Insights

Indirect Costs Charged as a Fixed Amount | The Misunderstood USAID Localization Tool 

March 21, 2024 

USAID’s August 2022 publication, “Localization at USAID: The Vision and Approach,” includes the following objective: “[To] Channel a larger portion of assistance directly to credible local partners while ensuring accountability for the appropriate use of funds and achievement of development and humanitarian results.” While there should be no debate about “ensuring accountability for the appropriate use of funds,” the devil is in the details, especially regarding the establishment of indirect cost pools and indirect cost rates. There is often a significant burden for USAID to manage and perform due diligence in administering awards to local organizations. There is especially a significant burden for nascent USAID local partners to not only understand but also to establish and maintain the systems required to successfully implement their first directly awarded USAID grant or cooperative agreement.  

However, a misunderstood but potentially effective tool in the Standard Provisions for Non-U.S. Nongovernmental Organizations can be used to achieve USAID localization objectives. This tool, Standard Provision RAA4. Indirect Costs – Charged as a Fixed Amount (Non-Profit) can offer an impactful approach for addressing USAID’s localization goals. While there is quite a bit of guidance and plenty of discussion on the pros and cons of using Standard Provision RAA5. Indirect Costs – De Minimis Rate, there has been little guidance or discussion on the use of RAA4.  

A significant barrier is often the concepts of indirect costs and indirect cost pools. These are often foreign concepts for local organizations. The concept of Modified Total Direct Costs (MTDCs) which alters the base of an indirect cost calculation, is also US government specific. In addition, if a local organization has experience with receiving funds from other donors, any overhead rate limitations are often based on total direct costs (no amounts subtracted from the base of indirect cost calculation). This means the local organization would potentially need to have an entirely separate accounting system for each donor. While the capacity of any organization can be built with sufficient time and resources, the question is whether limited USAID staff and financial resources should be used to build and monitor such systems for local organizations.  Not only will such systems require the financial investment of the local organization (potentially billable to USAID), but they will also require a significant time investment of their finance and administrative staff, their program management staff and their organizational leadership. The establishment of such robust accounting systems can well take up to a year.  

Should the objective be to ensure local organizations have the same systems as US-based non-profit organizations or should the objective be to partner with local organizations and have them do what they do best? If the answer is the latter, then Standard Provision RAA4. Indirect Costs – Charged as a Fixed Amount (Non-Profit) can be an essential USAID tool for achieving this. 

The applicability for using this standard provision, requires all of the following: 

  1. The recipient has never received A Negotiated Indirect Cost Rate Agreement (NICRA); 
  1. The recipient has chosen not to use the 10% de minimis rate authorized in 2 CFR 200.414(f)); and 
  1. The indirect costs are not included as other direct costs in the budget. 

Per the provision, a firm need not purchase and set up a costly ERP system and train staff on the establishment and use of indirect cost pools. Rather, the typical indirect costs such as salaries and expenses of executive officers, personnel administration, accounting and other facilities and administration costs that benefit more than one program or activity can be estimated and established as a fixed amount. In addition, the schedule for payment of the fixed amount can be established in the award. The only caveat is that the award would need to contain a description of the categories of costs that will not be allowed to be charged as a direct cost to the award.  Under this approach, although the organization will be required to track both direct costs and the costs that would normally be considered indirect costs with its existing accounting system, it would not have to invest in an expensive ERP system, develop indirect cost pools, or train staff in its use.  

A concern that I have heard expressed by USAID staff members is how do we prevent overpayment of indirect costs. Such concerns may be “a penny wise but a pound foolish.” While it is possible to overestimate the facilities and administration costs with USAID then having potentially to pay more than what an organization actually incurs (there is also the possibility to underestimate such costs), there is a proviso in the standard provision to allow for adjustments if there is a significant change of total costs (20 percent or more in the aggregate). However, such overpayments should be considered immaterial when weighed against the additional burden placed on USAID to administer an award with indirect costs or administer an award using the de minimis rate. If we are truly concerned about busting the burdens placed on our local partners, using the fixed amount approach would be a small investment to make for reducing the significant burden and risk placed on the local organization by eliminating the need to establish such systems and indirect cost pools.   

As a contractor supporting USAID’s goal of increasing awards to local organizations for more than a decade now, we have experienced the benefits and challenges that local organizations face. The use of RAA4 is a nuanced solution for addressing a complex issue. As part of Jefferson’s local capacity building services, we help USAID and local organizations navigate issues with this and other solutions needed to support localization efforts.  

About the author: 

Eric Bolstad is a Senior Vice President and Jefferson’s USAID Portfolio Lead. He has an MBA with a Concentration in Contract Management from Florida Tech and Bachelor of Arts degrees in International Relations and Spanish from California State University – Chico. With 30+ years in international development, his expertise in contracting and finance for international development projects makes him a sought-after expert in supporting the capacity building of USAID’s local partners. 

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