5/18/2010.
11 

Appendix B—Acronyms 

Acronym Description 

DoS Department of State 

OMB Office of Management and Budget 

SIGIR Special Inspector General for Iraq Reconstruction 

USAID U.S. Agency for International Development 

 
12 

Appendix C—Audit Team Members 

This report was prepared and the audit conducted under the direction of Glenn D. Furbish, 

Assistant Inspector General for Audits, Office of the Special Inspector General for Iraq 

Reconstruction. 

The staff members who conducted the audit and contributed to the report include: 

Tinh T. Nguyen 

James Shafer 

Robert Whiteley 

 
13 

Appendix D—USAID Management Comments 
14 
15 

Appendix E—SIGIR Mission and Contact Information 

SIGIR’s Mission Regarding the U.S. reconstruction plans, programs, and 

operations in Iraq, the Special Inspector General for Iraq 

Reconstruction provides independent and objective: 

 oversight and review through comprehensive audits, 

inspections, and investigations 

 advice and recommendations on policies to promote 

economy, efficiency, and effectiveness 

 deterrence of malfeasance through the prevention and 

detection of fraud, waste, and abuse 

 information and analysis to the Secretary of State, the 

Secretary of Defense, the Congress, and the American 

people through Quarterly Reports 

Obtaining Copies of SIGIR 

Reports and Testimonies 

To obtain copies of SIGIR documents at no cost, go to 

SIGIR’s Web site (www.sigir.mil). 

To Report Fraud, Waste, and 

Abuse in Iraq Relief and 

Reconstruction Programs 

Help prevent fraud, waste, and abuse by reporting 

suspicious or illegal activities to the SIGIR Hotline: 

 Web: www.sigir.mil/submit_fraud.html 

 Phone: 703-602-4063 

 Toll Free: 866-301-2003 

Congressional Affairs Hillel Weinberg 

Assistant Inspector General for Congressional 

Affairs 

Mail: Office of the Special Inspector General 

for Iraq Reconstruction 

 2530 Crystal Drive 

 Arlington, VA 22202-3940 

Phone 703-428-1059 

Email hillel.weinberg@sigir.mil 

Public Affairs Deborah Horan 

Director of Public Affairs 

Mail: Office of the Special Inspector General for Iraq 

Reconstruction 

 2530 Crystal Drive 

 Arlington, VA 22202-3940 

Phone: 703-428-1217 

Fax: 703-428-0817 

Email: PublicAffairs@sigir.mil