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This page provides detailed guidance to help local governments in Washington State allocate indirect (overhead) costs, including key questions to consider and sample cost allocation plans and procedures.
It is part of MRSC’s Financial Policies Tool Kit , created in partnership with the State Auditor’s Office Center for Government Innovation .
What Is Cost Allocation?
Cost allocation refers to a process of accounting and recording the full costs of a government service by including its indirect costs or "overhead" in addition to its direct costs.
Direct costs are those that clearly and directly benefit a specific fund or program, such as supplies, materials, staff salaries and benefits, or consultant fees that support a single department or project.
Indirect costs , commonly referred to as "overhead costs" or central services, are for support services that are shared by multiple departments, programs and/or funds, such as accounting, payroll, administrative, or human resource salaries and benefits; information technology (IT) services for the entire municipality; or operating and maintenance costs for city hall or other buildings shared by multiple departments.
For example, the full cost of the Public Works Department includes its direct costs (wages, benefits, maintenance, and operations) plus the indirect costs/"overhead" of support services received from central services (such as accounting, payroll, and IT).
A cost allocation plan distributes these indirect costs to ensure that the respective funds are fairly and accurately paying for the services they receive.
Why Do Local Governments Allocate Costs?
There are a number of reasons that a local government should develop a cost allocation plan or system. A formal cost allocation system can help a jurisdiction:
- Identify the actual cost of services being provided to the citizens.
- Equitably share the costs of shared facilities and support services between departments, programs, and funds throughout the organization.
- Ensure accuracy of cost-based user fees for public services such as utilities, development review, parks, or any other service where the user pays a fee for service.
- Relieve pressure on the general fund by allocating certain general fund costs to enterprise or other funds that receive a benefit from support services.
- Comply with state law and minimize audit issues. RCW 43.09.210 requires that all service rendered by one department to another shall be paid for at its true and full value by the department receiving the service, and that no department shall benefit in any financial manner whatever by an appropriation or fund made for the support of another.
- Get reimbursement for allowable overhead costs from federal and state grants, to the extent that this is allowed by the grant. This usually requires a formal cost allocation plan with internal controls to assure accuracy. Federal monies require strict adherence to OMB’s Uniform Guidance (2 CFR 200) .
Basic Steps of Cost Allocation
The key to successful cost allocation is to establish an allocation system that is fair, equitable, and supported by current data. In particular, a cost allocation system should:
- Identify shared facilities or support services
- Identify the costs to be allocated
- Determine the allocation factors/methodology to distribute the costs equitably
- Allocate the costs
- Update and monitor the data and methodology to ensure the allocation remains fair and equitable over time
Step 1: Identify Shared Facilities or Support Services
Your jurisdiction should allocate costs for any services, staff, facilities, or equipment that benefit other funds or departments. Identify within central services or internal service departments any specific services that support multiple funds or departments (such as payroll, accounts payable, utility billing, and facilities and grounds maintenance).
For the purposes of this cost allocation methodology, these costs are referred to as indirect costs or "overhead."
Key questions to consider:
- What staff members or departments support multiple funds or programs? Common examples for smaller jurisdictions include finance directors, clerks/treasurers, payroll clerks, and facility maintenance staff. For larger jurisdictions, this may also include categories like city administrators, attorneys, human resources, and IT.
- What contracted services support multiple funds or departments? For instance, do you contract with a technology firm to provide IT services to your entire jurisdiction? Have you hired a company to maintain shared facilities or grounds?
- What facilities and equipment are used by multiple departments or programs? Are all of your departments and programs located in one central services or public works facility? Did you purchase a piece of equipment (such as a vehicle or a copier) that will be used by multiple departments?
- How should costs be allocated to your enterprise (utility) funds? Utility funds and other funds with restricted revenue sources should only reimburse for the actual benefit received from the services provided by other funds such as the general fund, internal service funds, motor pools, IT services, and others.
- Should you allocate costs associated with your elected officials? When considering whether to allocate these costs to restricted funds such as utilities, use extreme caution. The SAO will require documentation to support the fairness of these charges. Do the elected officials devote time every meeting to those enterprise activities? Consider using agenda items as the basis for allocating these costs.
Step 2: Identify Costs
Once you have identified these shared "overhead" functions, compile their total costs using timesheet data or other accounting of actual expenditures associated with this activity.
You can also allocate shared costs using budget projections, although in that case you should include a monitoring component at the end of the year to make sure the budget and the actual costs are within an acceptable range. If you are using projections, the cost allocation plan should define what the "acceptable range" is. For instance, the plan might state that the actual costs must be within 1% of the budgeted costs, or 5%, or somewhere in between.
For instance, below are two simple, fictional examples of cost allocation processes for payroll and facility maintenance.
Example A: Calculating Payroll Costs
The payroll department conducts payroll for all departments, so payroll costs can and should be allocated. To calculate the total cost of providing payroll services, you must calculate the number of hours that each staff member spends on payroll. The most accurate method of calculating this is to use timesheet data. Record the hours each staff member spent on the payroll function, along with their hourly pay rates and the prorated costs of benefits for those employees. Only include payroll hours - if the staff members providing payroll services also perform other duties, do not include the other duties.
If you do not have this level of timesheet data, it will be important to establish a process for hourly timesheet reporting over multiple pay periods to ensure accurate data collection. Conduct a periodic timesheet analysis to determine how the payroll staff spend their time over the course of a typical period (such as a quarter) and update this analysis at least once or twice a year.
Example B: Calculating Facility Maintenance Costs
Use the same method to calculate the maintenance costs for facilities that are shared by multiple departments. This example is for a hypothetical City Hall. Be sure to include the costs of materials and any contractors that provide janitorial or other facility maintenance services.
Step 3: Determine Allocation Factors
Next, determine a fair and equitable way to spread those costs among the various departments, funds, or programs that benefit from the shared services. Use numbers that are easy to gather or estimate and that can be easily updated in the future to keep the cost allocation plan current.
Remove any costs that should not be allocated, costs that can be assigned directly, and any other agreed upon revisions that do not diminish the "cost-basis" of the plan.
- Payroll and personnel: Number of full-time equivalents (FTEs) or number of hours worked within each department or fund.
- Accounts payable/purchasing: Number of transactions for each department or fund.
- Financial reporting and budgeting: Budget appropriation levels or year-end fiscal totals.
- Facility operations and maintenance: Square footage or number of employees in the building for each department or fund.
- Information technology: Number of computers, servers, databases, etc. for each department or fund
- How will you document the cost estimates? For instance, when allocating wages, salaries, and benefit costs for services such as payroll, budget development, or financial reporting, conduct a periodic timesheet analysis.
Example A (Continued): Determining Payroll Allocation Factor
Payroll costs largely depend on the number of employees your jurisdiction has, so the allocation factor is typically full-time equivalent (FTE) positions. This means that the cost of the payroll function is allocated to the different departments based on the number of FTEs within each department.
Example B (Continued): Determining Facility Maintenance Allocation Factor
Facility maintenance costs depend in large part on the size of the facility, so the allocation factor for facilities maintenance is typically square footage (SF). This means that the facility maintenance costs for City Hall are allocated based on the number of square feet that each department occupies.
Step 4: Allocate Costs
Next, allocate the costs by applying the allocation factors to each department, program, or fund based on their proportionate share (a "one-step" methodology). Again, be sure to thoroughly and consistently document your calculations.
Larger or more complex organizations would typically use either a "two-step" methodology (allocating overhead costs to direct users and to those departments that use the services of the direct users) or reciprocal allocation methodology (allowing for overhead to be allocated back and forth between departments).
Example A (Continued): Allocating Payroll Costs
The payroll overhead costs are being allocated on the basis of FTEs per department. The following chart shows what that might look like based on the size of the departments in this example.
Note that the Finance and Payroll Department cannot allocate all of the payroll costs to other departments and must retain some of those costs internally, because some of the time is spent on payroll for employees within the department.
In this example, Finance and Payroll would retain $1,270 of the payroll costs and allocate the remaining costs to the other departments.
Example B (Continued): Allocating Facility Maintenance Costs
The facility maintenance costs for City Hall are being allocated on the basis of square footage per department. The following chart shows what that might look like based on the how much space each department occupies within City Hall.
Step 5: Update and Monitor the Data and Methodology
You should periodically review your cost allocation formulas and data to make sure they continue to accurately reflect costs. Incorporating an annual review as a pre-budget development step will help enhance your budget forecasting numbers and update your cost methodology.
Key Questions to Consider:
- What are your internal controls to ensure data accuracy and reviews? Incorporating internal control measures into the cost allocation plan demonstrates a commitment to accurate and reliable data.
- Did you use estimates or budget projections (as opposed to actual costs) in your allocation process? If so, you should include a monitoring component at the end of the year to make sure that the estimated and actual costs are within the acceptable range as defined by your cost allocation plan. Any variances outside of the acceptable range will require adjustment.
- How often will you update your calculations? You should review and update your data at least once a year, and perhaps more frequently for some figures such as public works timesheet information.
Examples of Cost Allocation Plans and Documents
Below are examples of cost allocation plans, studies, and related documents that may be useful, focusing in particular on small to mid-size jurisdictions.
Cost Allocation Plans, Policies, and Studies
- Arlington Cost Allocation Policy (2017) - on pages 31-32 of the comprehensive financial policies
- Bainbridge Island Cost Allocation Manual (2017) - Detailed goals, background, and methodology for the city’s cost allocation plan.
- Bremerton Overhead Cost Allocation Memo (2012) - Recommendations from the city auditor on how to improve the city's cost allocation process
- Monroe Cost Allocation Plan (2014) - Short, three-page cost allocation plan, changes city’s cost allocation method from estimated costs to a two-year "look back" method. Includes adopting resolution.
- Napavine Draft Central Services Cost Allocation Plan (2016) - Includes descriptions of central services and cost allocation methodology.
- Poulsbo Indirect Cost Allocation Plan (2012) - Easy-to-understand cost allocation methodology for all city departments and functions
- Skagit County Central Services Cost Allocation Plan (2021) - Includes summary and detail components, financial information for internal funds, and reconciliation of net position.
- Stevenson Cost Allocation Plan (2016) - Short, four-page cost allocation plan.
Cost Allocation RFPs
- Kennewick RFP for cost allocation plan/comprehensive rate study (2010) - RFP for the development of a full cost allocation plan and a comprehensive fee and rate study for development-related services
Below are some useful resources from the State Auditor's Office (SAO) and Government Finance Officers Association (GFOA) to help you create an effective cost allocation system.
- SAO Resources Database: Cost Allocation - Simple, three-page overview, including common cost allocation mistakes
- SAO BARS GAAP Manual: 3.9.5 Overhead Cost Allocation
- SAO BARS Cash Basis Manual: 3.9.5 Overhead Cost Allocation
- GFOA: Indirect Cost Allocation (2014) - GFOA best practices
- GFOA: Pricing Internal Services (2013) - GFOA best practices for cost allocation for internal services such as IT, payroll, legal, and HR
- GFOA: Cost Analysis and Activity-Based Costing for Government (2004) - For-purchase publication
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Cost Allocation Tip Sheet
Cost allocation is the process of assigning the shared costs of a resource, good, or service to the programs that benefit from that resource, good, or service. This tip sheet identifies the key concepts and vocabulary that frame cost allocation discussions and suggests practical ways to assign the shared cost of a resource, good, or service.
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Cost Allocation: Key Concepts and Vocabulary
Cost allocation is the process of assigning the shared costs of a resource, good, or service to the programs that benefit from that resource, good, or service. Head Start programs, through the Uniform Guidance ( 45 CFR §75.400(d) ), require that all funds used to support program services be traceable back to the funding source.
The Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) in 45 CFR Part 75.415 Required Certifications describe the process by which grantees should develop and certify a cost allocation plan. A cost allocation plan is the method used to fairly and equitably divide the shared costs of an organization to each of its programs. It is essentially a budget, or a prediction of how shared costs and services are expected to benefit more than one program in an agency. As with any budget, it should be carefully thought out. Cost allocation plans are rarely perfect, but they should reflect (as correctly as possible) how shared costs and services will be charged to various funding sources.
The cost allocation plan is expected to be a reasonable estimate of how an organization will use and charge shared costs and services. A written cost allocation plan is a clear best practice guide for effective fiscal management. As with any plan, cost allocation plans often change. It is not enough to simply develop a plan at the beginning of the year and forget about it. Throughout the year, organizations should evaluate if the plan has changed and if costs need to be divided differently based on any significant changes.
Head Start programs use multiple terms to describe the funding sources they use and combine to achieve program goals and support community services. Although blended and braided funding are similar in nature, these three terms are still being used:
Blended – Blending refers to combining funds from two or more funding sources together to fund a specific part of a program or initiative. Remember that the Uniform Guidance ( 45 CFR §75.400(d) ) requires grantees be able to trace all funds used to support services back to the funding source.
Braided – When funds are braided, two or more funding sources are used to support the total cost of a service while maintaining their separate identities. Revenues are divided and expenditures are tracked by different categories of funding sources. In braiding, cost allocation methods are required to ensure there is no duplicate funding of service costs and that each funding source is charged its fair share across the partners.
Layered – This model introduces the concept of “supplement does not supplant.” The concept of layering funds is used to guarantee that Early Head Start-Child Care Partnership funds will improve service quality without duplication or replacement of existing child care funding. Funding from different sources — Early Head Start program, Child Care Development Fund, and other early care funders) — are “layered” to fund comprehensive services that meet the full-day, full-year needs of parents. Depending on the expense and the eligibility of the child receiving services, cost allocation may be required.
ABC Child Development Center receives funding from the Early Head Start program, state-funded child care, and foundation funding. ABC decides to use some of the funding from these separate streams to implement a strategy to improve health outcomes for children. The total cost of this improved health outcomes strategy is $250,000. ABC would be responsible for coordinating and carrying out the strategy and keeping each funding stream’s connection with its original source. ABC would also maintain any constraints on the funds allocated. Expenses, management data, performance measures, and demographic and other reporting requirements would be tracked and attributed to the original funding streams based on the funds allocated and the benefits derived from the improved health outcomes strategy.
ABC Child Development Center receives two separate funding streams to provide a child care program for 40 children and a Head Start program that serves 60 children. The agency’s child development center has decided to build an outdoor play area that will be used equally by the children in each program. The cost to install the new playground is $200,000. Each program has agreed to pay their fair share of the costs for the purchase and installation of the playground. In this example, the ABC Child Care program would be responsible for $80,000 of the costs — $200,000 x 40% (number of children). The ABC Head Start program would be responsible for $120,000 of the costs — $200,000 x 60% (number of children).
Cost Allocation Considerations
- Check with your auditor to identify costs that benefit only one program. These do not have to be allocated.
- Identify costs shared between Head Start and other programs. These must be allocated in accordance with approved policies and procedures.
- Make sure the allocation of staff time matches time sheets, payroll, and time and effort reporting.
- The allocation plan needs to assign costs as accurately as possible in the most reasonable method to ensure funding streams are charged their fair share based on the benefit received.
- Monitor cost allocation plans regularly to confirm proper allocation to funding resources. This process could be done through an automated accounting system.
For further information, see Cost Allocation Narrative posted on the ECLKC.
Resource Type: Publication
National Centers: Program Management and Fiscal Operations
Audience: Directors and Managers
Last Updated: September 1, 2023
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Cost Allocations - More Important than Ever for Nonprofits
Allocating costs has always been an important task for nonprofit organizations , and with the FASB’s Accounting Standard Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (Topic 958), it has become more important than ever.
In fact, providing financial statement users an analysis of expenses by both their functional and natural expense classification is required for all nonprofits in order for their financial statements to be in accordance with generally accepted accounting principles (GAAP). Additionally, the IRS requires nonprofits to present this information on their Form 990 and some funders of federal awards may also require nonprofits to allocate their costs. Therefore, it is essential for nonprofits to develop and maintain a cost allocation policy so that they can keep record of their allocation methodologies and ensure they are applied consistently. Not only does this keep the nonprofit compliant with the rules and regulations described above, but it also allows management to perform adequate business analysis, especially for organizations with multiple departments or programs.
There’s lots to consider when it comes to nonprofits. We recently compiled a list of nonprofit trends.
What Is Cost Allocation? Cost allocation is the process of spreading shared expenses across significant program services and supporting activities, which are the functional classifications. This should include direct and indirect costs. Direct costs are just what they sound like—costs that are directly identifiable to a specific program or activity. Indirect costs are the just the opposite—costs incurred that benefit more than one objective and cannot be tied to one individual program or activity.
Each significant program or department of a nonprofit should have its own functional expense classification, which are all supported by supporting activities. These supporting activities include classifications such as:
- Management and general
- Membership development activities
In addition to allocating expenses based on these functional classifications, nonprofits must also disaggregate these functional expense classifications by their natural class. The natural expense classifications include classes such as salaries, legal fees, office expenses, and travel, just to name a few. Part IX of the IRS Form 990 is the statement of functional expenses section of the form and provides the natural expense classification detail that is required to be disclosed and submitted to the IRS.
This can be a good starting point for nonprofits when thinking about their own organization and natural classifications that are applicable to their programs and supporting activities, specifically for internal and other reporting purposes. More detailed natural expense classifications may be used for these purposes; however, the level of detail on the Form 990 is required for reporting requirements to the IRS.
Four Key Steps in the Cost Allocation Process The cost allocation process can be broken down into four key steps:
Identify the costs to be allocated – Before costs can be allocated across the organization, management must identify which costs to allocate. A simple way to start this process is to begin with a trial balance or budget. Management can use either of these items to identify the costs that are direct, indirect, or a combination of both. Once the costs to be allocated have been identified and categorized as direct or indirect, management should then determine the most appropriate method to use to allocate those costs among the organization.
Determine the allocation methods – Once the costs have been clearly identified, management must then select an appropriate method to use to allocate the costs. Commonly used methods include allocating costs on the basis of time and effort, full-time equivalents (FTEs), square footage, and key indicators. After determining the allocation bases for the costs, the documentation to support each allocation basis should be collected. For costs allocated on the basis of time and effort this could include timesheets. Management would need to obtain data regarding the average number of hours worked per employee to allocate costs on an FTE basis. For costs allocated on the basis of square footage, management would need to calculate the square footage occupied by each department. Finally, if there are costs allocated on the basis of key indicators, the organization would need to compile program service counts, by department, or something similar. This basis can utilize organization or industry-specific methods, such as the number of clients served, the number of families placed, etc.
When possible, automate the allocation process – After the costs have been identified and appropriate allocation methods have been selected, management should consider automating the cost allocation process. In some accounting software there are allocation tools already built in to the system; however, for systems that do not have this feature, or for allocations that are more complex, spreadsheet templates can be utilized. Although preparing these tools and templates takes some time up front, once they are set up, the information they provide to both internal and external users of the organization’s financial statements is invaluable.
Document the allocation methodologies – The final, and arguably the most important, step in the process is to document the methodologies used to allocate costs in a written cost allocation policy. This written policy provides audit evidence to support the allocation methodologies used and is also a valuable resource for others in the organization to reference, especially future employees. The written policy should summarize the information discussed in the previous three steps but should also include documentation regarding how often the allocation methods should be reviewed or updated.
The Importance of Cost Allocation Following the steps above to accurately and consistently allocate costs across an organization’s programs and supporting activities ensures the organization is in compliance with both GAAP and IRS reporting requirements. However, this process also provides management with key information for decision making. More specifically, it allows management to understand the true costs of providing services and operating programs.
With this information, management will be better informed to make crucial decisions related to identifying fundraising and cost-savings opportunities, and other management decisions necessary to remain in operations and continue to provide services to the community and beyond.
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What Is Cost Allocation?
Cost Allocation Explained in Less Than 5 Minutes
Definition and Examples of Cost Allocation
How cost allocation works, types of cost allocation.
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Cost allocation is a method used to assign costs to cost objects for a specific department, project, program, or other area.
The methods for cost allocation involve simple calculations, which can be beneficial to small business owners who need accurate financial information to help them price their products or services and make overall decisions. Learning about these methods can help you get a handle on your expenses and positively affect your bottom line.
Cost allocation is a method used to assess the costs associated with cost objects in specific categories within a business. Cost objects might include a product or service you sell, a particular department within your company, or the costs of dealing with a supplier.
Cost allocation is not just for large corporations looking to reduce expenses. Small business owners can greatly benefit from cost allocation; you get a more detailed look into the actual costs associated with your business, which allows you to assess prices better and increase your profitability.
For example, you might want to determine the costs of dealing with one of your suppliers, so you’d add up all of the associated costs. These costs can include everything from the phone calls you make to the time spent dealing with issues caused by them. Additionally, you could count how much you pay for the supplies you get from them.
Cost allocation essentially works by assigning costs to smaller areas within the overall business so that you can view profits or losses at a more granular level. When you use cost allocation, you might discover that your true production cost per unit is higher than expected.
It’s important to remember that cost objects will vary depending on your business and industry.
That means you might consider increasing prices to maintain a specific profit margin . On the opposite end of the spectrum, you may decide to scrap a product that turned out to be a money pit.
To accurately calculate cost allocation, you must first identify the cost object, then begin to assess the actual cost.
Spreading costs is not an exact science when it comes to cost objects. Some ways to allocate costs are based on units manufactured, square footage, number of hours, headcount, or usage.
Let’s say you have a building with a photography studio on the first floor and a salon on the second floor; you’ll use square footage as your cost object. The salon is 2,000 square feet, and the studio is 1,000 square feet. The total rent for the building is $6,000 per month. To allocate rent between the two spaces, you would first divide the total rent by the total square footage of the building:
$6,000 (overall rent) ÷ 3,000 sq. ft. (total space) = $2 per sq. ft.
Second, you’ll want to calculate the rent for the photography studio:
$2 (price per sq. ft.) x 1,000 (studio sq. ft.) = $2,000
Third, you can calculate the rent for the salon:
$2 (price per sq. ft.) x 2,000 (salon sq. ft.) = $4,000
Your rent per space should be $2,000 for the overhead expense of the studio and $4,000 for the overhead expense of the salon.
Other scenarios might include payroll cost allocation based on employee cost centers, or payment processing cost allocation based on transactions per location or franchise.
Cost objects can be just about anything you assign a cost to. Some examples of cost objects are jobs, payroll, departments, projects, financial systems, IT, and programs.
Cost allocation is based on different types of costs that fall into one of three categories, generally speaking.
Direct costs are the easiest to assign to an identified cost object, because they are directly related. For example, a direct cost could be the labor required to produce a product or the materials used.
When you have an indirect cost, it is not attached to a specific cost object but still is necessary for the business to function. For example, common indirect costs could be security costs or administrative costs not related to a specific department.
Overhead costs—also called operating costs—are those costs associated with the day-to-day operations of your business. These accrue regardless of actual production, but still support productivity. Operating costs might include insurance, rent, and legal fees.
Costs can be fixed or variable depending on the type. A fixed cost is constant, while a variable cost can fluctuate depending on other factors.
The cost type factors into how you allocate the cost later. For example, if you were cost allocating rent, it would be allocated to overhead expenses. You would likely use the square-footage method to allocate the cost.
When allocating costs directly related to a product, you might use the units-produced allocation method to factor in overhead costs with the direct costs to create the product. This will allow you to determine better the price you should be asking.
- Cost allocation helps business owners identify areas of opportunity with their products or services.
- Cost objects can include anything you want to measure and assign a cost to, such as products, programs, projects, or even a customer.
- Ways to allocate costs include square footage, units produced, usage, and headcount.
Warren Averett. " Types of Cost Allocation Methods for Government Contractors ."
Municipal Research and Services Center of Washington. " Cost Allocation ."
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Indirect Cost Allocation
Gfoa recommends governments allocate their indirect costs and address factors described in this best practice to prepare indirect cost allocation plans.
In addition to the direct cost of providing services, governments also incur indirect costs. Such indirect costs include shared administrative expenses where a department or agency incurs costs for support that it provides to other departments/agencies (e.g., legal, finance, human resources, facilities, maintenance, technology). The cost to governments to track every expense and directly attribute each cost to each function would exceed the benefits. Indirect cost allocation is an accounting function by which estimates are made to distribute indirect costs to programs or functions, in order to approximate their full cost. Certain important management objectives (measuring the cost of government services, establishing fees and charges, charging back the cost of internal services to departments/agencies, fully utilizing restricted funds, and requesting reimbursements under federal and state grants, when allowed) can be served by allocating indirect costs. Regardless of the purpose of an indirect cost allocation, a systematic and rational methodology should be used.
GFOA recommends governments allocate their indirect costs. There are a number of issues a government needs to address in connection with indirect cost allocation. Because of the varied reasons for which indirect cost allocations are performed, a one-size-fits-all approach typically is not possible. Therefore, the GFOA recommends that governments address the following when planning the preparation of indirect cost allocation plans:
1. Who should perform the allocation? An indirect cost allocation can be performed either by the government’s own staff or by an external party. Specific factors that should be addressed in choosing between the two include:
- In certain political environments, a government’s constituents may be more accepting of an externally prepared cost allocation;
- The optimal choice may depend on the purpose of the cost allocation (for example, departmental chargebacks vs. grant reimbursement); and
- Regardless of who prepares the cost allocation, management needs to be involved in the process and knowledgeable about the methodology used.
2. What factors need to be addressed if an external party is selected to perform the allocation? If an external party is engaged to perform a cost allocation, the government should address the following:
- The need for independence may prevent the financial statement auditor from serving in this role;
- The selected preparer should have knowledge and experience that is specifically relevant to the purpose for which the cost allocation will be used;
- The government should obtain ownership of the final work product;
- The government’s staff should obtain at least a basic understanding of the process used to prepare the cost allocation;
- For cost allocations that will be used for claiming indirect costs for grants, the contract for services with the preparer should state whether the preparer will assist in negotiating with a grant provider, if necessary, and which party (the government or the preparer) would be responsible for any indirect costs that are ultimately disallowed; and
- The government is responsible for having a system in place that ensures that data are appropriately classified in the accounting system.
3. How often should a cost allocation be performed? An indirect cost allocation should be evaluated annually to ensure that factors that can have a significant effect on the allocation (e.g. changes to cost centers, involvement of new funds). The basis and methodology for the cost allocation should be reviewed regularly to ensure the allocation is fair, consistent, reasonable and rational, based on the following:
- Complexity of the calculation;
- Changes in grant requirements;
- Purpose for which the allocation is to be used;
- Implementation of a new enterprise resource planning (ERP) system;
- A significant change in economic factors affecting cost basis (e.g. inflation);
- A change in the government’s administration; or
- A structural change in the government.
4. What factors need to be addressed if a cost allocation is to be performed by the government’s own staff? If in indirect cost allocation is to be performed by the government’s own staff, a team approach normally is preferable. That team should consist of stakeholders from the government’s departments/agencies and should have a designated team leader to make decisions when there are differing positions on the team and it is not possible to reach consensus. In addition:
- The internal staff that works on the project should have knowledge and experience that is specifically relevant to the purpose for which the indirect cost allocation will be used. Likewise, it is important that internal staff be aware of all applicable laws and regulations if the cost allocation is to be used as the basis for requesting reimbursement under an intergovernmental grant;
- The government should develop an educational process to ensure that the staff involved remain knowledgeable;
- Agencies/departments of the government should be responsible for using classifications which, to the greatest extent possible, identify direct costs, to maximize the amount recovered from grant providers, when applicable (also applicable to externally prepared cost allocations); and
- Data and the related source documentation should be captured and simultaneously to avoid audit problems that could otherwise arise as a result of subsequent data changes.
5. Should the government use an indirect cost allocation plan or an overhead percentage rate? There are pros and cons to using either an indirect cost allocation plan or an overhead percentage rate for recouping indirect costs, regardless of whether cost allocations are performed by an external party or by the government’s own staff. Since an indirect cost allocation plan involves a greater level of detail and more complex calculations, a government should determine whether increased cost recovery from grantors and ratepayers would justify the extra effort.
6. What are other items that governments should address when developing an indirect cost allocation?
- The methodology used in the allocation should be fair, rational, and consistently applied with few exceptions to that methodology.
- The basis for allocation of each indirect cost should reasonably approximate the proportional share of service received from the service provider.
- For example, a cost allocation used to chargeback costs to governmental departments/agencies may need to take place more frequently.
- As systems are updated, the data used for the allocation can change throughout the year. For example, if information technology expenditures are allocated based on the number of computers used for various functions, the number of computers used as a base at the point in time of the calculation should be documented. Similarly, if an allocation is based on the number of full-time employees, the date of the personnel report used should be documented.
- For example, information technology services could be allocated by computer devices, financial services could be allocated by the number of transactions processed.
This best practice was previously titled Taking Advantage of Indirect Cost Allocations.
- Board approval date: Thursday, September 1, 2022
- Utility Menu
- Sponsored Cost Allocation Methodology Guidance
- Originally Issued: January 2021
- Responsible Office: Office for Sponsored Programs
- PDF version of Sponsored Cost Allocation Methodology Guidance
Harvard University has established the following guidance for the allocation of costs that benefit two or more projects or activities in proportions that are not easily determined. Allocations are often necessary when Principal Investigators and administrators are assigning recurring or other costs to sponsored projects or activities in alignment with relative benefit.
Reason for Guidance
Harvard University must comply with the federal regulations in the Cost Accounting Standards (CAS) and the Office of Management and Budget Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 CFR 200, (Uniform Guidance). For costs benefitting a single project, the expense(s) should be allocated and directly charged to that project.
Uniform Guidance Subpart E §200.405 (d), Allocable Costs, stipulates that it is necessary to substantiate the proportional benefit of costs when costs benefit two or more projects.
“If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost must be allocated to the projects based on the proportional benefit.” These costs should be simply apportioned to reflect the easily determined proportional benefit.
“If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, then … the costs may be allocated or transferred to benefited projects on any reasonable documented basis.” When costs that benefit two or more projects or activities in proportions that are not easily determined, an allocation is necessary.
Allocation is one of several ways to charge expenses onto a project or activity:
Direct charging a direct cost based on an easily determined, measurable benefit to the project or activity.
Distribution of a direct cost based on an easily determined, measurable relative benefit across several benefiting projects or activities.
Allocation of a direct cost based on relative benefit when the benefit is known, but not easily determined or not practically measurable across several funding sources. An allocation uses a reasoned basis to approximate the measurable benefit to distribute a direct cost.
Consider establishing a recharge center to charge benefiting funds based on actual costs and actual usage after the costs are incurred. This approach should be used when there are multiple costs and the users or usage is unknowable at the time costs are incurred.
This document provides guidance on the use of an “Allocation Methodology” that meets the reasonableness and documentation requirements in the Uniform Guidance. It guides users to apply a reasoned basis to a recurring cost, or a recurring group of costs, according to the anticipated proportional benefit that advances the work of each project or activity.
Allocation Methodology Components & Criteria
A valid allocation methodology establishes a reasoned basis for apportioning or transferring costs in proportional benefit to two or more projects or activities.
There are three basic components of an allocation:
- The percent of the cost charged to each project or activity
- The method or reasoning used to derive that percentage
- Accompanying documents and, where applicable approvals
At Harvard, valid allocation methodologies meet all of the following criteria:
- Provide a reasonable linkage between the cost(s) incurred and the benefit to each individual project or activity
- Are identified prior to the allocation of expenses to sponsored projects or activities
- Are documented with sufficient detail that a person unfamiliar with grants management would understand
- Allow for the consistent treatment of costs that meet the criteria of the allocation methodology
- Are reviewed periodically and adjusted as needed
Allocation Methodology Practices
- Identify the basis of the allocation method in advance of purchasing, or at the time of ordering, the goods or services whenever possible to avoid the need for manual journals or cost transfers.
- Apply different allocation methodologies across a department or research group to best fit the expense type and allocation cost basis, rather than using the same methodology for all costs in the department.
- Document the allocation methodology prior to, or concurrently with, the costs being incurred and allocated. Include the rationale for using the selected basis to approximate the relative benefit received by each project or activity. (See additional documentation practices below.)
- Review allocations regularly to ensure they continue to reflect proportional benefit.
- Significant changes to factors used in the allocation cost basis will indicate the need to review the allocation components, or even the allocation methodology, outside of the regular review period. This review should include monitoring for changes in funding as sponsored projects or activities begin and end.
- Obtain approval according to the tub and department practices.
Timing and Compliance Considerations
- If costs are allocated and charged directly to sponsored projects or activities at the time of purchase, perform at least quarterly monitoring to ensure allocations continue to reflect relative benefit to all benefiting projects or activities
- Do not use sponsored funds to hold or suspend costs before they are allocated
- Ensure that all held or suspended costs are fully allocated and that the amount allocated does not exceed the amount of costs held or suspended
- Provide sufficient justification for all journal entries or cost transfers.
- The following allocation practices are generally unacceptable because they do not meet University standards for a high degree of accuracy or do not consider actual relative benefit.
- Rotating charges among sponsored projects or activities on a monthly basis without establishing that the rotation schedule reflects the relative benefit to each sponsored project or activity
- Using any allocation methodology that is based only on available sponsored funds, budgets, or to avoid restrictions imposed by law, terms of the sponsored award, or for other reasons of convenience.
- Describing an expense inaccurately to confound understanding of what the expense is and, therefore, how it benefits the project or activity.
- Charging expenses exclusively to sponsored projects when the expense also supports non-sponsored activities.
- Assigning charges to sponsored projects or activities in advance of the benefit to the project. (Refer to the Travel Policy for further information on acceptable cost practices for travel.)
- Once the allocation methodology has been determined and approved, retain the documentation in the department or local units in accordance with sponsor terms, federal regulations and University records retention policy.
- Document the type of costs to be included in the allocation methodology (e.g., consumable lab supplies, animal per diems, equipment service maintenance contracts, rent on non-federal awards)
- Document the rationale or logic that supports the linkage between costs incurred and proportional benefit to all benefiting projects.
- Document the determination or calculation of percentages used to allocate costs to all benefiting projects, including all supporting metrics, such as headcounts, FTEs, etc.
- Document the process for updating the methodology , including the frequency of review, revision, and approval to ensure that costs remain allocated based on relative benefit to all benefiting projects.
- If costs are accumulated in a suspense or holding account, document the account string and its timely and complete reconciliation.
- If the allocation requires a calculation for each distribution, attach documentation supporting the calculation to each allocation journal entry.
- If the allocation does not require a calculation for each distribution and uses a department-approved methodology, document the journal entry with support for the expenditure, as required by University policy.
This guidance is applicable to all Principal Investigators (PIs) and administrators at the University within all schools, units, divisions, University-wide initiatives, and centers, who are involved with the initiation, administration, and conduct of sponsored projects.
Roles and Responsibilities
All Harvard PIs, faculty and staff are responsible for monitoring the expenditures throughout the lifecycle of their sponsored projects to ensure that costs are allocated in accordance with this guidance.
Principal Investigators (PIs) have primary responsibility for ensuring compliance with federal, sponsor and university regulations as well as the monitoring of expenditures, timely review and correction of errors, and proper allocation of expenses. The PI should perform routine reviews of award expenditures and allocation methodologies to ensure alignment with relative benefit.
Grant Managers and Department/Local Level Managing Units (individuals responsible for account monitoring/management) assist PIs in the timely review and reconciliation of expenditures, including reconciliation of suspense/holding accounts, while offering valid cost basis options for an allocation methodology. Administrators should familiarize themselves with this guidance and be prepared to provide options to the PI if more than one allocation cost basis appears to fit the circumstance. Local managing units should establish the valid allocation methodologies and maintain adequate documentation in accordance with the University retention policy, with approvals where applicable, as well as support for individual allocations.
School/Tub-level officials provide guidance and are responsible for ensuring that local units follow any tub-defined policies and accompanying procedures. Schools may develop additional approval processes and perform routine follow-up, as they deem necessary.
Office for Sponsored Programs (OSP) is responsible for publishing this guidance and related materials, and providing additional guidance and clarification, when applicable. This guidance is updated through the Operations and Policy Committee (OPC).
The reasoned basis used to approximate the proportional benefit to benefiting activities when the relative benefit cannot be easily determined. Allocation methodologies are used in allocations to support the assignment of costs.
The units that represent the approximation of relative benefit over which the costs are allocated. The cost basis is part of the allocation methodology used in the allocation.
- Appendix A: Allocation Methodology Examples (PDF)
- Appendix B: Allocation Methodology Calculation – Personnel Effort Calculation (Excel)
- Appendix C: Allocation Methodology Calculation – Headcount (Excel)
Related Policies and Guidance
- Cost Transfer Policy
- Effort Reporting Policy
- Internal Billing Transactions
- Record Retention (General Records Schedule)
- ROPPA (Responsibilities of Purchasers, Preparers and Approvers Policy)
- Sponsored Expenditures Guidelines
- Sponsored Financial Reporting and Closeout Policy
- Transaction Monitoring
To demonstrate compliance with UG, this document provides various resources for department/local units to utilize for their expenditures. Administrators are encouraged to discuss with their school/tub official prior to placing an allocation expense onto a sponsored project if an allocation methodology does not utilize or is not covered by this guidance.
The Sponsored Cost Allocation Methodology Info Session (video, login required)
School Contact List
- FAS/SEAS: Research Administration Services (RAS)
- HKS: Research Administration Office (RAO)
- HMS/HSDM Research Finance: Office of Research Administration (ORA)
- HSPH: Kay Sullivan , Associate Director, Research Operations
- HGSE: Tiffany L. Cott , Director, Sponsored Projects
- Wyss: mailto:[email protected] , Director of Sponsored Projects
- January 2021: New
- Absence Management Guidance
- Administrative and Clerical Salaries on Federal Awards
- At-Risk Account Guidance
- Capital Equipment: Summary of Policy for Capital Equipment in Schools with Sponsored Research
- Consulting or Related Service Agreements
- Cost Sharing Policy
- Cost Transfer Policy
- Data Use Agreements
- Entering Preproposals into the Grants Management Application Suite (GMAS) Guidance
- eRA Commons Registration Requirements for Senior/Key Personnel
- Establishing an Internal Grant-Making Program
- Federal Work Study on Sponsored Awards Policy
- Fixed Price Residual Balances Guidance
- Guidance on Charging Approved Family and Medical Leaves to Sponsored Awards
- Foreign Awards Paid in Foreign Currency Guidance
- Gift vs. Sponsored Award Policy
- Indirect Costs - Policy for the Application of Indirect Costs to Sponsored Awards
- Intellectual Property
- Interest Income Paid on Non-Federal Sponsored Funds
- Interfaculty Involvement (IFI) Guidance
- International Collaborations and Activities
- International Projects Guidance
- NIH Public Access Policy
- Negotiating and Signing Authority for Agreements Related to Research
- Guidance Regarding Individuals Outside of the United States Being Paid with Sponsored Funding
- On-Campus and Off-Campus Indirect Cost Rates Policy on Federal Sponsored Awards
- Participant Support Costs Guidance
- Participation Agreement
- Program Income Guidance
- Proposal Submission Deadlines
- Provost Criteria
- Retention of Research Data and Materials
- Service Centers: Academic Service Center Policy
- Severance on Sponsored Awards
- Closeout and Reporting Policy for Sponsored Awards
- Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Collaborations: Guidance on Conflict Management Considerations
- Sponsored Expenditures Guidance
- Sponsored Travel Guidance
- Stipends on Sponsored Awards
- Subrecipient Monitoring Policy
- Subrecipient vs. Contractor Guidance
- Tuition Policy
- A Nonprofit's Guide to Cost Allocations
7/19/2022 - By Emily Lalas
What is cost allocation?
Cost allocation for nonprofits is the practice of grouping all costs together in a manner that helps the user determine the actual cost of operating its programs and/or locations. To effectively develop and operate sustainable programs, nonprofit organizations should ensure that they are tracking and planning for the actual cost of each program. Many costs are easy to categorize by program. However, costs related to multiple programs such as management salaries, utilities and other shared costs may not be as easy to record directly to a program. As such, these costs are often overlooked when planning program funding, which can result in your organization not raising enough support to sustain operations or leaving funding on the table from awards that your organization has already received.
Donors use reports such as financial statements and Form 990 when evaluating an organization. One of the key pieces of information they are usually looking for is the percentage of an organization’s costs that are related to operating its programs as opposed to administrative costs. Additionally, they want to see that the cost of fundraising is generating a good return for the organization. Organizations typically want to keep the ratio of program costs to administrative costs as high as possible. Developing a strategic cost allocation plan can help organizations ensure that they are communicating the actual cost of operating their programs to users of their financial reports.
How should my organization determine a cost allocation plan?
While there are many ways to determine a cost allocation plan for your organization, it is best to keep it clear and simple. The following steps are recommended to complete your allocation plan.
- Take inventory of programs. The leadership team of your organization should meet to look at all the different services that the organization is providing to the community and should then determine significant programs. For example, you may provide food to the homeless that you fund with multiple grants each year. Instead of treating each grant as a program, consider treating the service itself as a single program, which is then funded with multiple grants. It is important to remember that the goal here is to capture the actual cost of the services you are providing, not necessarily the expenses reimbursed by a single grant.
- Determine direct program costs. These costs are anything that you can readily determine are related to a single program. For example, paying a teacher’s salary for an educational program or paying a food vendor for a meal service program.
- Determine major indirect cost pools. Group costs for similar functions together to be allocated lump sum. For example, you may group together things like administrative salaries, fringe benefits, occupancy, marketing, general and administrative, etc.
- Evaluate each program’s fair share of each cost pool. Evaluate each cost pool and determine the percentage of costs that go towards each program, then allocate the full amount proportionately. It is important to note that the portion of each cost pool benefiting particular programs may vary. For example, it may be determined that programs benefit from 90% of the total occupancy costs, but only 60% of total salary expense. To have a strong methodology, each cost pool should be evaluated based on an appropriate basis. This may include square footage for occupancy costs, direct costs of Program A in proportion to total direct program costs, etc. If you do not know where to start with allocating certain costs, the best thing to do is to evaluate any historical data that you have. This may include records such as timesheets of management personnel detailing how much time they spent on each program. Any costs left over after allocation to all programs and fundraising are considered administrative costs.
- Document and use consistently. One of the most important things that you need to do after you develop a cost allocation methodology is to document the plan including your programs, cost pools, which accounts comprise each cost pool and the basis (or rationale) for allocating each cost pool. Organizations should allocate costs consistently in accordance with the established methodology.
- Revisit and revise. As your organization evolves, it is important to reevaluate your costs and ensure that your cost allocation methodology is evolving alongside your actual activities. This may include changing the way that your costs are allocated to ensure that your organization continues to track the actual cost of each program. Any changes to the methodology throughout the year should be documented with a rational reason for doing so.
What if my organization receives grants with specific cost allocation rules?
Sometimes grantors determine the extent to which indirect costs can be charged to a specific grant. In this case, indirect costs may need to be recalculated for grant reporting and funding requests to abide by the terms of the awarding agency.
If your organization receives federal funding, it is important to be familiar with the cost principles that apply to your organization. Most standard 501(c)3 organizations receiving federal funding will be subject to the cost principles detailed in OMB Circular No. A-122 . These rules govern what is allowable under federal programs and give guidance and examples regarding cost allocation plans .
Even in instances where cost allocations are more heavily regulated, organizations still benefit from tracking their own cost allocations to ensure programs are adequately funded and should still evaluate their costs to maximize use of grant funding while remaining compliant with terms of their awards.
Whether your organization is developing an allocation methodology for the first time or is in the process of evaluating an existing methodology, including a trusted advisor such as an accountant specializing in nonprofit accounting can give you peace of mind knowing that you are properly evaluating your organization’s finances, strategically using as much of your existing funding as possible and remaining compliant with all award terms.
If you have questions about cost allocations and would like more guidance, reach out to our Nonprofit team.
About the Author | Emily Lalas
Emily is a senior in the Audit & Assurance Services practice of Saltmarsh, Cleaveland & Gund. Her primary areas of expertise include providing audit and assurance services to the firm’s non-profit and healthcare clients. Emily is active in serving non-profit organizations throughout Pensacola and before joining Saltmarsh, she worked in bookkeeping and office administration for a regional law firm.
- GAAP In-Kind Reporting Update: ASU 2020-07 Effective for Nonprofit Organizations for Fiscal Years Beginning After June 15, 2021
- Emily Lalas is Making an Impact for Non-Profits
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Create and assign a cost allocation policy to a cost control unit
- 2 contributors
Use this procedure to create and assign a cost allocation policy and the corresponding rules to a cost control unit. This recording uses the USP2 demo data company.
Create a policy
- Go to Cost accounting > Policies > Cost allocation policies .
- Click New .
- In the Policy name field, type a value.
- Select Organization.
- In the Statistical dimension field, enter or select a value.
- Click Save .
Create allocation rules
- In the list, mark the selected row.
- In the Cost object dimension hierarchy node field, enter or select a value.
- In the Cost behavior field, select 'Total'.
- In the Allocation base field, enter or select a value.
- Continue until you've created all the rules.
Assign the policy to a cost control unit
- Click Policy assignments for cost control unit .
- The rules are date-effective. A user or the system can expire the rules if a newer version is created.
- In the Cost control unit field, enter or select a value.
Submit and view feedback for
Simplify Your IT Cost Allocation Approach to Accelerate Time to Value
IT cost allocation is often complex and time-consuming, even when it doesn’t have to be. Many organizations fall into this trap of adding more detail, increasing the complexity and time required when a simple allocation strategy would’ve provided clarity for stakeholders.
Besides, what’s the point of adding complexity if it doesn’t provide any additional value?
“The allocation of IT costs for the purpose of chargeback, show back or cost transparency is often about landing at the right level of complexity and detail to get the job done.” But that’s just the tip of the iceberg.
In this report, Gartner® has shared a seven-step IT cost allocation considerations to help your organization simplify processes and accelerate time to value. Download the report to take control of your allocation strategy today.
Gartner, Simplify Your IT Cost Allocation Approach to Accelerate Time to Value, Robert Naegle, Cesar Lozada, 29 March 2023 GARTNER is a registered trademark and service mark of Gartner, Inc. and/or its affiliates in the U.S. and internationally and is used herein with permission. All rights reserved.
Please complete this form to access the Analyst Report
- Climate Corps®
Climate Policy News You Can Use — November 2023
The Fifth National Climate Assessment was released this week, with the jaw-dropping finding that climate-related extreme weather events are costing the U.S. economy at least $150 billion a year . Every region of the U.S. is affected, and billion-dollar disasters now happen every three weeks on average, up from every four months in the 1980s. On a more hopeful note, the report points out that “the degree to which climate change will continue to worsen is largely in human hands,” and “the benefits of deep emission cuts for current and future generations are expected to far outweigh the costs.” See EDF’s statement .
Here are some ways you can support the policies we need to deliver those emissions cuts:
1. Keep climate on Congress’s agenda
The House passed a continuing resolution (CR) to fund the government at current levels for some agencies and programs until January 19th, and others through February 2nd, 2024. The CR also extends the authorization of the Farm Bill until September 30th, 2024. The bill now heads to the Senate, where leaders Schumer and McConnell have both indicated they want to pass it quickly.
Assuming that happens, we will not see another shutdown threat until next year. House Speaker Mike Johnson has laid out plans to complete consideration of standalone appropriations bills, after which the House could turn back to energy and environmental legislation. Now is the time to voice your support for fully funding the Inflation Reduction Act and for keeping climate on the agenda for Congress.
- Continue to impress upon your Members of Congress the importance of the Inflation Reduction Act to your business and the need to ensure full funding of its provisions and implementing agencies.
- Talk to your Members of Congress and the new Speaker’s office about the risks that climate change poses to your business (see NCA5 examples by region ). Let them know you support policies to cut GHG emissions and improve resilience.
2. Urge FERC to finalize the Transmission Planning and Cost Allocation Rule
The U.S. must speed up the development of electric transmission to enable interconnection of clean resources, increase grid reliability during extreme weather events, prepare for increased electrification of vehicles and buildings, and fully realize the potential emission reductions from the Inflation Reduction Act. Expanding electric transmission is also critical for companies to meet renewable energy goals.
To address this challenge, the Federal Energy Regulatory Commission (FERC) needs to finalize the Transmission Planning and Cost Allocation reforms it proposed in April 2022. Core components of a strong rule are (1) a requirement for long-term, scenario-based planning that reflects the needs of a decarbonizing system; (2) a mandate for multiple-value planning that incorporates economic benefits, reliability and resilience, congestion relief and generation availability; (3) a clear process for cost allocation with a standard methodology for resolving disputes; and (4) inclusion of non-wire alternatives and grid-enhancing technologies in the planning process.
Stakeholders are urging FERC to finalize a strong Transmission Planning and Cost Allocation rule, including Senate Majority Leader Schumer , the National Urban League and American Council on Renewable Energy and the National Caucus of Environmental Legislators . Now is the time for businesses to weigh in too.
- Reach out to FERC directly and/or issue a public letter urging FERC to finalize a strong Transmission and Cost Allocation rule as early as possible in 2024.
3. Welcome the SEC’s final rule on climate disclosure
As I’ve written previously , the Securities and Exchange Commission (SEC) is planning to release its final rule on climate-related financial disclosure in the next couple of months. The purpose of the rule is to bring disclosure of climate risk level with other forms of financial risk, enabling prudent decision-making by companies and investors. It is vital for organizations that support climate disclosure to publicly welcome the final rule upon its release.
- Prepare to make a positive statement on the release of the SEC’s final rule. If you filed supportive comments with the SEC, reiterate the points of your letter publicly.
- Work with other companies and your industry groups to show support for the final rule.
- Read EDF’s Stakeholder Guide to the SEC’s Proposed Rule on Climate-Related Disclosure
- EDF’s legal and regulatory team are happy to talk to interested companies about why and how to support the final rule. Reach out to me if you’d like to have that conversation!
4. Support EPA’s methane policy
All signs are pointing to EPA finalizing its oil and gas methane standards in the run-up to COP28. These urgently needed requirements are the culmination of a years-long stakeholder process, including two public comment periods that showed historic support from companies across sectors. As a reminder, EPA’s methane rules are relevant not just to oil and gas companies but also to banks and investors, electric utilities, companies that use natural gas as a manufacturing input, and major electricity users in states with gas-heavy grids.
With the whole world watching, COP28 is a critical window for companies to rise to this make-or-break moment in the energy transition, supporting strong methane rules and a robust implementation process. COP28 provides an ideal platform for companies to go on record in support of common-sense and cost-effective methane regulation.
- Issue a press release or social media post welcoming the EPA’s final methane rule as soon as it is posted here . Underscore the critical role methane regulations play in combating climate change.
- Contact Sean Hackett via email. to learn more.
- Read EDF’s blog: Three ways EPA’s upcoming methane regulations will help slow climate change and protect public health .
- Read EDF’s blog about why and how investors can support climate policy .
Finally, EDF is headed to COP28 next month. Bookmark this web page to see what we’re focused on and where to find us (events to be added soon).
As always, I welcome your feedback and thank you for reading. Feel free to forward this newsletter to anyone you think might find it interesting, or if someone forwarded it to you, subscribe here.
Climate Policy News You Can Use — April 2023
Climate Policy News You Can Use — June 2023
Climate Policy News You Can Use — July & August 2023