Companion Guide to Video August 2012

www.fhwa.dot.gov/federal-aidessentials

Finance 

Administrative Requirements

Developing an Indirect Cost Allocation Plan

This approach allows agencies to include indirect costs as a 

reimbursable item on federally funded projects

All across the Nation, budgets for public works 

projects are being seriously cut. If your agency 

is like most, you’re looking for ways to cover 

your cost of 

operations 

–– and not only 

with direct costs, 

but also with the 

indirect ones that 

support the 

computer you’re 

using and the 

office you’re 

occupying. 

An increasingly popular method for covering 

indirect costs is to include them as a 

reimbursable item on federally funded projects. 

While this approach won’t increase the value of 

your award, it will provide an additional method 

for funding indirect costs.

If this is something your agency wants to do, you 

must first develop an Indirect Cost Allocation 

Plan, or ICAP. An ICAP spells out your 

objectives and all the methods your agency will 

need to use in order to calculate its indirect cost 

allocation and achieve an equitable allocation of 

indirect costs to all projects. There are some 

guidelines you’ll be expected to follow, but the 

methods you ultimately use will be based on 

your organization's objectives.

Set Objectives

Here we will look at some different ways of 

calculating indirect rates and the steps agencies 

will take to finalize their ICAP.

Your agency’s indirect rate is the centerpiece of 

the ICAP and is calculated by dividing indirect 

costs by direct costs. While the calculation is 

fairly straightforward, consideration must be 

given to what to include in the indirect cost pool 

(the equation’s numerator) and in the allocation 

base (the denominator).

For example, it’s up to your agency to decide 

whether the indirect cost pool will include 

“central services” –– those departments that 

process payroll and provide legal advice. It’s 

also up to your agency to determine whether the 

direct allocation base will be limited to direct 

salaries and wages, like project inspectors or 

project managers, or if it will also include other 

direct project costs like contractor payments. 

While the single indirect rate is the most 

commonly used approach, some agencies do 

choose to develop multiple rates. For example, 

an agency might want one rate for public works 

projects and another rate for transit. Or an 

agency might designate a special rate for use 

only during emergency relief efforts.
Federal-aid Essentials for Local Public Agencies

Determine Approach

Smaller agencies tend to use actual costs to 

compute a provisional rate. This is because 

provisional rates are easier to justify than 

estimated or predetermined ones and,

consequently, tend to be a bit higher. Larger 

agencies, however, seem to prefer 

predetermined rates because they tend to 

project 3-4 years out rather than relying on 

annual evaluation and adjustment – making 

them easier to administer.

As long as the indirect costs are allowable under 

current Federal-aid regulations, what you 

include in the cost pool and the allocation base, 

the number of rates you develop, and the 

accounting method you use is at your agency’s 

discretion.

Determine Accounting Method

Once your agency has worked through the 

details, you need to document the proposal and 

submit the plan to the Federal or State agency 

providing the Federal funding. One of those two 

agencies will conduct an audit and review. That 

agency’s approval is your green light to begin 

requesting reimbursement of indirect costs on 

projects. 

 

Document Proposal, Submit Plan and Apply 

Rate

If your agency is new to the development of 

ICAPs, you’ll be interested in the many different 

resources available to guide you through the 

process. Your primary resource, of course, is the 

Federal or State government agency providing 

the funding. The people there can help you 

define your goals and objectives and then select 

the most appropriate approach for your situation. 

They may even be able to show you a plan 

submitted by another agency – one that shares 

your objectives or has a similar organizational 

structure.

 

Collect Resources

We have just reviewed all the steps agencies 

will take to finalize their ICAP. 

• Start by collecting your resources 

• Then set objectives

• Determine your approach and 

accounting method

• Document and submit your proposal for 

approval before applying the indirect 

rate
Federal-aid Essentials for Local Public Agencies

The content of this 

document is not a 

substitute for 

information obtained 

from State departments 

of transportation, 

appropriate FHWA 

Division Offices, and 

applicable laws. 

Scenarios have been 

simplified for emphasis 

and do not necessarily 

reflect the actual range of 

requirements applicable 

to the scenario or this 

topic. This document

was created under 

contract number

DTFH61-11-D-00025 by 

the Federal Highway 

Administration, U.S. 

Department of 

Transportation, and is 

offered to the public to 

heighten and focus 

awareness of Federal-aid 

requirements within the 

local public agencies 

community and 

reinforces the 

importance of these 

necessary policies, 

procedures, and 

practices.

This companion resource 

is the script content for 

the video production of 

the same name. 

Additional Resources

• Principles and standards for allowable costs 

http://www.whitehouse.gov/omb/circulars_a087_2004

• Guidance for State, local, and Indian tribal governments for applying OMB 

Circular A-87

http://rates.psc.gov/fms/dca/asmb%20c-10.pdf

• 2004 FHWA memo clarifying indirect costs of State and local governments 

in OMB Circular A-87

http://www.fhwa.dot.gov/legsregs/directives/policy/indirectcost.htm

• 1998 FHWA clarification memo regarding OMB Circular A-87

http://www.fhwa.dot.gov/tea21/indcosts.htm

• Codified rules for grants awarded by the U.S. DOT to States and local 

governments

http://www.ecfr.gov/cgi-bin/textidx?c=ecfr&SID=38c13e220257fbf1b9d4ecb7b30d189e&rgn=div5&view=tex

t&node=49:1.0.1.1.12&idno=49

• Principles and standards for determining costs for Federal awards through 

grants, cost reimbursement contract and other agreements

http://www.ecfr.gov/cgi-bin/textidx?c=ecfr&SID=486bc6a1ee374cf0782f677ed7988522&rgn=div5&view=tex

t&node=2:1.1.2.10.6&idno=2