No matter the industry, your daily job is important. You deliver valuable products and services to your market, impacting those who depend on you. Whether you offer a broad range of services to the worldwide community or specific programs to a targeted local group, clarity of your true costs on a unit-by-unit basis is critical to ensure sustainability, maximize impact and create internal efficiencies.
As the diversity of your services increases, the true cost of delivering a service becomes increasingly opaque. Blurring costs across different programs and grants is not due to poor accounting practices or lack of proper planning and budgeting; it is due to the uncertainty of indirect costs and how to apply it.
State, Local, Tribal and Nonprofit organizations all share the same challenge: how to assign organization-wide shared costs (indirect costs) to the final product line or service received. All organizations have indirect costs that benefit the entire organization at variable levels per program or grant. It is then difficult to add these indirect shared costs into your organization’s direct costs to calculate the true cost of the services you perform.
The Indirect Cost Problem
Many organizations do not know how to assign indirect costs to their programs or grants. This puts them at risk of taking on grants they cannot support, which forces them to use taxpayer dollars that should be used for core mission services to fund grant programs unknowingly. This also causes them to miss opportunities for cost recovery that could fund new services and projects the organization wants to support.
According to USAspending.gov in FY 2023, organizations have obligated $7.6 Trillion in grant funding programs. These funds span all types of services and programs critical to the citizens accessing services. However, 9-20% of those funds is unspent each year due to flawed program design, timing or lack of capacity to execute.
Indirect costs are not fully recovered in many grants, often due to the absence of an approved indirect cost rate, funder limitations, or administrative complexity. These factors contribute to an estimated $1.5 trillion in grant funds remaining unspent annually, along with other drivers such as program design, timing and capacity constraints. Such costs are subsidized year after year by your organization when the funds could come back into your organization from these grants you were awarded. You can recover those costs, allowing you to spend the funds you receive from other sources for what they are intended.
The Cost Allocation Plan Solution
The solution lies in understanding what your indirect cost truly is. Once you know this, you know what it costs to fully perform your different services. This can be accomplished by preparing a cost allocation plan for your organization that informs you of your organization-wide indirect cost regardless of funding source.
Then, you can take it a step further by negotiating your indirect cost rate (NICRA) with your federal cognizant agency. By obtaining a NICRA, you unlock the opportunity to apply your approved indirect cost rate to eligible grants that permit indirect cost recovery, subject to award specific limitations.
The Outcome
With an approved NICRA, organizations may be able to recover previously unreimbursed indirect costs on open grants or grants with provisional indirect cost rates that are later finalized, subject to the terms of the award and federal agency approval.
These funds reimburse indirect costs that were previously absorbed by the organization, freeing up organizational resources for mission critical priorities. You can now use these funds to fill budget gaps, purchase technology or perform projects you always wanted to accomplish but never had the funds to do so.
In addition, some grants require a match component to access the grant. This leaves the organization in a place where these funds must be available before they can even apply for the grant.
Pursuant to 2 CFR §200.306(c), and with prior approval from the awarding agency, organizations may be permitted to use unrecovered indirect costs reflected in an approved NICRA to satisfy all or part of a non federal match requirement. This provision recognizes that indirect costs are real and necessary costs incurred in performing grant-funded services.
State, Local Governments, tribal and nonprofit organizations have very distinct missions, requirements and restrictions. However, they do share one driving commonality: they all want to deliver the best products and services in the most efficient manner possible. Visibility of the true cost of service is essential to survive in any industry. By leveraging a cost allocation plan and indirect cost, true costs can be fully understood, and full cost recovery can be accomplished.
How Cherry Bekaert Can Be a Part of the Solution
Many municipalities receive grant dollars. Often, not all awards are spent because of limited resources or timing. Cherry Bekaert’s Cost Recovery Services will assist you in identifying and recovering eligible indirect costs on qualifying awards by leveraging your indirect cost rate.
We assist you in preparing your Indirect Cost Rates and obtaining your NICRA, so you can achieve your mission and goals. We then determine the actual amount available and support you in drawing down any available funds for maximum recovery.
Because the organization has already absorbed these indirect costs in prior periods, recovery represents reimbursement for costs already incurred, strengthening the organization’s overall financial position and ability to support its mission.
