Cost Principles for Indirect Cost Rates of Non-Profit Organizations – Multiple Rate Method

Note:  A sample indirect cost rate proposal using the multiple rate method is shown in Illustration 6-3 of ASMB C-10, which is the implementation guide for OMB Circular A-87 that was issued by the Assistant Secretary for Management and Budget (ASMB) for the U.S. Department of Health and Human Services' (DHHS) at https://rates.psc.gov/fms/dca/asmbc-10.pdfPDF.

Step 1:  Identify Total Costs

Identify organization’s total costs, regardless of funding source.

Step 2:  Classify Total Costs

Classify total costs for base period as direct or indirect costs.  See §12.3, Step 2.

Step 3:  Pool Indirect Costs

Pool indirect costs into prescribed cost groupings.

Depreciation and Use Allowances — costs of buildings, capital improvements to land and buildings, and equipment.  Depreciation and use allowances on buildings used exclusively in the conduct of a single function, and on capital improvements and equipment used in such buildings must be assigned directly to that function.

Interest—interest on debt associated with certain buildings, equipment and capital improvements.

Operation and Maintenance Expenses — expenses incurred for the administration, operation, maintenance, preservation, and protection of the organization’s physical plant, e.g. security; janitorial and utility services; repairs and ordinary or normal alterations of buildings, furniture and equipment; maintenance and operation of buildings and other plant facilities; property, liability and other insurance relating to property; and space and capital leasing.  This category must also include its allocable share of fringe benefit costs, depreciation and use allowances, and interest costs.

General Administration and General Expenses — expenses incurred for the overall general executive and administrative offices of the organization and other expenses of a general nature that do not relate solely to any major function of the organization, e.g. the director's office; office of finance, business services, and budget and planning; personnel; general counsel; and management information systems.  This category also includes its allocable share of fringe benefit costs, operation and maintenance expenses, depreciation and use allowances, and interest costs.

Step 4:  Distribute Cost Groupings

Distribute each cost grouping to major functions using the prescribed base, unless the organization can demonstrate that: (1) a different base would result in a more equitable allocation of costs; 2) a more readily available base would not increase the costs charged to the sponsored awards.

Depreciation and Use Allowances — base varies according the costs being allocated as follows:

  • Buildings, and capital improvements and equipment used in such buildings — usable square feet of space, excluding common areas, e.g. hallways, stairwells, and restrooms
  • Buildings, and capital improvements and equipment related space, e.g. individual rooms and laboratories — full-time equivalents that use the space; salaries and wages of individual functions benefiting from the use of that space; or organization-wide employee FTEs, or salaries and wages, applicable to the benefiting functions of the organization
  • Certain capital improvements to land, such as paved parking areas, fences, sidewalks, and the like, not included in the cost of buildings — FTE basis for user categories; salaries and wages of all employees applicable to each function for distribution to major functions

Interest/Operation and Maintenance Expenses — same as used for depreciation and use allowances on buildings, equipment and capital improvements to which the cost relates.

General Administration and General Expenses — modified total direct costs.

Step 5: Identify Major Functions

Identify the organization’s major functions; create a separate cost pool for each major function.  Allocate cost groupings to major functions using the distribution bases identified in Step 4. Allocate in the prescribed order.

  • Cost groupings are to be distributed among major functions in the following order: 1) depreciation and use allowances; 2) interest; 3) operation and maintenance; and 4) general administration and general expenses.
  • Any other cost groupings may be allocated in the order determined to be most appropriate by the organization.
  • If cross allocation is used, the order of distribution does not apply.  If cross allocation is used, the composition of the indirect cost categories must be modified to include the allocations to and from other categories.

Step 6: Distribute to Awards

After cost groupings have been distributed to major functions, distribute the costs in the cost pool for each major function to the respective awards within that function. Use modified total direct costs as the distribution base.

Step 7: Calculate Indirect Cost Rate

Calculate the overall indirect cost rate for each major function. Also present the overall rate in terms of "Facilities" and "Administration" categories.

Calculate Overall Rate for each major function — Divide total indirect costs assigned to each major function by modified total direct costs for that function. Express result as a percentage.

Calculate "Facilities" Rate for each major function — For each major function, add the indirect costs that are "Facilities" costs and divide by modified total direct costs for that function. "Facilities" costs are:

  • Depreciation and use allowances
  • Interest
  • Operation and maintenance expenses.

Calculate "Administration" Rate for each major function — For each major function, add the indirect costs that are "Administration" costs and divide by modified total direct costs for that function. "Administration" costs are general administration and general expenses.

Step 8: Apply Indirect Cost Rate

Apply the indirect cost rate established for each function to all awards within that function.

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Cost Principles for Indirect Cost Rates of Educational Institutions – Multiple Rate Method

Note:  A sample indirect cost rate proposal using the multiple rate method is shown in Illustration 6-3 of ASMB C-10, which is the implementation guide for OMB Circular A-87 that was issued by the Assistant Secretary for Management and Budget for (ASMB) for the U.S. Department of Health and Human Services’ (DHHS) at https://rates.psc.gov/fms/dca/asmb%20c-10.pdf‎PDF.

Step 1: Identify Total Costs

Identify organization’s total costs, regardless of funding source.

Step 2: Classify Total Costs

Classify total costs for base period as direct or indirect costs.  See §12.3, Step 2.

Step 3: Pool Indirect Costs

Pool indirect costs into prescribed cost groupings.  Additional cost groupings may be established when:

  • Indirect costs exist that do not benefit all major functions
  • Costs that are normally treated as indirect costs are direct charged to an award
  • It is determined that certain support costs are measurable on a workload or other quantitative basis
  • When an activity provides its own purchasing, personnel administration, building maintenance or similar service
  • When fringe benefits are treated as indirect charges

Depreciation and Use Allowances — costs of buildings, capital improvements to land and buildings, and equipment.  Depreciation and use allowances on buildings used exclusively in the conduct of a single function, and on capital improvements and equipment used in such buildings must be assigned directly to that function.

Interest—interest on debt associated with certain buildings, equipment and capital improvements.

Large Research Facilities — see OMB Circular A-21, (F)(2)(c).

Operation and Maintenance Expenses — expenses incurred for the administration, operation, maintenance, preservation, and protection of the organization's physical plant, e.g. security; care of grounds; janitorial and utility services; repairs and ordinary or normal alterations of buildings, furniture and equipment; maintenance and operation of buildings and other plant facilities; property, liability and other insurance relating to property; and space and capital leasing. This category must also include its allocable share of fringe benefit costs, depreciation and use allowances, and interest costs. See also OMB Circular A-21(F)(4)(c) regarding the employment of a utility special cost study.

General Administration and General Expenses — expenses incurred for the overall general executive and administrative offices of the organization and other expenses of a general nature that do not relate solely to any major function of the organization; i.e., instruction, organized research, other sponsored activities, or other institutional activities.  This category also includes its allocable share of fringe benefit costs, operation and maintenance expenses, depreciation and use allowances, and interest costs. It excludes costs incurred within non-university-wide deans’ offices, academic departments, organized research units, or similar organizational units.

Departmental Administration Expenses — administrative and support services that benefit common or joint department activities or objectives in academic deans' offices, academic departments and divisions, and organized research units.  See OMB Circular A-21 (F)(6) for additional limitations.

Sponsored Projects Administration — costs incurred by separate organizations established primarily to administer sponsored projections such as grant and contract administration, special security, purchasing, personnel, administration, and editing and publishing of research and other reports. It also includes its allocable share of fringe benefit costs, general administration and general expenses, operation and maintenance expenses, and depreciation/use allowances.

Library Expenses — costs of operating the library, e.g. books and library materials, less library income.  It also includes the fringe benefit costs, general administration and general expenses, operation and maintenance, and depreciation and use allowances. Costs incurred in the purchases of rare books with no value to sponsored agreements should not be allocated to them.

Student Administration and Services — administration costs of student affairs and for student services.  It also includes the fringe benefit costs, general administration and general expenses, operation and maintenance, and depreciation and use allowances.

Offset for Facilities and Administration (F&A) Expenses Otherwise Provided for by the Federal Government — reimbursements and other payments for the federal government that are made to the institution to support solely, specifically, and directly, in whole or in part, any of the administrative or service activities described in the other cost groupings.

Step 4: Distribute Cost Groupings

Distribute each cost grouping to major functions using the prescribed base, unless:

  • The cost grouping can be identified directly with a major function, in which case the cost grouping should be charged directly to that function
  • A cost analysis study has been conducted to select appropriate distribution bases in accordance with OMB Circular A-21 (D)(2)(d)(3)
  • The organization can demonstrate that:

Depreciation and Use Allowances — base varies according the costs being allocated as follows:

  • Buildings, and capital improvements and equipment used in such buildings—usable square feet of space, excluding common areas, e.g. hallways, stairwells, and restrooms
  • Buildings, and capital improvements and equipment related space, e.g. individual rooms and laboratories—full-time equivalents that use the space; salaries and wages of individual functions benefiting from the use of that space; or organization-wide employee FTEs, or salaries and wages, applicable to the benefiting functions of the organization
  • Certain capital improvements to land, such as paved parking areas, fences, sidewalks, and the like, not included in the cost of buildings—FTE basis for user categories of students and employees; employee allocation must be allocated to major functions in proportion to salaries and wages of all employees

Interest/Operation and Maintenance Expenses — same as used for depreciation and use allowances on buildings, equipment and capital improvements to which the cost relates.

General Administration and General Expenses — modified total direct costs.

Large Research Facilities — see OMB Circular A-21 (F)(2)(c).

Departmental Admin. Expenses —

  • Modified total direct costs (MTDC) to allocate the admin. expenses of the dean’s office of each college and school to the academic departments within each college or school
  • MTDC to allocate the administrative expenses of each academic department, and the department’s share of the expenses to the appropriate functions of the department

Sponsored Projects Administration — modified total direct costs.

Library Expenses — first on the basis of primary users (students, professional employees, and other users), and then further assigned to the major functions according to the provisions of OMB Circular A-21 (F)(8).

Student Administration and Services — allocated to the instruction function and subsequently to the sponsored agreements of that function according to the provisions of OMB Circular A-21 (F)(9).

Offset for F&A Expenses Otherwise Provided for by the Federal Government — treated as a credit to the affected individual F&A cost category before that category is allocated to the benefiting major functions.

Step 5: Identify Major Functions

Identify the organization’s major functions; create a separate cost pool for each major function. Allocate cost groupings to remaining F&A cost groupings, major functions, and specialized service facilities of the institutions using the distribution bases identified in Step 4. Allocate in the prescribed order.

  • Cost groupings are to be distributed among major functions in the following order:  1) depreciation and use allowances; 2) operation and maintenance; and 3) general administration and general expenses.
  • Other cost groupings may be allocated in the order determined to be most appropriate by the institution.
  • If cross allocation is used, the order of distribution does not apply.  If cross allocation is used, the composition of the indirect cost categories must be modified to include the allocations to and from other categories.

Step 6: Distribute to Awards

After cost groupings have been distributed to major functions, distribute the costs in the cost pool for each major function to the respective awards within that function.  Use modified total direct costs as the distribution base.

Step 7: Calculate Indirect Cost Rate

Calculate the overall indirect cost rate for each major function. Also present the overall rate in terms of F&A categories.

Calculate Overall Rate for each major function — Divide total indirect costs assigned to each major function by modified total direct costs for that function. Express result as a percentage.

Calculate "Facilities" Rate for each major function — For each major function, add the indirect costs that are "Facilities" costs and divide by modified total direct costs for that function. "Facilities" costs are:

  • Depreciation and use allowances
  • Interest
  • Operation and maintenance expenses
  • Library expenses.

Calculate "Administration" Rate for each major function — For each major function, add the indirect costs that are "Administration" costs and divide by modified total direct costs for that function.  "Administration" costs are:

  • General administration and general expenses
  • Departmental administration
  • Sponsored projects administration
  • Student administration and services
  • All other types of expenditures not listed specifically under one of the subcategories of "Facilities"

The administrative costs charged to an award shall not exceed 26% of MTDC.

Step 8: Apply Indirect Cost Rate

Apply the indirect cost rate established for each function to all awards within that function.

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