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Revenue Sources

Step 2 Clarify Your Income Strategy | Step 4 Identify and Select an Appropriate Revenue Source

Step 3 Homework on Federal Cost Sharing Regulations

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Indirect Costs as a Part of Cost Sharing
Your cooperative agreement has expenses in several categories including personnel costs, employee benefits, equipment (purchased or leased), travel, computers and supplies. These costs are direct costs because they are directly attributable to achieving your project’s outcomes. There are also indirect costs which are real costs associated with your project, but their total cannot be directly associated exclusively with your project. Indirect costs include expenses such as maintenance, janitorial services, heating and lighting, etc. and can be called overhead costs. The full cost of your project is the sum of the direct and indirect costs. For purposes of cost share, indirect costs may be counted as long as they are documented by memorandum.

Indirect costs are usually charged to the grant as a percentage of some or all of the other direct cost items in the applicant’s budget. This percentage is called an indirect cost rate. Federal guidelines treat indirect costs as an allowable expense and require that a grantee have an indirect cost rate that has been approved by the Federal government, either yearly or on some other regular cycle. The Office of Management and Budget (OMB) has assigned different Federal departments and agencies responsibility for establishing indirect cost rates for different classes of grantees.

Your intermediary’s central management and administrative functions, general expenses and selected joint costs necessary to overall operations are normally identified as indirect costs and are budgeted for and distributed through an indirect cost rate. These costs are not readily assignable to specific awards and activities because a direct relationship to cost objectives cannot be shown or might be arbitrary in nature.

A variety of indirect cost rates are available. You can work with the Office of Grants Management (OGM) to determine which is best for your organization.1 The provisional/final rate is preferable for non-profit organizations for the following reasons:

  • Actual indirect costs are allocated to program objectives in the year incurred, creating accurate cost information;
  • There are no prior year indirect costs carried into a future year to burden new or continuing funding;
  • All indirect costs are properly funded in the fiscal year incurred, creating no profit or loss for the organization;
  • The organization's accounting system must determine actual costs each year, a capability that ultimately must exist to synchronize accounting, budgeting, and cost allocation; and
  • The actual cost of services or programs is determined annually and is therefore available for purposes of internal management and informed budgeting.

The three basic methods for calculating indirect cost rates under OMB Circular A-122 are the Simplified, Multiple Rate and Direct Allocation methods. Specific instructions on the computation of indirect cost rates with the conditions on when to use each method are contained in OMB Circular A-122, Attachment A.

Back to the example of XYZ organization and its cost share. The agreement stipulates $125,000 in cost share must be provided as match in the first year. Some portion of this match can be in-kind contributions and some indirect costs, and the rest must be raised or found. XYZ has little experience in calculating an indirect cost rate and for the first year chooses to identify a target of $35,000 to be met in in-kind contributions of outside consultant/trainers who are giving their time to assist XYZ with training of local FBCO’s. XYZ has also obtained space free of charge from a board member, valued at $25,000. The space will be used to locate the program and provide classrooms for training and instruction. The remaining $65,000 in first year cost share will be matched by fundraising.

Step 3 Checklist

Review the Federal guidelines for cost sharing for your grant
Contact OGM about appropriate indirect cost items and calculating an indirect cost rate
Maintain excellent records and documentation for all in-kind and indirect costs used in cost sharing

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1 Details may be found at www.ed.gov/pubs/KnowAbtGrants/glossary.html. [back]

Step 2 Clarify Your Income Strategy | Step 4 Identify and Select an Appropriate Revenue Source