While many state and local governments are seeing their revenues begin to recover, rising costs and continued needs resulting from the pandemic have kept pressure on their general funds.
One way to help alleviate this pressure is the forgotten and poorly understood practice of recovering indirect costs from grants and contracts. By simply reviewing past grants and doing some math, several states, localities, and tribal nations have received millions of dollars that can be spent anywhere.
One large city in the western United States, for example, recouped nearly $1.5 million through cost recovery from grants. And one of the largest Native American tribes in the southwest is expected to earn between $8 million and $9 million.
How did they do it?
Indirect costs include items such as salary, IT support, and facility maintenance across multiple grants. States and local governments may seek reimbursement for facilities and administration costs or “costs incurred for a common or joint purpose that benefit more than one purpose and are not readily attributable to cost objectives specifically benefiting results obtained”, according to the U.S. Department of Labor Cost and Price Determination.
Even better, these costs can be recovered after they are issued, almost like an amended tax return.
Yet very few state and local governments recoup the indirect costs, wasting perhaps millions of dollars. Some do not accept indirect cost recovery as it can be confusing and complicated. Or they just forget because they’re focused on current challenges and don’t have time to go back and figure out what their indirect costs would be over dozens or hundreds of grants.
Many also forget that they most likely dipped into their general funds when administering the grants and don’t realize the total amount of money they could be leaving on the table. Or they may not remember that you can go back two years to recoup overhead.
Don’t leave money on the table
States, people and tribes should not leave money on the table. Here is a step-by-step guide on how to recover indirect costs:
Step One: Start Finding Thousands or Millions of Dollars
The first step in indirect cost recovery is to determine what your indirect cost rate is. To arrive at this rate, state and local governments must compile a list of indirect costs or support costs for each of their grants and account for them by grant segments. These costs can be payroll, IT, human resources or construction costs. These are costs that were not included in the grant budget, but support costs necessary to operate the grant.
Those with small finance teams or who have thousands of grants have turned to consultants to help them dig through the data, with fees paid on what is recovered.
Categorization of grants by segments or funders is necessary and required. This is usually already done each year with your federal grant expenditure table. The reason this is important is that the agency from which a government unit receives the largest amount of funding, called the aware agency, is the one you negotiate your indirect cost rate with and later use for purposes. cost recovery.
Step two: Negotiate your rate
Once you have identified your largest federal funder, you negotiate your calculated indirect cost rate with them.
For example, the agency could be the US Department of Transportation, the US Department of Housing and Urban Development, the Federal Emergency Management Agency, or the US Department of Health and Human Services.
The largest funder reviews your application and approves it although some of the grants may be for different service areas.
Step Three: Apply for Recovery Funds
Once you have federal government approval, you will receive negotiated indirect cost rate approval and can then calculate your returns. Here’s a simplistic example of how those dollars can end up adding up to millions:
Suppose you received a $250,000 grant, but only used $100,000. Your indirect cost rate has been approved at 30%. Applying that 30% to your $100,000 means your city or state would receive $30,000 on that grant alone. Because you haven’t fully used up your awarded grant, you have funds left over that you can go back and claim with your indirect cost rate. With the 30% rate on the $100,000 you spent, it is determined that you initially subsidized the $30,000 grant, so you can now collect it for your general fund.
If you had 33 grants of similar size and similar usage rates in your portfolio, you would receive $1 million in return.
Flow of money to the general fund
One of the persistent misconceptions about cost recovery is that the dollars recovered are tied to the original grant or program. It’s not true. They go straight back into the general fund and can be spent on anything.
Make no mistake: your state or local government spent money from the general fund to administer the grants. Whether or not you calculate these indirect costs, they still exist, possibly amounting to millions of dollars. At a time when many governments are just beginning to recover from pandemic-related disruptions and are trying to deliver vital services to citizens in need, can you afford not to be reimbursed for these costs?