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COVID-19 funding and cost allocation: What could go wrong?

Apr 16, 2021

During the past year, many grant-funded organizations saw significant increases in federal funds. Much of that funding is short term, while some of it will be with you for several years. 

Such fluctuations in funding can play havoc on a nonprofit’s processes and procedures. One of the areas that can be affected is cost allocation, whether you use a direct allocation method or an indirect cost rate (IDCR).

Direct allocation method

Organizations that use a direct allocation method to allocate shared costs (e.g., administrative and facility costs) allocate using some type of nonmonetary basis, such as square footage, number of employees or number of transactions. 

When there are new programs, organizations need to be sure to verify their allocation processes to be sure that the new programs receive their fair share of the costs. Some organizations use their software to make automatic allocations, and when new programs are received, they may forget to change those allocations. 

Keep in mind, these allocations need to be on a nonmonetary basis. That means you cannot allocate based on revenues, expenses or salaries. All of these bases are unallowable because they do not equate to benefit, only to size, and the larger programs may be paying more than their fair share. 

Indirect cost rate

Organizations that use IDCR face other challenges with additional funding. Most rates that are granted are provisional rates, which means it may not be the final rate. The rate gets finalized after the year and subsequent audit have been completed. 

New funding can have significant impacts on provisional rates because the rate base (denominator) increases due to more salaries or expenses, depending on your rate structure, and your cost pool (numerator) stays relatively the same, therefore decreasing the rate. The bigger the base, the smaller the rate, and the smaller the base, the bigger the rate. (Math, I know!) 

If you are not monitoring your actual rate and just charging your provisional rate, with new funds, you may be over charging your programs because your rate may have decreased. Chances are, your final rate will be lower than the provisional, and if you were charging the higher rate, you will have to refund all your programs for the amounts that they were overcharged. 

Need assistance with COVID-19 funding cost allocation?

Keep in mind you must charge your awards based on your cost allocation plan regardless of what you may or may not be reimbursed. You cannot stop charging to a program and reallocate them to other programs to avoid a fund deficiency. 

So, whether you use direct allocation methodology or a negotiated indirect cost rate, you need to be sure you are paying attention to your cost allocation — especially when you are receiving an increase in your funding. 

You can find more information about cost allocation at one of Wipfli’s Uniform Guidance trainings. Click here to view our upcoming Uniform Guidance trainings

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For more information on this topic, you may be interested in our upcoming webinar: COVID-Specific Finance and Funding Issues Q&A

Author(s)

Denes Tobie, CPA
Partner
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