Cost Allocation Plans (CAPs)

"The A-87 CAP was created because our profession (Municipal Finance Officers Association, at the time) wanted overhead reimbursement on Federal Grant programs which we knew cost us (Finance Directors) additional work. The result was the proverbial "half a loaf" as we were allowed to charge general overhead but not costs related to the legislative function (city councils and the city manager, city clerk, & city attorney to the extent that they supported the city council). This was certainly better than we had previously, which was nothing.

"The A-87 guidelines do not require that we use audited expenditures for the first CAP; but, if we use budgeted expenditures, we have to perform a "roll-forward" calculation that adjusts a future CAP for the difference between our budgeted expenditures and the audited year-end results. Since the "roll-forward" calculation is a lot of extra work, many finance directors have opted for calculating the A-87 CAP using audited expenditures. Simplifying the A-87 process by using audited expenditures was not a big deal when the primary purpose of the CAP was grant overhead reimbursement.

"Today, the most important use of the CAP is to recover "full costs" on service fees and municipal utilities which is why we were one of the first firms to develop the Total Cost CAP. Basing a Total Cost CAP on budgeted expenditures for the next fiscal year has the following advantages: (1) The calculated fees and charges more closely match the costs of providing the service rather than being based on audited expenditures which could be two or more years old; and, (2) The costs of the legislative function and its support are included which can be a significant cost.

"If your only goal is to maximize revenues from fee services, the decision is a "no brainer." However, if you have state and/or federal grant programs that require the A-87 process, you have to make a decision based on the unique circumstances for your agency: (1) Should I do both? or (2) Can I negotiate an overhead rate on the programs that require the A-87 in lieu of preparing the A-87 CAP? or (3) Is there a simpler indirect cost approach that can be done in-house in lieu of preparing an A-87 CAP that is permitted by the grantor?"

- Rick Kermer, Reply to a Finance Director, 2006.

A Cost Allocation Plan will allow an Agency to fairly and completely allocate its administrative costs. This will allow the General fund to recover costs from Enterprise Funds, Grant Funds, and will also determine the overhead costs on the hourly rates of staff providing fee services.

• A-87 Cost Plans

  - Using actual expenditures and documented time allocations, the A-87 Plan follows the guidelines outlined by the federal government through OMB Circular A-87. This plan should be used for federal grant administrative cost recovery.

• Total Cost Plans

  - When grant regulations are not an issue, a Total Cost Plan, which uses the costs that the A-87 Plan disallows, is able to allocate all indirect costs like the private sector routinely does. This plan is recommended whenever the goal is to fully allocate indirect costs for interfund transfers and fee calculations.

RCS specializes in performing Cost Allocation Plans. Contact us for information about our services, or discover how you can do one yourself using our proprietary software, available through Government Software Systems.