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Cost Principles Direct vs. Indirect Costs

Cost Principles Direct vs. Indirect Costs. Prepared by Office of Sponsored Programs Spring 2011. Understanding Direct vs. Indirect Costs. Introduction

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Cost Principles Direct vs. Indirect Costs

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  1. Cost PrinciplesDirect vs. Indirect Costs Prepared by Office of Sponsored Programs Spring 2011

  2. Understanding Direct vs. Indirect Costs • Introduction Cost Principles for Educational Institutions, published by the Office of Management and Budget (OMB) Circular A-21includes regulations that require institutions to disclose what costs are charged to sponsored projects and if they are direct or indirect costs. One of the determining factors for a cost to be considered as direct or indirect depends on if the costs are explicitly budgeted and justified in the proposal. Also, that the sponsor accepts the proposed cost as part of the project direct costs. Therefore, it is imperative that the PI pre-determines the type of cost as allowable and that it can be claimed directly and includes the cost in the proposal budget.

  3. Direct Costs • In preparing your budget, one of the most complex distinctions for determining how to charge allowable costs to awards is whether an expenditure is a direct cost or indirect cost. • Direct costs are those that can be identified specifically with a project and can be directly assigned to a specified cost in the approved budget. Examples: • Salaries & wages • Clerical staff • Office supplies • Postage • Communication • The costs are accepted by the sponsor as part of the budgeted cost • Administrative costs/Facilities and Administrative Costs (F&A)– may be considered as direct costs: • Required to complete the specific requirements of a grant project • Not routine, administrative work that benefits multiple activities of the institution and have to be approved in the proposal budget

  4. Administrative Costs • Administrative costs can be used interchangeably with indirect costs and must be budgeted. Examples: • Administrative and clerical salaries • Office supplies • Envelopes • Postage • Telephone costs • Services – printing, fees etc.

  5. Administrative costs contd… • The administrative costs, normally considered to be F&A (Indirect) costs must be budgeted specifically and justified in the proposal and approved by the sponsor. Procedures to include F&A costs as direct costs: • Examine and identify the necessity for charging directly • Include in proposal and justify the need for the decision (budget justification) • Review for sponsor compliance • Review approved F&A costs periodically (management process)

  6. Indirect Costs/Facilities & Administrative Costs (F&A) • Indirect/F&A costs incurred for a common or institution-wide objective that benefits more than one project or fiscal or administrative operations of the institution (other academic departments, administration, business office etc.). Examples: • Academic administration salaries – Deans, department heads, administrative officers • CFCC Library operations, including purchase of books and journals • Plant operations - utilities, maintenance and repairs • General expenses – insurance, security, taxes • Allowance and depreciation of buildings

  7. Administrative Costs contd… • F&A costs which are considered indirect costs (OMB Circular A-21), are generally charged to a project by applying a percentage to the total direct costs of the project. • An indirect cost or overhead rate which is generally pre-determined by sponsor • The rate has to be specifically requested by the sponsor • The rate may be negotiated • The percentage charged may be prorated costs or fixed rate (eg. 8% of direct costs) Please note: It is important to collect the maximum indirect cost allowed by sponsor! There are various ways in which indirect costs can be calculated (unless formula is given by sponsor). There is a cap of 26% enforced by the federal government. OSP will assist you in determining the rate and calculation of indirect costs.

  8. OSP Services • OSP will assist you in determining: • If a cost is allowable or unallowable • If a cost is direct or indirect • How indirect costs (F&A) can be budgeted and charged as a direct cost • How to calculate, justify, and include in budget proposal • How to negotiate an acceptable rate for indirect costs • If the project will use a large amount of F&A costs

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