A Guide with Best Practices for Indirect Costing

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The first question that needs answering is, “What is an Indirect Cost?” Knowing indirect cost in any business is a very important best practice for businesses. It helps in budget management and risk management by providing information of costs that are almost invisible. Ignoring the best practice of knowing indirect cost can weaken the roots of business organizations. Therefore, understanding indirect cost is a highly recommended best practice.

An indirect cost is one that cannot be acknowledged directly. It cannot be recognized through a single grant or contract. These costs are applied equally across all activities of the organization, based on the benefits that will be gained. Examples of indirect costs are utilities, rentals, and staff salaries. Indirect costs are usually reasonable and justified and in compliance with government grants or contracts.

How Rates of Indirect Costs Are Set

The rates are set through negotiations between the organization and the government assigned agencies. The government assigns specific agencies it selects to deal with organization and ensuring that rates for indirect costs are set reasonably with best practices.

Knowing Where to Find the Rates of Indirect Costs

Every government has a specific office where information about the rate of indirect costs assigned by the government is accessible for best practices. In the United States there is the OCC where this information can be found. OCC means Overhead and Special Costs and Contract Closeout Branch. It is also known as the office of acquisition and assistance and the only office that has USAID acknowledgement.

This office maintains and obtains information about the current rates for US organizations and firms under federal agencies. It also acts as a clearing house for USAID. It reminds contract negotiators and officers that knowing indirect cost rates is a best practice that cannot be ignored. Its mission is to provide predominant funding in organizations. When rates are revised, the organization arranges coordination through understanding.

Potential business people, contractor and others must submit proposed rates as a basic best practice. Other relevant and related materials must also be included such as audit reports, rate agreements and financial proposals. The negotiators are then expected to forward copies to the OCC as a best practice. The rates are then determined and established.

The OCC also obtains the rates for those organizations that do not present their rate agreements with their proposal. Those organizations that have not interacted with USAID before and those that require verification will have to submit the following information along with a request for assistance.

  1. Category of Award For Best Practices
  2. Sum Total of Proposals With Best Practices
  3. Operative Time Period of Best Practices
  4. Proposed Indirect Rates and Bases
  5. Contact Details of The Applicant and that of a Contractor or Grantee Office
  6. Details of an Intermediate Agency or/and Audit Office
  7. Any Other Best Practice that may be significant

Therefore, indirect costing is an essential best practice that cannot be ignored. Compliance with indirect costing is the key to success with budget and finance management planning.

Further reading: Corporate Governance | Audit | Performance Improvement

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