This blog is a recap of our latest webinar on indirect costs, “How to Make Sure Governments Aren’t Leaving Money on the Table.” You can access the full free recording with slides here.
As we’ve covered in our latest blog series on indirect costs, they are instrumental for governments seeking to maximize revenue through the use of grants. It’s no secret that grants are becoming a chief source of revenue across the board for state, local, and tribal governments. By maximizing grant funding through indirect costs and cost allocation plans, governments can still come out stronger in the era of COVID-19.
Consequences of Failing to Capture Your True Costs
Many government organizations don’t realize that when it comes to missing their true cost of services, they’re actually leaving money on the table by failing to fully subsidize on grant funding. Not only that, but failure to capture true costs of services can have even more far-reaching consequences, including:
- Missed Revenue: In a time when governments cannot afford to miss out on any additional revenue streams, failing to capture your true costs means being unable to capture your potential reimbursements from grant funding.
- Misused Grants: Without knowing your true costs of services, you could be unintentionally subsidizing funding with grants that could be well spent on other needs or projects.
- Public Misunderstanding: It goes without questions that citizens want to know where their taxpayer dollars are going. Without having a full understanding of your true costs of services, you cannot accurately depict how your organization is spending from General funds vs. grant funds, leading to a lack of transparency to the public.
How to Calculate Your True Costs? Direct Costs + Indirect Costs
After assembling your cost allocation plan, it’s time to calculate your indirect cost rate proposal (ICRP). When putting together an ICRP, you calculate the rate of overhead costs (indirect costs) to add onto a service, project, or grant to charge to outside individuals or agencies performing those services. Your ICRP can also be used to calculate rates for a specific program or grant. So, how do you calculate that ICRP? By breaking down your direct costs, indirect costs, and adding them together.
Your direct costs are expenses that can be traced directly to (or identified with) a specific cost center or cost object such as a department, process, or product. They can also be assigned to a particular service and can include labor, services, supplies, and outside services, etc.
Unlike direct costs, your indirect costs cannot be easily assigned to a particular service. They are incurred for a common purpose and may be either fixed or variable. Lastly, your indirect costs are not directly accountable to a cost object such as a specific project, facility, or function. These can be costs such as administrative services, IT equipment, etc.
The Benefits of Full ICRP and Cost Allocation Plan
When an agency or department uses their cost allocation plan as a managerial tool to optimize resources as well as their ICRP, they can fully recover the full cost of a grant program. Additionally, agency-wide and indirect support and costs are accounted for and fully reimbursed. Lastly, by having a cost allocation plan and ICRP at your disposal, you can make a more informed decision about whether to take on a grant program.
Don’t leave money on the table! Start assembling your cost allocation plans and ICRPs now and get ahead of the new year.
To get started, download our free "Guide to Indirect Costs."
Ready to see how we can help you assemble your cost allocation plan and maximize your indirect costs? Reach out to firstname.lastname@example.org to schedule a free demo with our indirect cost experts today.