ALL AGENCIES, DEPARTMENTS, AND DISTRICTS GOVERNED
BY THE BOARD OF SUPERVISORS
EFFECTIVE:
_________________________________
David E. Sundstrom, Auditor-Controller
1.
POLICY
County policy for charging the costs of County
services to outside agencies, businesses, and individuals,
and other County funds, is for full cost recovery
whenever possible. This necessitates that departments’/agencies’
billings include appropriate County and department/agency
indirect costs.
1.1
Purpose
The purpose of this procedure is to provide
basic guidelines for calculating department
billing rates and indirect costs. If any provisions
of this procedure are in conflict with applicable
state/federal regulations those other regulations
govern.
1.2
Authority
1.2.1
Federal Office of Management and Budget
(OMB) Circular A-87, Cost
Principles for State, Local, and Indian
Tribal Governments, (revised 1995;
amended 1997)
A-87 is the primary regulation for
determining indirect costs chargeable
to federal and state awards.
1.2.2
Federal Department of Health and Human
Services (DHHS) publication
ASMB C-10 Implementation Guide for OMB
Circular A-87 (revised
1997;formerly OASC-10)
ASMB C-10 amplifies and comments on
the provisions of A-87. It provides
general guidelines for determining direct
and indirect costs applicable to federal
programs and for preparing and submitting
cost allocation plans.
1.2.3
State Controller’s Handbook
of Cost Plan Procedures for California
Counties
The Handbook supplements A-87 and
ASMB C-10 and provides guidance that
is specific to California counties.
1.2.4
Accounting Standards and Procedures
Manual
The State Controller’s Accounting
Standards and Procedures for Counties
provides generally accepted accounting
principles and procedures.
1.2.5
State of California Government Code
Section 51350
Authorizes counties to charge cities
for costs incurred in providing services
that are contracted or authorized by
law.
1.2.6
State of California Government Code
Sections 54985 et al.
Authorize counties to charge fees
to recover the costs of providing services.
1.2.7
Board of Supervisors Resolution No.
68-566, dated May 28, 1968
Authorizes the Auditor-Controller
to compute, or review and approve, all
billing rates charged by County departments
and districts, and requires inclusion
of both departmental and general overhead
factors when computing costs and determining
charges for services.
1.2.8
Board of Supervisors Resolution No.
77-346, dated March 8, 1977
Clarifies the policies and procedures
for including indirect costs in grant
applications.
1.2.9
Board of Supervisors Resolution No.
77-1194, dated July 19, 1977
Established policy of charging General
Fund overhead costs to specific districts
and funds.
Established policy of charging General
Fund overhead costs to special districts
& County service areas governed
by the Board of Supervisors.
1.3
Definitions
Following are definitions of terms used
in this procedure.
1.3.1
Base
When allocating costs, calculating
an indirect cost rate, or determining
fees, costs are divided by an appropriate
factor that is referred to as the base.
Allocations and fees usually have bases
related to the unit of work processed
(e.g., one document), or the increment
of service time (e.g., productive hour),
or the use of an item (e.g., miles driven,
square footage occupied, machine hours
used). Indirect cost rates usually have
a base of salaries or salaries and employee
benefits (S&EB).
1.3.2
Billing Rates
Billing rates comprise direct and
indirect costs of providing a product
or service divided by the unit of that
product or service (e.g., service hour,
completion of a specified service, unit
of product provided).
1.3.3
Direct Costs
Costs that can readily be identified
with (i.e., tied to, traced to) specific
functions, programs, jobs, or activities.
Examples of direct costs include S&EB
of program staff, expenditures incurred
specifically to carry out a program,
and charges through the Job Cost Accounting
System to a billable work assignment.
1.3.4
Future Costs
Costs associated with, or attributable
to, current services that will not be
paid until a future period. If applicable,
these costs should be determined and
a portion of them included in current,
indirect cost calculations. As an example,
closure costs for County landfills must
be estimated and included in current
indirect costs. Other, possible future
costs could be: extraordinary maintenance
costs, allowances for defaults on collections,
potential liability/damage claims, or
estimated costs for statutory/regulatory
changes. Future costs can be diverse;
therefore, take time to consider what
they might be and whether they should
be built into current indirect cost
calculations. The primary consideration
is whether costs that will be paid in
the future are attributable to current
operations or service recipients.
1.3.5
Indirect Costs
Costs incurred for common or joint
purposes that benefit most of a department’s/agency’s
operations and that cannot be directly
associated with particular operations
without unreasonably excessive efforts.
Indirect costs may comprise one or more
of the following components: (1) indirect
costs of the department/agency; (2)
indirect costs of the department’s/agency’s
divisions or other organizational units;
and (3) County General support service
costs as determined by the County Wide
Cost Allocation Plan (CWCAP).
When indirect costs are recovered through
an agreement between the County and
another entity, or a state/federally
funded program, they may be limited
by the agreement or by what state/federal
agencies allow. See specific agreements
or program reimbursement guidelines.
1.3.5.1
County Wide Cost Allocation
Plan (CWCAP)
CWCAP (also referred to as the
"cost plan") is an annual
allocation of the indirect costs
of building and equipment depreciation
and of County General Fund support
services to those County departments,
agencies, and funds that receive
the benefits of those fixed assets
and services. CWCAP allocates
costs using bases (e.g., direct
billings, hours paid, checks processed,
expenditures) that correlate with
the benefits/services received.
Annual CWCAP allocations are based
on service departments’/agencies’
actual costs from two years prior
(e.g., FY 2002-03 CWCAP is based
upon FY 2000-01 actual costs).
Because support departments often
direct bill other departments/agencies
for services provided, CWCAP reduces
total cost allocations for direct
billed amounts.
Although CWCAP allocates costs
to the departments/ agencies within
the County General Fund, the costs
are not charged to them; only
costs allocated to funds outside
the County General Fund are charged
("debt service" and
"agency" fund types
are not charged). CWCAP allocations
of building and equipment depreciation
costs are not charged to funds
unless the assets were paid for
by the County General Fund.
CWCAP costs allocated to a department/agency,
whether charged or not, are indirect
costs to that department/agency.
Departments/agencies should include
these costs when determining their
fees and billing rates.
Auditor-Controller Cost Studies
prepares CWCAP each fiscal year
for the upcoming fiscal year.
For information related to CWCAP
contact staff in that unit.
1.3.5.2
Department-wide and Division/Program-level
Indirect Costs
Departments have indirect costs
(e.g., administration and support)
which benefit their entire organization.
Individual divisions/programs
within departments may have their
own indirect costs (e.g., managers
and supervisors), which may need
to be determined and recovered.
Often only department-wide indirect
costs need to be determined. Sometimes
division/program-level indirect
costs must be determined if they
support a program but cannot be
recovered as direct costs of that
program.
1.3.5.3
Indirect Cost Rate (Percentage)
An indirect cost rate refers
to indirect costs divided by an
appropriate base (typically salaries
or S&EB).
1.3.5.4
Indirect Cost Rate Proposals
(ICRPs)
ICRPs are a specific form of
departmental indirect cost rate
calculation. They are addressed
by A-87, Attachment E and must
conform to state/federal regulations,
terminology, and preparation methodologies.
An ICRP rate is stated as a percentage
that represents the ratio of total
department/ agency indirect costs
and CWCAP costs to a base (e.g.,
salaries, S&EB). A department/agency
can apply that percentage to base
amounts (e.g., salaries) of functions,
programs, or activities to determine
its indirect costs.
For more information about ICRPs,
see A-87, Attachment E, or contact
Auditor-Controller Cost Studies.
1.3.5.5
Overhead
The term overhead is not used
elsewhere in this procedure. Although
it is a commonly used term, it
sometimes refers to an entity’s
indirect costs, and it sometimes
refers only to indirect, fixed
costs (e.g., facility costs).
1.3.6
Labor Burden
This is a combination of the costs
of employees’ non-productive time
and fringe benefits (e.g., insurance,
retirement) that is typically calculated
as a percentage of base pay and is applied
to employees’ hourly pay rates.
It is often used as a factor in the
Job Cost Accounting System to charge
appropriate amounts of labor burden
costs whenever employees charge direct
hours to jobs. Inclusion of a labor
burden factor helps recover costs of
employees’ non-productive time
and fringe benefits.
1.3.7
Organizational Unit (Organizational
Level)
As used in this procedure, the term
organizational unit refers to the County
Accounting & Personnel System (CAPS)
term for organizational unit designations
within a fund/agency.
1.3.8
Revenue (Credit) Offsets
These are revenues or credits that
reduce/offset the costs of providing
a product or service. These receipts,
or reductions of expenditures, reduce
or offset cost items allocable to billed
programs/activities. Examples of such
transactions include purchase discounts,
rebates, allowances, recoveries, indemnities
on losses, insurance refunds, gains
on a sale of fixed assets, and adjustments
resulting from overpayments or erroneous
charges. To the extent that credits
accruing to, or received by, a department/agency
relate to allowable program/activity
costs, a proportionate share of the
credit must be utilized as a cost reduction
to the program/activity. For state/federal
awards this cost reduction is required
by A-87.
1.3.9
Roll Forward (Carry Forward)
A-87 requires that CWCAP contain roll
forward calculations for all departments
(excluding the support departments being
allocated). County departments with
federally funded programs (e.g., SSA)
must use these roll forward amounts.
Other County departments generally do
not use roll forward amounts, even though
the amounts are shown for them. Roll
forward amounts represent an adjustment
of the costs used in CWCAP two fiscal
years previous. The earlier year’s
CWCAP costs were estimates for that
year. Two years later we have actual
costs. The differences between the estimated
cost allocations and the actual cost
allocations are roll forward amounts.
1.3.10
Time/Hours
Following are definitions of different
units of employee time (hours). When
calculating hourly fees and rates, an
appropriate time base must be used.
1.3.10.1
Non-Productive Time
An employee’s total paid
time includes a combination of
productive (see 1.3.10.3) and
non-productive time. Non-productive
time is non-work time and includes:
paid time away from the
job, of which the major types
are: vacations, sick leave,
paid holidays, compensatory
time off, jury duty;
paid time at work not directly
performing a department’s/
agency’s tasks/operations
(e.g., training and break
time).
Properly calculating total non-productive
time provides the basis for calculating
productive time and hourly rates
based upon productive time.
Employees often include their
break time in the time they charge
to work assignments. If break
time is not charged directly to
work assignments, and if it is
separately listed on employees’
time sheets, then it should be
included as a component of non-productive
time.
1.3.10.2
Overtime Hours
Hours worked in excess of regular
straight-time hours. Overtime
hours should be billed at different
rates than regular hours. Consequently,
it may be necessary to determine
incremental cost adjustments for
overtime work. Overtime compensation
usually entails higher hourly
pay offset by lower benefit costs;
these compensation differences
can be used to calculate an adjustment
to basic hourly billing rates.
1.3.10.3
Productive Time
Productive time is on-the-job
work time. Productive time is
usually calculated by deducting
non-productive time (see 1.3.10.1)
from total time. Productive time
is used as a base when determining
productive hourly rates.
CAPS report HR67A10 provides productive
and non-productive hours and cost
information. The report is calculated
from payroll; therefore, it does
not show departments’/agencies’
internal non-productive time,
such as break time and training
time.
If actual productive hours cannot
be determined in a cost effective
manner, the State Controller generally
allows (for state funded/mandated
programs) the use of a default
of 1,800 productive annual hours
based upon a total of 2,080 annual
hours.
1.3.10.4
Standard Times (Measured Clock
Times to Perform Services)
These are standard times needed
to perform tasks, and they are
sometimes used to calculate fees
for performing a task (e.g., processing
a document). Under-recovery of
costs may occur when using fees
based upon standard times if the
rates are calculated using bases
of total hours (e.g., 2,080 hours/year)
or productive hours. When developing
billing rates using standard times,
a position’s costs should
be spread over the hours charged
to work assignments (see 1.3.10.5).
Under-recovery may also occur
if standard times are not designed
to recover non-task times such
as wait time (e.g., wait time
between serving customers), filing,
or responding to inquiries.
1.3.10.5
Time Charged to Work Assignments
Time charged to work assignments
represents time that employees
charge to their primary work assignments,
whether billed or not, and generally
excludes their indirect work such
as record keeping, maintenance,
filing, and training. It will
usually be less than productive
hours; consequently, it will result
in higher hourly rates. If a significant
portion of productive time is
not charged to work assignments,
then a base of time charged to
work assignments may be more appropriate
than productive time for recovering
costs. This distinction is important
when deciding on an appropriate
base for a billing rate. See the
example in Exhibit II attached
to this Procedure, which emphasizes
the differing results from different
time bases.
1.3.10.6
Total Hours
Total hours, such as 2,080 hours/year
may be an appropriate base for
calculating a full year’s
S&EB costs. It may also be
appropriate when billing a percentage
of a position’s costs. It
is usually an inappropriate base
for calculating an hourly billing
rate.
2.
PROCEDURE
2.1
Review Controlling Statutes, Agreements,
and Regulations
Review statutes, agreements, and regulations
that govern the specific billing rates or
indirect costs. This procedure cites only
general statutes and regulations; often, other
rules apply (e.g., funding agency’s
claiming instructions, grant guidelines).
If rates or fees are for a funded program,
identify any claiming limitations, calculation
methodologies, and unallowable costs specified
by the agreement or claiming guidelines.
2.2
Determine the Purpose of Billing Rate or
Indirect Cost
Before preparing a billing rate or an indirect
cost amount or rate, clearly determine the
intended purpose/use (e.g., bill other departments,
include in a grant claim, charge public for
costs of a service) and the type of result
that will be needed (e.g., amount/hour, amount/product,
percentage rate). To help clarify the purpose,
consider the following:
What costs are to be recovered (i.e., costs
of an entire organization or costs for particular
services/personnel)?
Do some customer groups incur different costs
that should be billed differently?
How will billings be done?
Will there be one or multiple billing rates/methodologies?
What product or service unit will be billed
(e.g., one photocopied sheet or one service
hour)?
What cost base will be used (e.g., salaries,
S&EB, productive S&EB, assignment
hours)? Calculations can be directed toward
the desired unit of measure.
Does the department/agency want a single,
combined indirect cost rate for all of its
units? Regulations permit a single, overall
rate if operations are similar in nature,
and if units’ individual indirect cost
rates would not be materially different.
Are multiple rates needed because of diverse
operations that have widely varying indirect
costs among divisions, organizations, or programs?
If so, departments/agencies may need to calculate
indirect costs at the division or organization
level.
2.3
Consistency
If a department calculates multiple rates
or fees it must treat costs consistently for
the different calculations. The same costs
cannot be indirect costs for one rate/fee
and direct costs in another rate/fee calculation.
For example Accounting Assistants cannot be
100 percent indirect costs when calculating
one rate and direct costs when calculating
another rate. However, a cost element (e.g.,
Accounting Assistants’ S&EB) may
be split into direct and indirect components,
which are allocated differently.
2.4
Select an Appropriate Allocation Base
If a rate is being calculated, select an
allocation base that corresponds with how
the rate will be used. Depending on the need,
rates may include all costs (i.e., both direct
and indirect costs), or they may be limited
to specific components. Fees will generally
include all costs and use an allocation base
that is the unit of product or hour of service
that will be charged. When the rate is an
indirect cost rate, the allocation base will
generally be either salaries or S&EB.
2.5
Determine Timing vs. Sources of Information
When cost studies are prepared after a period
to which they will apply that fiscal year’s
actual cost information can be used. For example,
state-mandated cost ICRP studies are prepared
after the end of the fiscal year to which
they will apply. Refer to County
Accounting Procedure (CAP) No. B.5, State-Mandated
Costs and Claims for Reimbursement for
more information of state-mandated cost claims.
Often studies are prepared before or during
the period to which they will apply, and the
costs will be either actual costs from a previous
period or estimated costs (e.g., budgeted
amounts) for the period of study.
2.6
Calculations of Billing Rates and of Indirect
Costs
These steps are to aid in calculating billing
rates and/or indirect costs/rates applicable
to services and products. Many of the steps
apply both to billing rates and to indirect
costs. Indirect costs are just one component
of billing rates. The primary components of
most billing rates are the direct costs associated
with the product or service.
2.6.1
Determine Costs
Regardless of how costs are classified
and distributed, account for all costs,
including unallowable costs. Expenditures
(individually and in total) must agree
to supporting financial source documentation
(e.g., CAPS accounting reports such
as Expenditure Budget to Actual reports
and Job Cost Accounting reports). Itemizing
and grouping costs should usually be
done to aid referencing back to original
source documentation and to associate
costs with a funding entity’s
required claiming categories. If necessary,
obtain organization level expenditure
data (e.g., level 01, 02, 03) from CAPS
to identify costs for a particular function,
program, or activity.
2.6.2
Identify Credits and Revenue Offsets
Identify any rebates, refunds, recoveries,
credits, or carry-forward adjustments
that were received or accrued. Deduct
amounts that represent credits/offsets
to costs.
2.6.3
Categorize Costs
Once all costs have been listed, sort
them into categories of unallowable
costs, allowable indirect costs, and
allowable direct costs.
2.6.3.1
Determine Unallowable Costs
Review costs for allowability
under applicable regulations.
Allowable costs must be necessary
and reasonable. Unallowable costs
must be identified and excluded.
Regulations cited in section 1.2,
above, provide guidance on costs
that are allowable, unallowable,
or allowable under specified conditions.
Below is a partial list of the
most common allowable/ unallowable
expenses according to A-87, Attachment
B. Even if unallowed by a federal
program, some costs may be includable
when determining rates or fees
that will be charged to others
(e.g., landfill fee, permit fee).
Allowable Costs:
Accounting
Communications
Depr./use allowances
Materials and supplies
Personnel services
Purchasing
Auditing services
Fringe benefits
Maintenance and repair
Personnel administration
Printing and reproduction
Training and education
Unallowable Costs:
Bad debts (cannot be charged
to the federal government
unless provided for in the
applicable federal regulations)
Legislative expenses
Fund raising
Entertainment
Lobbying
Public relations
Contingencies
If unallowable costs are base
unit costs, they must receive
an allocated share of indirect
costs. For example, costs of issuing
bonds are unallowable; nevertheless,
a share of indirect costs must
be allocated to staff working
on bond issuance activities.
Costs Allowable Under Certain
Circumstances (see *, below):
Some interest and other
financial costs (see A-87)
Memberships, subscriptions,
and professional activities
Reference materials
Meetings and conferences
* According to A-87, the above
costs may be allowable provided:
(1) benefits received are related
to the function, program, or
activity; (2) the cost is reasonable
relative to the value of the
service benefit received; and
(3) the department/agency does
not devote a substantial part
of its activities to influencing
legislation. Whenever allowability
is in doubt, discuss with the
funding agency and obtain specific
advance approval.
2.6.3.2
Categorize Direct and Indirect
Costs
Group department and County
direct and indirect costs. Exclude
items from indirect costs if they
have been, or will be, claimed
as direct costs. For example,
some programs receive funding
to reimburse the costs of fixed
asset purchases; if so, they must
ensure that corresponding portions
of their fixed assets’ depreciation
are excluded from CWCAP costs.
Personnel Costs: Sort all positions
into direct and indirect categories.
Some positions may have portions
of their time in both categories.
An organization chart is usually
helpful when determining whether
positions are direct or indirect.
Directors, assistant directors,
division managers, administrative
staff, secretaries, clerks, systems/computer
support personnel, receptionists,
analysts, accounting staff, and
technicians should be considered
when identifying indirect positions
since most of these support more
than one function.
Services and Supplies Costs: Examine
expenditure line items and determine
whether they benefit one program
(direct) or multiple cost objectives
(indirect). Costs such as telephone,
office supplies, and office equipment
maintenance are typically treated
as indirect. Some costs may be
direct with respect to one department,
but indirect with respect to another;
classification depends on the
particular department/agency and
the type of activity.
CWCAP Costs: The Auditor-Controller
allocates CWCAP costs (see section
1.3.5.1) to most departments/agencies
at the fund-agency level, not
at individual organization levels.
If an indirect cost rate is being
calculated for the entire department/agency,
include the entire CWCAP allocation
to the agency (generally excluding
roll forward). Use the CWCAP that
is for the same year as the indirect
cost rate.
2.6.4
Allocate Allowable Indirect Costs
Developing a single indirect cost
rate for an entire department/agency
is the easiest option and entails dividing
all indirect costs by a single base.
If usage of indirect support is reasonably
equal among units, indirect costs may
be uniformly allocated to all organizational
units.
When some organizational units use significantly
more or less resources than others,
greater or lesser amounts of indirect
costs should be allocated to them. Developing
multiple indirect rates for a department/agency
requires allocating indirect costs to
the department’s/agency’s
organizational units. Methods of allocation
depend on how similar (or dissimilar)
units’ operations are and how
they share indirect resources.
2.6.4.1
Single Rate for Entire Department
When a County department/agency
has only one major function,
program, or activity, or when
all of its major functions,
programs, or activities benefit
from allowable indirect costs
to approximately the same degree,
a single rate for the entire
department/agency may be prepared.
Allowable indirect costs are
divided by the selected cost
base (e.g., salaries, S&EB).
