Indirect costs are costs for activities that benefit more than one program or objective and, therefore, cannot be identified to only a specific contract. Such costs are generally classified under functional categories such as general maintenance and operation expenses, general office and administrative expenses, general overhead, etc. Unless it is otherwise prohibited by statute, regulation, agency policy or contract, the State will reimburse grant contractors for the State's share of properly allocated indirect costs. Some common methods of allocating indirect costs are based upon time, space, units of service or percentage of funding. To avoid any potential misunderstanding, each grant contract should specifically state whether or not indirect costs will be reimbursed and the method or basis for allocation should be identified.

In situations where the contractor provides services funded by a variety of sources (i.e., federal, state, local government or private) indirect costs must be properly allocated to all such programs. The State will only reimburse its fair share of allowable indirect costs. For example, if a contractor operates a program for a local government or private entity whose policy prohibits the reimbursement of indirect costs, those costs must be borne by the contractor and may not be allocated to the State.The following criteria must be met in determining when indirect costs are allowable:

1. The reimbursement of indirect costs is not prohibited by statute, regulation, agency policy or contract.
2. The items of expense included in the allocation to the state contract are allowable and not of the same nature as those charged as a direct cost to the contract.
3. The method used to allocate indirect expenses is documented, accurate and common to all programs.
4. The period being used to determine allocable indirect costs is appropriate for the contract period.

The contractor applies its allocation policies and procedures on a consistent basis to State programs and other operations.

Guide to Financial Operations

REV. 03/19/2012