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Types of Indirect Cost Rates

There are three types of indirect cost rates: provisional, predetermined, and fixed with carry-forward. Grantees who are negotiating for an indirect cost rate should find this information helpful in determining which type would benefit their organization. It is important to note that the difference between the rates is how they are developed or the type of costs they represent, and how it reflects the grantee’s actual costs.

There are three types of indirect cost rates: provisional/final predetermined and fixed with carry-forward.

1. Provisional/Final Rates

Provisional rates are used when a final, predetermined, or fixed rate has not been established for a grantee.

"Provisional rate" means a temporary indirect cost rate applicable to a specified period which is used for funding, interim reimbursement, and reporting indirect costs on Federal awards pending the establishment of a "final" rate for that period. 

"Final rate" means an indirect cost rate applicable to a specified past period which is based on the actual allowable costs of the period. A final audited rate is not subject to adjustment. 

2. Predetermined Rate 

A predetermined rate is firm; it cannot be adjusted. 

"Predetermined rate" means an indirect cost rate, applicable to a specified current or future period, usually the governmental unit's fiscal year. This rate is based on an estimate of the costs to be incurred during the period. Except under very unusual circumstances, a predetermined rate is not subject to adjustment. (Because of legal constraints, predetermined rates are not permitted for Federal contracts; they may, however, be used for grants or cooperative agreements.) Predetermined rates may not be used by governmental units that have not submitted and negotiated the rate with the cognizant agency. In view of the potential advantages offered by this procedure, negotiation of predetermined rates for indirect costs for a period of two to four years should be the norm in those situations where the cost experience and other pertinent facts available are deemed sufficient to enable the parties involved to reach an informed judgment as to the probable level of indirect costs during the ensuing accounting periods. 

3. Fixed Rate with Carry-Forward 

The fixed rate with carry-forward has an element of both the predetermined and provisional rates but none of their detriments. A grantee can adjust its estimated rate to an actual rate. 

"Fixed rate" means an indirect cost rate which has the same characteristics as a predetermined rate, except that the difference between the estimated costs and the actual, allowable costs of the period covered by the rate is carried forward as an adjustment to the rate computation of a subsequent period. 

Fixed rates with carry forward provisions are not an option for Head Start grantees, according to the Division of Cost Allocation.

Topic:Fiscal Management

Keywords:Accounting principlesFinancial reporting

Resource Type: Article

National Centers: Program Management and Fiscal Operations

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