Finding Text
Improper Calculation of Modified Total Direct Cost (MTDC) Base for Indirect Cost Allocation Federal Programs Workforce Innovation and Opportunity Act Cluster ALN 17.258, 17.259, and 17.278 Federal Agency U.S. Department of Labor (DOL) Compliance Requirement Indirect Cost Finding Type Significant deficiency in Internal Control over Compliance Criteria The Department’s indirect cost calculations were required to comply with the applicable provisions of the Uniform Guidance and the Department’s negotiated indirect cost rate agreement (“NICRA”). Specifically: 2 CFR §200.68 defines Modified Total Direct Cost (“MTDC”) as including “all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $25,000 of each subaward,” and expressly excludes “the portion of each subaward in excess of $25,000.” 2 CFR §200.403 provides that costs charged to federal awards must be necessary, reasonable, allocable to the federal award, and must conform to any limitations or exclusions set forth in the Uniform Guidance or the federal award. 2 CFR §200.414 establishes the federal framework for indirect (F&A) costs and requires the use of the negotiated indirect cost rate methodology approved by the cognizant agency. The Department’s NICRA further established the approved indirect cost base as MTDC. Accordingly, when calculating indirect costs, the Department was required to apply its negotiated indirect cost rate to an MTDC base that excluded the portion of each subaward or subcontract in excess of $25,000. Condition The Department recorded indirect cost transactions using an incorrect Modified Total Direct Cost (MTDC) base for the year ended June 30, 2025. The approved indirect cost methodology establishes the base as total direct costs excluding subawards and subcontracts in excess of $25,000. However, the Department did not apply the $25,000 limitation when calculating the MTDC base and included the full amount of certain subgrants and subcontracts in the base used to allocate indirect costs. As a result, the MTDC base used by the Department to calculate indirect costs was overstated, which affected the allocation of indirect costs charged to the programs. Cause The deficiency occurred because the Department did not implement adequate review controls over the calculation and application of the Modified Total Direct Cost (MTDC) base used to allocate indirect costs. Specifically, the Department did not ensure that the MTDC base excluded the portion of subawards and subcontracts in excess of $25,000, as required by the Negotiated Indirect Cost Rate Agreement (NICRA) and Uniform Guidance. As a result, indirect costs were calculated using an incorrect cost base. Effect As a result of applying an incorrect Modified Total Direct Cost (MTDC) base, the Department overstated the cost base used to calculate indirect costs. This condition may have resulted in indirect costs being improperly allocated to federal programs. Consequently, amounts charged to federal awards may not comply with the limitations established in the Uniform Guidance and the Department’s Negotiated Indirect Cost Rate Agreement (NICRA). If not corrected, this condition increases the risk of misallocation of costs among programs and potential disallowance of indirect costs by the federal awarding agency. Questioned Costs The error was detected before the issuance of the basic financial statements and therefore, the transaction was adjusted and recorded correctly. Therefore, there is no questioned cost. Identification as a Repeated Finding This is not a repeat finding from the immediate previous audit. Recommendation We recommend that the Department strengthen its internal controls over the calculation and application of indirect costs to ensure compliance with the requirements of the Negotiated Indirect Cost Rate Agreement (NICRA) and Uniform Guidance. Specifically, the Department should establish procedures to verify that the Modified Total Direct Cost (MTDC) base is calculated in accordance with federal regulations, including the exclusion of the portion of subawards and subcontracts in excess of $25,000. The Department should also implement a formal supervisory review of the MTDC base and indirect cost calculations prior to charging indirect costs to federal programs. In addition, the Department should provide guidance or training to personnel responsible for grant accounting to ensure consistent application of NICRA requirements and federal cost principles. Views of responsible officials and planned corrective actions Management of the Department agrees with this finding. Refer to the corrective action plan on pages 114-119.