In 2013, the White House Office of Management and Budget (OMB) issued historic guidance regarding the policies and procedures of federal grants. Applicable to all new written agreements (contracts and grants) signed after December 26, 2014, government agencies and departments that hire a nonprofit using federal funds must reimburse the organization for its reasonable indirect costs, also referred to as overhead or administrative costs. The Interim Final Rule, updating the regulations of all federal departments and agencies required to follow the OMB Uniform Guidance, closed for public comment on February 17, 2015.
Nonprofits can seek reimbursement of their indirect costs by electing to use their already federally approved indirect cost rate (if one exists), negotiating a new rate, or utilizing the default minimum rate of 10% of the modified total direct costs. The Guidance applies not only to federal government agencies, but also pass-through entities such as those state and local governments that carry out part of a federal program. This is a significant change, as many pass-through entities previously did not pay indirect costs, even if the nonprofit had a negotiated indirect cost rate established.
While the Guidance does not require a government agency to use the new overhead reimbursement standards for existing contracts or a basic renewal of an existing contract, any substantial changes made to the contract could require that the higher overhead rules apply. For nonprofits that already receive or plan to receive federal funding, it is important to understand the new guidelines and accurately identify and track overhead costs in order to benefit from these changes. It may be necessary to contact the government or pass-through entity associated with the contract in order to elect or negotiate an indirect cost rate and reimbursement. Furthermore, nonprofits should be prepared in the case that those state or local agencies that issues their award are not up to speed about the new requirements. The National Council of Nonprofits advises:
In connection with government grants and contracts, the [OMB] Uniform Guidance provides only the promise of improved treatment; it is incumbent upon each organization to (1) take action to own its own costs, (2) learn its responsibilities and rights under the new rules, and (3) protect those rights through advocacy, both on its own behalf with each grant and contract, as well as by engaging in efforts with the broader nonprofit community.
Lastly, nonprofits should take note that while the guidance requires these agencies to pay for indirect costs, it does not provide additional funding to do so.
Additional Tips from CalNonprofit’s Webinar, “What Nonprofits Need to Know About the New OMB Guidelines:”
- Take the time to read the Guidance, specifically, Appendix IV – Indirect (F&A) Costs Identification and Assignment; Rate Determination for Nonprofit Organizations
- Make sure your organization’s accounting system distinguishes between direct and indirect costs
- Weigh the pros and cons of negotiating a new rate versus opting for the default rate of 10%
- Be prepared to stick up for your entity if the agency is not following the rules
National Council of Nonprofits: New OMB Guidance on Indirect Costs: What It Does and Why It Matters; Know Your Rights … and How to Protect Them
Nonprofit Quarterly: The Word for Today is “Overhead”: OMB Uniform Guidance Takes Effect