Program Letter 18-2

Application of 45 C.F.R. § 1630.5(g) Exception for Certain Indirect Costs

 SUMMARY

Under certain circumstances, the Legal Services Corporation (LSC) permits a recipient of a Basic Field Grant to charge “indirect costs” to the grant. LSC defines indirect costs as “those [costs] that have been incurred for common or joint objectives and cannot be readily identified with a particular [award, activity, or project.]” 45 C.F.R. § 1630.5(e). The Federal government similarly defines indirect costs. See 2 C.F.R. § 200.56 (defining indirect costs as “those costs incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved.”). Indirect costs usually include the costs of operating and maintaining facilities and general program administration costs, such as “salaries and wages of program staff whose time is not directly attributable to a particular grant or contract.” 45 C.F.R. § 1630.5(e); see also 2 C.F.R. § 200.414(b). Indirect costs could also include the purchase of equipment or services that generally support a grantee’s work (e.g., case management systems, telephone and internet services, vehicles, consulting services, etc.) and cannot be directly traced to one grant.

LSC permits recipients of Basic Field Grants to allocate a proportional share of another funding source’s share of an indirect cost to LSC funds, where the other funding source “refuse[s] to allow the allocation of certain indirect costs to an award.”1 45 C.F.R. § 1630.5(g). LSC has learned that some LSC recipients have applied for federal, state, and local government grants, as well as private grants, using budgets that contained no or an artificially low amount for indirect costs. LSC understands that recipients took this approach believing they could allocate the related indirect costs to their LSC grant because no funds were available to pay them from the other funding source. To date, LSC has not issued guidance about what constitutes another source’s “refusal” to allow the allocation of indirect costs, and what LSC would consider sufficient evidence of such refusal, under § 1630.5(g). LSC is issuing this program letter to provide recipients with the needed guidance. A refusal can take several forms, such as a cap on the amount of indirect costs that can be allocated to a grant or a statement from a funding source that including indirect costs in the application budget will cause the application not to be competitive.

This program letter applies to funding from sources other than LSC from the date of this program letter forward. Because LSC has not provided guidance on this issue previously, recipients do not need to reallocate indirect costs allocated to their LSC grants prior to the date of this program letter. By the beginning of their next fiscal years, recipients must develop and implement a policy for allocating indirect costs across all grant sources that will permit the charging of those costs.

BACKGROUND

LSC awards Basic Field Grants to recipients for the purpose of “providing legal assistance to eligible clients.” 42 U.S.C. § 2996e(a). Basic Field Grant funds are distinct from many other types of grant funds in two ways. First, they are provided for the delivery of general legal assistance, rather than to carry out a specific project or service. Second, although recipients must compete for Basic Field Grants, the same organizations regularly apply for and usually receive them; changes in Basic Field Grant recipients occur but are unusual. As a general matter, therefore, Basic Field Grant funds represent stable, ongoing funding for recipients’ day-to-day operations. In recognition of this fact, LSC has long permitted recipients to use Basic Field Grant funds to pay for a greater amount of general operational costs than can usually be charged to federal grants. 62 Fed. Reg. 68219, 68222 (Dec. 31, 1997) (final rule); 62 Fed. Reg. 45778, 45779 (Aug. 29, 1997) (proposed rule).

Grantees of the federal government must comply with a set of common rules applicable to all federal grants known as the Uniform Guidance. 2 C.F.R. Part 200. Under the Uniform Guidance, grantees may allocate indirect costs to a federal grant “proportion[ate] to the benefits received.” 2 C.F.R. § 200.405(a)(2). This principle means that a grantee cannot charge to any one grant more than its proportionate share of a grantee’s indirect costs.

Many federal and non-federal grants contain terms limiting the amount of indirect costs that may be paid out of the grant. For example, if a grant term states that 20% of the total grant award may be used to pay for indirect costs, a grantee can allocate to that grant a maximum amount of indirect costs equal to 20% of the grant award. It does not matter if the grantee’s total indirect costs incurred to carry out the grant come to 25% of the award – the amount the grantee can charge to the grant is capped at 20%. The excess 5% must be paid from other sources.

LSC is not bound to follow the Uniform Guidance and permits recipients to charge more indirect costs to their Basic Field Grants than normally is permissible under Federal grant rules. 45 C.F.R. § 1630.5(g) states:

Some funding sources may refuse to allow the allocation of certain indirect costs to an award. In such instances, a recipient may allocate a proportional share of another funding source’s share of an indirect cost to LSC funds, provided that the activity associated with the indirect cost is permissible under the LSC Act, LSC appropriations statutes, and regulations. (Emphasis added.)

45 C.F.R. § 1630.5(g); see also 62 Fed. Reg. 62819, 62822 (Dec. 31, 1997). In the case of the hypothetical federal grant described above, this language authorizes the recipient to charge part of the excess 5% of indirect costs to its Basic Field Grant. The recipient must, however, determine which funding sources are available to pay for the excess costs and allocate a proportionate share of the excess to each source, including the Basic Field Grant. It cannot simply choose to allocate the entire excess balance to the Basic Field Grant without further analysis. Nor can the recipient choose to allocate the entire excess to the Basic Field Grant if it has unrestricted funds available to pay indirect costs.

Beginning in 2014, LSC became aware that some recipients have applied for private and federal grants using artificially reduced indirect cost allocations. See, e.g., LSC Office of Inspector General (OIG) Report No. AU15-02, Legal Aid of West Virginia, Jan. 2015, at 5;2  OIG Report No. 14-04, Southern Arizona Legal Aid, May 2014, at 2. In Report No. AU14-04, the Office of Inspector General noted that Southern Arizona Legal Aid (SALA) had unilaterally chosen not to include any indirect costs in some of its grant applications. SALA subsequently allocated “most allowable indirect costs to the LSC grant and much less of the indirect costs to most other non-LSC funding sources.” Id. at 3.

OIG found that “the funding source did not refuse to allow SALA to allocate certain indirect costs but merely accepted SALA’s proposal[.]” Id. OIG continued to say that “[i]f a grantee voluntarily provides a low indirect cost rate when applying for a grant, this does not seem to constitute a refusal by the funding source to allow the allocation of certain indirect costs.” Id. at 4. Because “[t]he language of the regulation appears to require an affirmative act on the part of the other grantor,” and SALA could not show affirmative refusals by its non-LSC funding sources to pay for indirect costs, OIG concluded that “we do not believe the exception to [§ 1630.5(g)] was met.” Id. LSC management agrees with OIG’s conclusion in the SALA report.

LSC has since learned through desk audits and site visits that other recipients have taken an approach similar to SALA’s when applying for non-LSC funding. This approach does not satisfy § 1630.5(g) for purposes of indirect cost allocation. A recipient cannot allocate indirect costs associated with a non-LSC grant to its LSC grant pursuant to § 1630.5(g) if the other grant is not available to pay the costs because the recipient did not ask the other funding source to pay its share of the indirect costs or voluntarily submitted an artificially reduced indirect cost rate.

APPLICATION OF § 1630.5(g)

The language of 45 C.F.R. § 1630.5(g) is clear: another funding source must refuse to pay all or some of its share of indirect costs before a recipient may charge any portion of those costs to its Basic Field Grant. It is not sufficient for purposes of § 1630.5(g) for a recipient to submit an application for a grant that fails to include a budget amount for indirect costs without first asking the funder whether it will pay for indirect costs. Rather, the rule requires a non-LSC funder to affirmatively refuse to pay the costs. Refusal to pay indirect costs may take many forms, including the following hypothetical examples:

  • A Federal agency places a cap on the amount of indirect costs that may be charged to its grant  (e.g., the funding announcement states that indirect costs may not exceed 15% of the total grant amount, or states that no indirect costs may be included).
  • A prospective funder responds to a grantee’s proposed grant budget by lowering or striking the line item for indirect costs.
  • A grantee asks a prospective funder whether the funder will allow its funds to be used to pay general operating expenses associated with the grant, such as a proportionate amount of rent or accounting services, and the prospective funder says no.

The list above is intended to be illustrative of refusals to pay indirect costs that would satisfy § 1630.5(g). It is not an exhaustive list.

Recipients must have policies in place to allocate the proper proportions of indirect costs across all funding sources, including where one or more funding sources refuse to pay for indirect costs. Unrestricted funds must be included as a source of funds available to pay for indirect costs. LSC understands that there may be several reasonable ways of calculating the proportion of excess indirect costs that could be allocated to LSC funds. For example, if a grantee has four funding sources and one refuses to pay indirect costs, the remaining funding sources could each pay a third, or each source could pay for indirect costs in proportion to the size of its funding. Because each recipient has a different mix of funding sources and restrictions on how they can use those sources’ funds, LSC is not requiring recipients to follow a particular allocation methodology. LSC expects recipients to have a reasonable written methodology for calculating each funding source’s proportionate share of the recipient’s indirect costs, to use the methodology to allocate costs among their funding sources, and to show LSC how they allocated their indirect costs across funding sources.

The guidance provided in this Program Letter will apply to all non-LSC grants and applied for after the date of this Program Letter’s issuance. LSC will not require grantees to reallocate indirect costs charged to their LSC grant prior to the date of this Program Letter’s issuance. Starting in the recipient fiscal year that commences after the issuance of this program letter, recipients must allocate indirect costs across all funding sources to the extent practical and permissible under other funders’ policies and governing authorities. 

FOR FURTHER INFORMATION

If you have any questions concerning these issues, please send them to the Office of Compliance and Enforcement at fiscalquestions@lsc.gov.

  • 1. Generally, LSC’s special grant programs – currently Technology Initiative Grants, Pro Bono Innovation Fund, and Disaster Supplemental Grants – do not allow charging of any indirect costs. Consequently, this guidance applies only to funds awarded as Basic Field Grants, including Basic Field-Agricultural Worker and Basic Field-Native American grants.
  • 2. OIG made only brief mention of this issue in Report No. AU15-02 (“LAWV Management noted the entire amount of the maintenance contract is allocated to LSC because some other funding sources do not allow such charges, however, the OIG notes that LAWV allocates other office expenses across multiple funding sources using the distribution codes.”). For that reason, our analysis focuses on the more expansive discussion of the issue in Report No. AU14-04.