Indirect cost rates fluctuate each year based on the results of your operations. If the indirect rate decreases, it could be a sign that your organization is heading to a major cash flow problem to resolve. Stay on top of your current year’s indirect cost rate to plan and prepare for any changes. It is similar to your personal yearly tax planning to reduce taxes or prepare for the inevitable tax bill. Your indirect cost rate is decided each year with the Negotiated Indirect Cost Rate Agreement (NICRA), which you prepare and submit to your cognizant agency after the closing of the year. If the indirect cost rate calculated is different from the amount you have been using, you will need to adjust the indirect cost taken for the full prior year plus all months since the end of the year.
The best practice is to monitor your indirect cost rate monthly and quarterly. As part of your monthly closing process, your organization should be calculating and charging the allowable indirect costs to each grant based on the grant’s restrictions each month and based on year-to-date. For the most part, organizations calculate this monthly charge using an excel template. The template should be taking year-to-date expenses and properly reducing the direct costs by expenses that are not eligible for indirect costs based on the grant restrictions. You can insert a calculation in that template, based on the calculation used in the NICRA which takes the totals year-to-date in the spreadsheet and calculates a preliminary rate for the year.
How much does the indirect cost allocated to admin (as a negative charge back) cover the year-to-date admin expenses? Is it too much, too little? Either one could be an indication of a problem.
The calculation of indirect cost is extremely sensitive, meaning that adding or deleting expenses can make a significant difference. There are decisions you can make to change the indirect cost rate during the year, such as hiring the admin staff you desperately need. However, with the indirect cost rate you mostly have to estimate, plan and prepare for an expected outcome – much like tax planning. There is only so much you can do to influence the rate without going against the rules of your grant or creating cash flow problems for your organization.
Without proper planning and preparation, significant cash flow problems may arise if you are required to return funds that you had requested during the prior fiscal year and current year-to-date while using an inflated indirect cost rate.