CAPTURE JANUARY 2016 Q1 ISSUE 01 | Page 17

2016 Q1 ISSUE COSTTREE CAPTURE. 17

For example, if you are a pass through entity (e.g. a First5 Regional) you are only allowed to include $25,000 of your sub-recipient’s direct cost when calculating your MTDC, regardless of whether that pass through has direct cost of $30,000 or $1 million. If you have a sub-recipient that has $500,000 in direct cost, you as the pass-through entity can only apply $25,000 to your direct cost for the program, which means only $2,500 in indirect cost once the 10% de minimis is applied. However, in actuality, if you did not have to adjust for MTDC, you would have received $50,000 from the $500,000 cost of your sub-recipient. That $50,000 would represent your cost of oversight and management of the sub-recipient. That would be part of your true cost.

Why does this matter? Every little bit helps, right? This is a common misnomer in nonprofits today. The problem with the theory of “every little bit” is that it does not make for a sustainable nonprofit, nor does it increase that organization’s social impact. Understanding your true cost and leveraging the new regulations of the Uniform Guidance does both of those things.

What if we told you that you can calculate your true cost almost as easy as you can calculate your MTDC? Would you do it? Well, we hope the answer is yes. In both cases, the first step to understanding your true cost is defining your direct cost. Since you have to do this anyway, if you pursue the 10% de minimis, we won’t count this step.

The next step to calculating your true cost is defining your indirect cost. This is where a cost allocation plan comes in handy. What is a cost allocation plan you ask? Well, a cost allocation plan is a tool to define your indirect cost. You don’t need to be a mathematician or allocation specialist, you don’t even need to know anything about finance. All you need to know is: (1) Your expenditures; (2) Your major daily activities, (e.g. finance, payroll, tech maintenance, office management); and (3) How to best spread your costs to represent the service received (allocation basis).

Once you have those three things, as well as some type of cost allocation tool with built in calculations, you hit go and you have yourself your indirect cost. Once the structure is built, this process can take less than an, hour depending on your size. That may be the best hour you spend all year, because you now have the true cost of each of your programs and grants, as well as perspective on the decisions you need to make to remain sustainable and maximize your impact. Oh yeah, you also have all the information necessary to claim your FULL indirect cost reimbursement from any federal grants you receive.

In order to break the starvation cycle, as a sector we must move the conversation from overhead to impact. The discussion of true cost needs to begin. True cost is a comprehensive view of what it really costs for nonprofits to deliver a service. Mathematically it is:

It is critical to understand that NO direct cost can ever exist without the use of indirect. For example, you can have three employees working at the soup kitchen, feeding the homeless. Those three represent a direct cost. However, the building that houses the kitchen, the Executive Director who hired them and the payroll service are ALL indirect costs. If these three people never got hired, did not get a paycheck and did not have a building in which to serve the food, the soup kitchen would not exist. The indirect costs associated with feeding the homeless at this soup kitchen are vital to the existence of this nonprofit. So we need to shift the conversation to “true cost,” rather than direct or indirect (or even admin or overhead).

Once that happens, it is now incumbent on each nonprofit to define their own true cost. This step can be a little more daunting to some. Nonprofits are short on resources and frequently don’t have a CFO or an accountant on staff. Thus, it is usually up to the ED to wear many hats, including the lead finance officer hat. This is where the 10% de minimis starts to look like the obvious choice for indirect cost reimbursement. All you do is define you direct cost and take 10% of that, right?

WRONG. 10% de minimis does NOT mean 10%. What 10% de minimis means is 10% of your MTDC

Your MTDC (Modified Total Direct Cost) must be calculated. There are specific direct line item costs that must be excluded when calculating your MTDC, such that that actual reimbursement is much less than 10%.

NEXT STEP.

TRUE

COST

Direct Costs (any direct personnel or material cost that can be attributed directly to a program)

Indirect Costs (management staff, payroll, HR, technology, facilities, etc.)

+

=