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Conversion from Use
Allowance to Depreciation
Hirons & Associates has developed
a sophisticated method for converting our clients from use allowance to
depreciation in order to maximize their indirect cost recovery. By using
depreciation instead of use allowance, we can double your indirect cost
recovery for buildings from 2% to 4%, increasing the recovery for your
institution by millions of dollars. The calculation of depreciation and
method of allocation is the underpinning to this dramatic increase.
Use allowance is based on a 50-year useful life for all buildings.
However, the individual components of a building do not last 50 years. An
aggregate 25-year useful life more closely represents the actual life of a
building. Using our specialized methods, we componentize your building and
calculate the depreciation for the components, which effectively reduces
the useful life from 50 years to 25 years and thereby doubles your rate for
buildings from 2% to 4%.
Hirons & Associates can help you DOUBLE
the building portion of your indirect cost recovery.
It is important to note that our approach to establishing useful lives
is critical to maximizing your cost recovery and is accepted by the federal
government. Some institutions are inclined to be very aggressive in
establishing short, useful lives. This approach clearly maximizes immediate
benefit by establishing a higher depreciation rate. However, we believe
that there are important considerations that mandate a somewhat more conservative
approach. The useful lives we select for our clients are based on data from
the American Hospital Association, Marshall & Swift Appraisal Manual
and your institution.
Our methods and results are proven and accurate.
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Componentization/Depreciation
In order to double your institution's indirect cost recovery for
buildings, Hirons & Associates will do a detailed building
componentization/depreciation study on the buildings you choose. You are
not required to do a detailed componentization of all buildings. To
accomplish this we will take the following steps:
1. We will review your plant
fund ledger and the recording of all capitalized amounts, for select
research buildings, on a building-by-building basis to establish the year a
project was capitalized.
2. We will reconcile these
figures with the total building costs, which include the cost of fixed or
built-in equipment, the cost of original construction and the cost of
subsequent alterations and renovations.
3. We will then use the costs
associated with original construction and succeeding alteration and
renovation to determine which of the building components have been included
in or affected by the construction reported on the ledger. We will then
allocate these costs to the proper component. In the case of new
construction, all components will be included. In the case of alteration or
renovation, only some of the components will be included. For instance,
foundation probably will not be included in renovation projects, with the
possible exception of additions.
4. We will use proven appraisal
techniques to establish costs when data has been lost or discarded.
5. We then will review all
federal construction grant award documents to determine a) the construction
project(s) to which the awards apply; and b) whether the award is intended
to cover only the building or the building plus its fixed and movable
equipment.
6. We then will assign a useful
life to each component and depreciate accordingly.
Contact us to learn more about how we would apply this process to your
institution. Click here.
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Detailed Inventory of Fixed Equipment
In order to maximize the indirect cost recovery for your buildings, we
recommend an inventory of your fixed equipment. OMB Circular A-21
stipulates that the cost of fixed equipment may be segregated from the
building account in which it is normally capitalized. A-21 also provides
guidance on what can be considered fixed equipment.
Hirons & Associates staff members who conduct the room-by-room
inventory of equipment have been carefully trained to properly identify and
record all fixed equipment. Our staff is highly sensitive to the needs of
the university. We are careful not to disrupt any activity or disturb any
equipment in the rooms we inventory.
We conduct a 100% review of all rooms for several reasons:
• we know that the data is accurate
• we can then validate as well as update our findings easily
• we thereby maximize cost recovery
We have found that the more costly fixed equipment is often used
exclusively or predominantly in research areas. Since this equipment is
identified in the room-by-room inventory, we can incorporate it into the
room-by-room cost allocation, thereby maximizing the cost recovery for your
equipment.
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Allocation of Moveable Equipment
We also assist our clients with the room-by-room allocation of moveable
equipment. Many institutions still allocate their moveable equipment on a
building basis. It is extremely beneficial to allocate your moveable
equipment on a room-by-room basis for the same reasons we allocate the
depreciation and fixed equipment on a room-by-room basis. Much of an
institution's expensive moveable equipment is in the high research areas.
By allocating on the room-by-room basis, it will increase the recovery for
the moveable equipment by 1-3 points.
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Room-by-Room Allocation of Costs
Original construction costs must, of necessity, be spread
proportionately to all rooms based on square footage. However, alterations
and renovations are generally confined to particular wings, floors or groups
of rooms. Since research space is normally subject to more frequent
renovation, separating these costs and applying them to the space that is
actually renovated will produce a more accurate and greater cost recovery.
It is important to note that room-by-room allocation for alterations and
renovations is highly analytical and not simply mathematical. We carefully
examine plant records, drawings, and conduct physical inspections to
determine the rooms to which costs should be distributed properly.
For an example of how we captured an additional $1.2 million in cost
recovery for one of our clients, click
here.
Other benefits to allocating costs room-by-room:
• We conduct a room-by-room analysis for
all rooms whether or not they are used for research. This data proves
useful for planning and budgeting in general, for Organized Research and
other functions.
• The room-by-room distribution of project costs provides information
to establish a room rental cost. This is useful for sponsors who are
restrictive in their indirect cost reimbursement policies.
• The data that comes from these studies is in a format that's easily
accessible. It can be electronically downloaded into the David M. Griffith
and Associates CRIS model or any other indirect cost model.
Find out how Room-by-Room Allocation of Costs can benefit you. Click here.
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