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Hypo-Variance – Full Cost to OMB Conversion


OMB vs. Full Cost

In this issue, we will   go over the conversion of a full cost allocation plan to an OMB (Office of Management and Budget) 2 CFR Part 200 compliant cost allocation plan.  To understand the process and reason for converting a full cost plan to an OMB plan, we must first understand the differences and uses of the two. 

A Full Cost Allocation Plan:

  • Used internally within an agency for the reimbursement of the cost of indirect administrative services from non-general fund operations
  • Used to calculate the indirect costs to be included in the calculation of user fees to the public
  • Uses a less conservative approach, but still follows the OMB structure
  • Uses budget numbers to more accurately reflect what is currently happening within the agency, compared to an OMB compliant cost plan, which in the rears   
  • Based on the federal regulations, it includes costs that are excluded from the OMB plan, such as general government costs like city council, elections, and dues and subscriptions
  • The central support departments are defined as a department whose primary purpose is to support all or a subset of departments/funds within the agency, not to support the public 

OMB 2 CFR Part 200 Compliant Cost Allocation Plan:

  • Used for federal and state grant reimbursements
  • Very conservative—strictly follows the regulations put in place by the federal government
  • Actual costs of the last closed-book fiscal year are used to estimate future costs
  • Many costs are excluded, such as city council and general government expenses—for a full list of unallowable costs to exclude, request a free cost slider from CostTree here
  • Excludes costs of departments that do not support the entire agency as a whole, such as public works administration and other departments of an administrative nature
  • The central support departments are defined as a department whose primary purpose is to support ALL other departments/funds within the agency, not to support the public

Now we know that the full cost plan allocates out all indirect costs in the most accurate manner possible using the most current budget data; it is the closest representation of the true cost of service, while the OMB plan excludes general government and other unallowable costs per the federal guidelines.  Many agencies create both plan types, but that doesn’t mean that they need to create two separate plans from scratch.  The full cost plan can be created first, then quickly converted to an OMB cost plan by removing cost categories and central support departments that are not allowable per the federal regulations. 

If you’re using a Cloud-based software or platform, or if you’re using a spreadsheet, the following steps to quickly transform your Full Cost Allocation Plan into an OMB Compliant Cost Allocation plan may not apply.

1st - Create a copy of your completed full-cost plan to retain.  Then, remove all of your unallowable central support departments.  None of the costs from the unallowable departments can be charged in your OMB plan and should be removed entirely from the plan. Departments to remove include, but are not limited to, city council, public information office, marketing, elections, and your singular administrative departments, such as public works administration or police administration.  

2nd – Within the remaining central support departments (the ones that support the entire agency), remove the allocations for any departmental functions that are unallowable under the federal guidelines.  Leave the costs of these functions represented in your plan, just show them as unallowed and uncharged.  It is important to show the costs within a central support department that are uncharged so a reviewer of the plan can reconcile the total expenses within the department back to the agency’s closed books and ensure that what is being charged out is appropriate. 

3rd – Within the remaining central support departments, disallow all line items in the department’s expenditures that are unallowable under the federal regulations.   The 2 CFR Part 200 defines what cost categories can be charged but the definitions are spread out over 50+ pages.  CostTree provides free resources including a pocket slider that condenses all of the cost categories down to an easy-to-use desktop reference. Access  CostTree’s digital slider from CostTree here.

4th – Add a revenue reconciliation schedule to each central support department that shows all revenues and expense offsets.  This is not a required schedule, but it is helpful in reducing audit time.  This schedule will describe all revenues and cash offsets, and it will add any unallowable general government offsets including taxes, fines, forfeitures, prior cost plan charges, fixed-fee services not based on hours, sale of property, and interest.  These unallowable revenues should not be included unless a revenue reconciliation is included, and the auditor will be able to more quickly tie the departmental costs being charged to the total expenditures. 

5th – Add your carry-forward true-up. As you are charging on actual expenses for use two years from now, the carry-forward will true-up these actual costs. To true-up, you need to get the estimated plan from two years ago and compare it to your current plan. This true-up will be added each year.  You will not have a carry-forward until the second year of creating your OMB cost plan.

6th-Sign a certification that the cost plan adheres to the OMB regulations, add an organization chart, and submit your federal plan for recovery of indirect costs on your grant programs, while using your full cost allocation plan for internal cost recovery and rate setting.