Audit report here: Negotiated Indirect Cost Rate Agreements: Opportunities Exist to Improve Processes and Data Management (usaid.gov)

Why We Did This Audit 

• We contracted with the independent certified public accounting firm of Williams, Adley & Company-DC LLP (Williams Adley) to conduct a performance audit of USAID's management of negotiated indirect cost rate agreements. Indirect cost rates are used to reimburse contractors and grantees for costs incurred for a common purpose in carrying out foreign assistance programs, such as office space, utilities and salaries that are not directly tied to specific award.
• Indirect costs carry risks for USAID because indirect cost rates and the basis for their allocation is sensitive information, and determining whether those costs are reasonable, allowable, and allocable can be difficult. We have received allegations of contractors and grantees charging indirect costs incorrectly and our past oversight has shown this to be in part due to unfamiliarity with requirements for indirect cost calculations. 
• The overall audit objective was to determine the extent to which USAID applied best practices for managing the indirect costs charged by its award recipients to USAID awards from fiscal year 2016 to 2021. Specifically, Williams Adley examined the extent to which:

1. --USAID negotiated provisional and final indirect cost rates with contractors and grantees within necessary timeframes and in line with applicable cost principles.
2. --USAID ensured that the indirect costs charged by contractors and grantees to USAID awards were (1) based on the approved indirect cost rate and/or method; (2) calculated consistently across USAID awards whether as prime and/or sub-contractor or grantee; and (3) reasonable, allowable, and allocable.

What We Found

• Williams Adley was not able to determine the extent to which USAID applied best practices for managing indirect costs charged to USAID awards from fiscal year 2016 to 2021 due to a limitation with USAID's systems. This systems limitation precluded Williams Adley from obtaining a complete listing of contractors and grantees to complete required testing. 
• However, during the course of the audit Williams Adley reported findings, including that:

1. --USAID's systems could be improved to report and analyze the usage of indirect cost rates.
2. --USAID does not have a process to monitor prime implementers' verification of sub-awardee indirect cost rates; and
3. --USAID does not have proper documentation to support indirect costs charged.

Why It Matters

• Indirect costs are a legitimate cost of doing business only to the extent that they are reasonable, allowable, and allocable.
• We are making six recommendations to ensure contractor and grantee indirect costs are negotiated and applied in compliance with government-wide and USAID requirements.