Financial Manual for Grants & Contracts Chapter 11: Cost Allocation & Resource Sharing

Introduction

Depending on organization and function, an entity may use a cost allocation plan, indirect cost rate, or both to identify and assign indirect costs to benefiting cost objectives.  This chapter compiles the federal, state and agency requirements that apply to cost allocation plans, as well as, the federal requirements that apply when resource sharing is used to fund rd costs that are allocated among multiple entities; i.e., partners in a one-stop center.  In the event of conflict between these standards and federal statute or regulation, the federal statute or regulation will apply.

Requirements pertaining to indirect cost rates are addressed in Chapter 12 of this manual while underlying cost principles for the general allowability and treatment of costs (as direct or indirect) are discussed in Chapter 8 of this manual.

Record retention and access requirements that apply to cost allocation plans are provided in Appendix K to this manual. All financial and programmatic records, supporting documents, statistical records, and other records pertaining to an award of federal or state funds must be retained and made available to authorized entities or their representatives in accordance with applicable administrative requirements.

Return to Top

Cost Allocation Plan

The cost allocation plan must be adequately documented and must include all costs that will be claimed as allocated costs under federal or state awards.

The cost allocation plan must include all csts that will be claimed as an allocated cost under a federal or state award.  This includes both allocated and billed costs as described in the paragraphs below.  Costs that are omitted from the cost allocation plan will not be reimbursed.  Documentation requirements are discussed in the remainder of this section.

Documentation.  As provided in applicable cost principles, “All costs and other data used to distribute the costs in the plan should be supported by formal accounting and other records that will support the propriety of the costs assigned to federal or state awards.”  Thus, the cost allocation plan must be adequately documented.  Documentation requirements are provided below, and include both general information that is required for all cost allocation plans, as well as, more specific information that is required to support allocated and billed costs.

General.  The following types of information must accompany all cost allocation plans:

  • An organization chart that is sufficiently detailed to show operations including the activities of the organization whether or not they are shown as benefiting from those functions being allocated
  • A copy of the organization’s financial statements for the period covered by the costs (i.e., comprehensive annual financial report, where applicable) or, a copy of the approved budget if the plan covers budgeted costs.  The financial statements are required to support the allowable costs of each activity included in the plan.
  • A certification that the plan 1) was prepared in accordance with the applicable Office of Management and Budget (OMB) Circular and/or the Uniform Grant Management Standards (UGMS), 2) contains only allowable costs, and 3) was prepared in a manner that treated similar costs consistently among the various federal or state awards and between federal and other non-federal awards/activities.  The certification is discussed further under the subtitle Certification in this section.

If the cost allocation plan is one that must be approved by a federal or state agency, documentation of the approval must also be maintained.  Submission and approval requirements are discussed later in this section.

Allocated Costs.  Certain information must be provided for every allocated cost as bulleted below.  Allocated costs refer to those that are pooled and distributed to benefiting cost objectives on a reasonable basis.  General accounting, personnel administration, and purchasing costs are commonly allocated.  Required documentation:

  • Brief description of the service
  • Identification of the unit rendering the service
  • Identification of the operating activities receiving the service
  • Items of expense included in the cost of the service
  • Method used to distribute the cost of the service to the benefited entity
  • Summary schedule showing the allocation of each service to the specific benefited entity

Billed Costs.  Certain information must be provided for every billed cost.  Billed costs refer to those that are billed to organizations or programs on an individual fee-for-service or similar basis, such as computer services, transportation services, insurance and fringe benefits.  Billed costs are common with internal service funds, self-insurance funds, and fringe benefits.  Required documentation for internal service and self-insurance funds, and fringe benefits follow.

  • Internal Service Funds. For each internal service fund or similar activity with an operating budget of $5 million or more, the cost allocation plan must include:

The "revenues" in the required revenue/expense statement that is listed above consists of all revenues generated by the particular service, including unbilled and uncollected amounts.  If some users were not billed at the full rate for that class of users, a schedule showing the full imputed revenues associated with these users shall be provided.  "Expenses" in the revenue/expense statement shall be broken out by object cost categories, e.g. salaries, supplies, etc.

  • Self-Insurance Funds.  For each self-insurance fund, the cost allocation plan must include:

Reserve levels in excess of claims (1) submitted and adjudicated, (2) submitted but not adjudicated, and (3) incurred but not submitted must be identified and explained.

  • Fringe Benefits.  The cost allocation plan must include the following for fringe benefit costs that are billed costs:

In addition, for pension and post-retirement health insurance plans, the following information must be provided:

Certification.  An authorized official of the organization must certify that the plan has been prepared in accordance with authorizing legislation and regulations, and state or other applicable requirements.  Every cost allocation plan must include a certification.  A sample certification follows:

This is to certify that I have reviewed the cost allocation plan submitted herewith and to the best of my knowledge and belief:

  • All costs included in this proposal ___ [identify date] to establish cost allocations or billings for ___ [identify period covered by plan] are allowable costs in accordance with the requirements of OMB Circular A-21, A-87, or A-122, and the federal and state awards to which they apply.  Unallowable costs have been adjusted for in allocating costs as indicated in the cost allocation plan.
  • All costs included in this proposal are properly allocable to federal or state awards on the basis of a beneficial or causal relationship between the expenses incurred and the awards to which they are allocated in accordance with applicable requirements.

    Further, the same costs that have been treated as indirect costs have not been claimed as direct costs.  Similar types of costs have been accounted for consistently

I declare that the foregoing is true and correct:

Organization: _____________________________________________
Signature: _____________________________________________
Name of Official: _____________________________________________
Title: _____________________________________________
Date of Execution:: _____________________________________________

 

Submission and Approval.  A State or local government that has been designated as a “major local government” by the Office of Management and Budget (OMB), is required to submit a cost allocation plan to its cognizant agency annually.  (OMB periodically lists “major local government” designations in the Federal Register.)

 

Other entities must develop a plan in accordance with cost allocation plan requirements, but are not required to submit the plan to the Agency (or a federal agency) for approval.  Instead, the approval process for these entities is conducted locally in accordance with the Contractor's local policies, with a copy of the cost allocation plan and related supporting documentation being maintained and made available for monitoring review and audit.  The cost allocation plan must be prepared and, when required, submitted within six months prior to the beginning of the Contractor’s fiscal year covered by the plan.

Entity Specific Consideration:
Local Governments that Negotiate an Indirect Cost Rate with the Agency.  The Agency serves as the State Single Audit Coordinating Agency, and therefore approves the indirect cost rates, for some local governments.  When these entities use both a cost allocation plan and an indirect cost rate, the cost allocation plan is usually considered in the negotiation of the indirect cost rate.  Although the Agency is responsible for negotiating the indirect cost rates of these entities, it is not required to and has not chosen to approve the cost allocation plan.

Authority:

Return to Top

Allocation Methodology

The allocation methodology must be described in the cost allocation plan and be consistent with applicable cost principles and administrative requirements.

One of the required pieces of information that must be included with the cost allocation plan is the "method used to distribute the cost of the service to the benefited entity."  This information will include a description of the overall approach used, as well as, the cost pools (see Section 11.3 of this manual) and allocation (distribution) bases (see Section 11.4 of this manual) used by the Contractor.

Whatever methodology is used, it must:

  • Result in an equitable distribution of indirect and/or shared costs
  • Correspond to the costs being allocated
  • Be efficient to use
  • Be consistently applied over time
  • Be consistent with Generally Accepted Accounting Principles (GAAP)
  • Be consistent with applicable cost principles and administrative requirements
  • Be accepted by each entity's independent auditor to satisfy the audit testing required under the Single Audit Act
  • Be supported by actual cost data
  • Be consistent with the overall program design and services approach

Chapter I-3 of the U.S. Department of Labor One-Stop Comprehensive Financial Management Technical Assistance Guide (One-Stop TAG) describes four examples of allocation methodologies. These methodologies are summarized below, but additional detail is available through the link provided under Authority.

Aggregate — all shared costs or indirect costs that will be allocated using a cost allocation plan are totaled.  A single allocation base is chosen and applied to the total costs.

Activity Basis — the costs associated with a particular function or activity are pooled. An allocation (distribution) base is developed for each pool and applied to the respective pools. The resulting distribution of costs reflect each cost objective's share of that activity or function.

Item of Cost Basis — each item of cost is allocated to the benefiting cost objective(s) using a separate allocation (distribution) base, e.g. rental costs allocated on square footage basis or telecommunications costs allocated on a number of units used basis.

Combination Basis — costs are allocated using a combination of the above bases, for example, allocating some costs on an activity basis and others on an individual item of cost basis.

Authority:

Return to Top

Cost Pools

Cost pools shall only contain costs that are consistently treated as indirect (or are shared) costs and which jointly benefit two or more of the same programs or other cost objectives to the same degree.

A cost pool can be used in the allocation of indirect and/or shared costs. Only actual costs may be allocated for purposes of expenditure reporting (budgeted costs may only be used for purposes of developing the budget). The costs accumulated in a cost pool must benefit the same programs to the same degree so that the distribution base used to allocate the pool will result in an equitable distribution of costs relative to the benefits received.

The U.S. Department of Labor Employment and Training Administration’s One-Stop Comprehensive Financial Management Technical Assistance Guide (One-Stop TAG) lists some examples of cost pools that an organization might establish. Those pools are listed below and described in Chapter II-8 of the One-Stop TAG. The link to the One-Stop TAG is provided under Authority. Examples of cost pools include, but are not limited to:

  • Administrative cost pools
  • Indirect cost pools
  • Intake cost pools
  • Supplies expense pools

For administrative and indirect cost pools, in some cases, laws may limit the amount of administrative or indirect cost allowed. Amounts not recoverable as indirect or administrative costs under one federal or state award may not be shifted to another federal or state award unless specifically authorized by federal or state legislation or regulation.

Authority:

Return to Top

Allocation (Distribution) Base

Cost pools must be allocated to benefiting cost objectives using an allowable basis that results in an equitable distribution of costs relative to benefits derived.

There is no single best base to use to allocate indirect and/or shared costs.  The base will vary with organizational structure, type of cost being allocated, program design and the relationship between the base and the allocated costs.  Guidelines for selecting an appropriate base(es) are provided below.  Examples of allowable and unallowable bases are also provided later in this section.

Guidelines.  The following guidelines are taken from the U.S. Department of Labor Employment and Training Administration's One Stop Comprehensive Financial Management Technical Assistance Guide (One-Stop TAG).  An acceptable base meets these criteria.

  • Minimal distortion — The base should distribute costs in a fair and equitable manner without distorting the results.  This requires that the base be as causally related as possible to the types of costs being allocated so that benefit can be measured as accurately as possible.
  • General Acceptability — The base should be generally accepted and in conformance with Generally Accepted Accounting Principles.  For example, it should be consistently applied over time.  The base should also be drawn from the same period during which the costs to be allocated have been incurred.
  • Represents Actual Cost or Effort Expended — The base should be a measure of actual cost or actual effort expended.  It should not be based solely on a plan, budget, job description, or other estimates of planned activity.
  • Timely Management Control — The base should be within management’s ability to control on a timely basis.  The base should produce reliable and fairly predictable results.  If the base is erratic and unpredictable, beyond management’s ability to control, or not timely, it is likely to produce unacceptable results.
  • Consistency with Variations in Funding — The base must be able to accommodate and withstand changes in funding during the year and from year to year.  If the base includes factors that are affected by variations in funding, it will produce distorted results.
  • Materiality of Costs Involved — The time and expense spent in developing the base should not be greater than justified by the materiality of the costs to be allocated.  In other words, the grantee should not spend more on obtaining the information needed to allocate pooled costs than the dollars in the pool warrant.  The base should be sufficiently detailed to provide the most equitable and accurate allocation possible.  At the same time, the base should be simple enough to be efficient while still attaining a fair distribution of costs.
  • Practicality and Cost of Using the Base — The base should be as efficient as possible in terms of the cost or effort in developing it.  Thus, wherever possible, a database that already exists in the financial or participant record keeping and reporting systems should be used rather than create a separate database to be used only for allocating costs.

Possible Allocation Bases.  The following bases have been suggested in guidance provided by the One-Stop TAG and the U.S. Department of Health and Human Services (DHHS) Assistant Secretary for Management and Budget (ASMB) guide, ASMB C-10.  (ASMB C-10 is the implementation guide for OMB Circular A-87.)  These are suggestions only.  A base that is listed below should not be used if it will result in an inequitable cost distribution or would be inconsistent with other requirements and guidance provided in this chapter.

Cost or Activity Sample Allocation Base(s)
Accounting Number of transactions; direct labor hours; allowable survey methods
Auditing Direct audit hours; expenditures audited
Consumable supplies Total direct costs; direct labor hours
Counselor Direct labor hours; number of participants counseled
Data processing System usage; direct labor hours
Disbursing serivice Number of checks issued; direct labor hours
Fidelity bond Number of bonded employees
Freight Number of items shipped; cost of goods
Health services Number of employees
Intake Number of eligible participants; current period enrollments
Legal services Direct hours
Motor pool costs Miles driven; days used
Office machines and equipment maintenance Direct machine hours; direct labor hours
Office space Square feet of space occupied; staff salary distribution
Payroll services Number of employees
Personnel services Number of employees
Postage Direct usage; acceptable survey methods
Printing/reproduction Direct labor hours; job basis; pages printed
Procurement service Number of transactions processed; direct hours of purchasing agent’s time
Retirement system administration Payroll; number of employees contributing
Telephone Number of instruments; staff salary distribution
Travel Mileage; actual expenses; direct labor hours
Utilities Square feet of space occupied; staff salary distribution

Unacceptable Allocation Bases.  Unacceptable allocation bases are generally those that do not meet the general guidelines discussed in this section.  Unacceptable bases are those that:

  • Distort the final results
  • Do not represent actual effort or cost expended
  • Are not used consistently over time and with variations in funding
  • Do not have an integral relationship to the types of costs being allocated

Examples of unacceptable allocation bases include, but are not limited to, the use of:

  • Relative funds available to allocate unassigned direct costs
  • Job descriptions to allocate staff costs
  • Fixed or predetermined number of staff hours assigned to an activity to allocate staff costs
  • Planned participant levels to allocate participant-related costs
  • Results from prior periods to allocate current period costs (because they do not measure actual activity or cost)

Authority:

Return to Top

Adjustments

Adjustments to allocated and billed services under a negotiated agreement must be performed in accordance with applicable requirements.

The requirements for conducting carry forward adjustments of allocated central services costs, and adjustments of billed central services costs are discussed in this section.

Carry-forward Adjustments of Allocated Central Service Costs. Allocated central service costs are usually negotiated and approved for a future fiscal year on a "fixed with carry-forward" basis. Under this procedure, the fixed amounts for the future year covered by agreement are not subject to adjustment for that year. However, when the actual costs of the year involved become known, the differences between the fixed amounts previously approved and the actual costs will be carried forward and used as an adjustment to the fixed amounts established for a later year. This "carry-forward" procedure applies to all services whose costs were fixed in the approved plan. However, a carry-forward adjustment is not permitted, for a service activity that was not included in the approved plan, or for unallowable costs that must be reimbursed immediately.

Adjustments of Billed Central Services. Billing rates used to charge federal awards must be based on the estimated costs of providing the services, including an estimate of the allocable service costs. A comparison of the revenue generated by each billed service (including total revenues whether or not billed or collected) to the actual allowable costs of the services will be made at least annually, and an adjustment will be made for the difference between the revenue and the allowable costs. These adjustments will be made through one of the following adjustment methods: (a) a cash refund to the federal government for the federal share of the adjustment; b) credits to the amounts charged to the individual programs; (c) adjustments to future billing rates; or (d) adjustment to allocated central service costs. Adjustments to allocated central services will not be permitted where the total amount of the adjustment for a particular service share exceeds $500,000.

Authority:

Return to Top

Resource Sharing

Local Workforce Development Boards that incorporate resource sharing as a method for Workforce Solutions Office Partners to pay their allocable share of costs must do so in accordance with applicable requirements.

The terms, "Workforce Solutions Office" and "Workforce Solutions Office Partner," have the meanings in 40 TAC §§801.23 and 801.27, respectively.

Where Workforce Solutions Office Partners collaborate to provide joint or common activities in Workforce Solutions Offices, some of the costs incurred will benefit multiple partners. These costs are referred to as shared costs. Like indirect costs, shared costs may be allocated to benefiting partners by use of a cost allocation plan.  Once costs have been allocated, payment may be accomplished through resource sharing.

On May 31, 2001, the U.S. Department of Labor published a notice in the Federal Register that authorized resource sharing as a One-Stop financial policy, making it applicable for Workforce Solutions Office Partners.  This section summarizes the requirements of that notice, as well as related guidance in the U.S. Department of Labor’s One-Stop Comprehensive Financial Management Technical Assistance Guide (One-Stop TAG).  Resource sharing is not required, and may not be applicable for all Workforce Solutions Office settings.  If a Board does use resource sharing, it must do so in accordance with the Federal Register Notice and One-Stop TAG.

Unlike cost allocation, which refers to the methodology used to distribute costs to benefiting cost objectives, resource sharing refers to the way in which each Workforce Solutions Office Partner funds (pays for) its allocated portion of total shared costs of the Workforce Solutions Office.  It allows each partner organization to pay for its allocable share of common Workforce Solutions Office costs using resources that are in addition to cash transfers.  Such resources may include, but are not limited to, provision of goods and services, full-time equivalent staff positions, and in-kind contributions (if authorized by governing statutes and regulations).  Resources used to pay shared costs must meet the following standards:

If resource sharing is used, the plan and supporting documentation should be defined and included in a Resource Sharing Agreement (RSA).  The RSA is separate from, but may be related to the Memorandum of Understanding required by Section 121(c) of the Workforce Investment Act (WIA).  At a minimum, the following elements should be included in the RSA:

  • List of partners
  • List of shared costs
  • Shared costs budget
  • Cost allocation plan
  • Shared costs, by partner
  • Resources
  • Reconciliation and modification

Additional considerations that should be taken into account when developing the RSA include, but are not necessarily limited to, the following:

  • Review by each partner agency’s independent auditors to ensure the methodologies are accepted by auditors
  • Privacy and data integrity considerations related to the provision of actual data
  • Provisions for the reconciliation and adjustment of actual costs and commitments against the budget
  • Circumstances under which modifications to the RSA will also require modifications to the MOU
  • Dispute resolution relating to information sharing, costs or other requirements of the RSA
  • Establishment of an "agreement manager" who would be responsible for gathering actual cost data, preparing reconciliations, and providing updated information on adjustments to partners

Authority:

Return to Top