This month, the Environmental Protection Agency (EPA) issued a Recipient/Applicant Information Notice (RAIN) that appears to fly in the face of the Uniform Guidance's instruction on the use of the de minimis 10% indirect cost rate. Certainly this rate and its ease of use have been a boon to some nonprofits; alternatively, it has forced a cost share on others. Might the EPA's move be a harbinger of things to come with respect to indirect costs?
The Uniform Guidance (2 C.F.R. Part 200) provides that nonprofits may elect to use an automatic indirect cost rate of 10% of modified total direct costs—which can be used indefinitely if they so choose—or negotiate a higher rate. 2 C.F.R. § 200.414(f). However, the catch is that this simplified approach can be used only if the nonprofit "has never received a negotiated indirect cost rate" before. Id.
In light of this, on August 21, 2018, the EPA issued a RAIN that informs nonprofit recipients and applicants of a new policy that "aligns" indirect costs under EPA assistance agreements with the Uniform Guidance, "while providing consistency and flexibility for EPA assistance agreement recipients." In particular, among other aspects of the RAIN, the new policy allows the "[u]se of the 10% de minimis rate, even if a recipient has had an [indirect cost] rate in the past."
This policy becomes effective for the upcoming fiscal year (FY19) on October 1, 2018.
Guidance on This Apparent Break from the Uniform Guidance
Notwithstanding the Uniform Guidance's instruction that the de minimis rate is to be used only if a nonprofit has not previously had a negotiated indirect rate, the EPA believes that exceptions may be made on a case-by-case basis, in accordance with 2 C.F.R.§ 200.102(b) and 2 C.F.R. § 1500.3(a), which allow recipients that have previously had an indirect cost rate to also use the 10% de minimis rate, provided they do not receive more than $35,000,000 in federal funding per fiscal year. When determining whether to allow the use of the 10% de minimis rate, the EPA may take into consideration factors such as the most recent previous indirect cost rate and type, the length of time since the indirect cost rate expired, type of entity, administrative and financial ability to negotiate an indirect cost rate, and any other pertinent factors.
Further, the EPA provides that the recipient must use the 10% de minimis rate throughout the term of the assistance agreement, unless the recipient negotiates and receives approval for an indirect cost rate with its cognizant federal agency during the term of the agreement. The recipient may request that the EPA allow it to apply the negotiated rate any time after the effective date for the negotiated rate. The EPA will allow the updated negotiated rate to apply for the period covered by the rate. A re-budgeting and/or change to the scope of work may be necessary if the indirect cost rate changes, since the amount of the overall award will generally remain the same.
A Harbinger of the Future
Certainly, the EPA's interpretation of what many in the grant community thought was a hard rule will bring with it questions and confusion. Indeed, many nonprofits may prefer to simply use the 10% de minimis indirect cost rate in order to avoid the cumbersome and time-consuming challenges of negotiating an indirect cost rate; however, since the vast majority of nonprofits have indirect rates well in excess of 10%, might this maneuver by the EPA create a path for it and other agencies to force cost shares (i.e., forcing nonprofits to use a rate that is less than their negotiated indirect cost rate)?
This author has heard and seen a number of nonprofits pressured into using a lower indirect cost rate than that which is negotiated in order to be more "competitive." Yet, the fact that they could not (by rule) utilize the 10% indirect rate because the nonprofit grant recipient currently or previously possessed an indirect cost rate foreclosed the use of the de minimis rate, allowing them to charge a rate that is at least closer to their actual indirect cost rate. Now, if agencies are allowed to impose a 10% indirect cost rate, irrespective of a nonprofit's actual indirect cost rate, might this be used to force nonprofits to agree to a 10% rate and "share" the remaining indirect cost? In short, the EPA may have made an interpretation that alters what had previously been a safeguard from government abuse, which could result in significant cost savings to the government on the backs of nonprofits. It remains to be seen whether this interpretation will survive further scrutiny and whether it will be judiciously and aptly utilized or manipulated to the detriment of nonprofits.