USAID overhead policies criticized by government watchdog

A federal audit has criticized the U.S. Agency for International Development for lacking the processes, documentation, and systems to monitor grantees’ overhead costs. Though USAID agreed that “the accuracy, process and procedures” of its systems could be improved, in its response to the findings, the agency also shot back — stating the audit offered a “distorted view” of USAID’s systems and a “misunderstanding” of the agency’s indirect cost rate processes. The audit centered on the Negotiated Indirect Cost Rate Agreements that U.S. government agencies, including USAID, provide to the organizations and contractors they work with. More commonly known as NICRAs, these rates allow partners to get paid for overhead costs, including rent expenses, personnel fees, and administrative costs. But according to the audit, ineffective systems, patchy monitoring processes, and weak documentation practices are making it difficult for USAID to track overhead rates, whether they were negotiated through the NICRA process or otherwise. “Despite managing over $142.5 billion in awards, [USAID’s NICRA team] did not have a system in place to collect or analyze indirect cost rate data,” the audit read. “Without historical or current indirect cost data, USAID cannot readily analyze the risks or determine trends throughout the indirect cost process to evaluate accuracy and efficiency in completing rate approvals, and rate usage.” USAID agreed with four of the six recommendations laid out in the audit, but has pushed back against two: developing a process to conduct a periodic review of implementer files to ensure accuracy and documentation; and sharing the responsibility of monitoring subgrantees’ indirect costs with prime implementing partners. According to the agency, USAID already reviews NICRAs at “various phases” throughout an agreement’s life cycle, including through the use of checklists to ensure all documentation is complete. USAID also noted the agency “does not have privity of contract with subrecipients,” and the responsibility to ensure the accuracy of those partners’ rates “is clearly placed on pass-through entities (prime awardees).” To bolster that argument, USAID referenced several federal and agency regulations, and highlighted that all prime partners are aware of their responsibilities to monitor subrecipient costs upon receiving their awards. “The audit findings do not fully reflect USAID’s collection, management, and retention of indirect cost rate data,” a USAID spokesperson told Devex, adding that the agency’s related processes are “conducted in strict compliance with federal regulations and align with the best practices used by other federal agencies.” “We continuously work to improve our processes, including with the Office of the Inspector General, to ensure American taxpayer dollars are used wisely, effectively and for their intended purpose in every place we work,” said the USAID spokesperson. The context The yearlong audit, which concluded in June of 2023, was conducted by the USAID Office of Inspector General, or OIG, an agency that oversees federal bodies focused on foreign assistance. It was launched after the OIG’s investigation unit received allegations that USAID’s implementers were incorrectly charging the agency for indirect costs, the audit states — and after lawmakers began to question USAID’s overhead policies from 2016 to 2021. Last year, USAID received heightened criticism from Republican members of Congress, who repeatedly accused the agency of allowing its large prime implementing partners to pad their awards with excessive overheads. “We have serious concerns over the lack of oversight regarding the issuing and review of your agency’s NICRAs with USAID’s partners,” wrote Sen. Joni Ernst, a Republican from Iowa, and Rep. Michael McCaul, a Republican from Texas, in a letter to USAID Administrator Samantha Power last year. “We fear NICRAs have ballooned due to a lack of stewardship and care.” But independent experts defended USAID to Devex, saying that its awards were fair while those in the rest of the development sector were too low. More money for overhead can lead to more effective, well-managed operations, they said, ending so-called “starvation cycles'' where organizations are forced to slash administrative costs. If forced to do so, it can lead to a lack of funding for staff support and effective decision-making, ultimately resulting in fewer resources over time. NICRAs solidify that support, and help organizations put more money toward their indirect costs — a rate that might typically be around 30% of the total award. Without a NICRA, USAID may limit an organization’s overhead rates to 10% of the value of a grant or contract, a proportion also known as the de minimis rate. Despite that, many still feel the agency’s indirect costing processes are far from perfect. For years, USAID has struggled with its own indirect cost challenges: While the U.S. government routinely funds the agency’s programmatic and humanitarian work, lawmakers are less willing to pool money toward USAID’s operating budget. Administrator Samantha Power has repeatedly sounded the alarm on the agency’s workforce shortfalls, stating in 2021 that each USAID contracting officer — those who work on preparing, issuing, and reviewing contracts — had managed over $65 million annually from 2017 to 2021, a figure over four times that of contracting officers at the Department of Defense. Now, it seems those challenges might be bleeding into the way USAID is handling NICRAs. In its response to the audit, USAID admitted that its NICRA monitoring systems could be improved, and that the multibillion-dollar agency currently uses manual processes and systems to store, track, and analyze such data — such as a Microsoft Excel spreadsheet titled “NICRA Tracker.” And though USAID is planning to revamp its NICRA process to make it fully automated, such a change won’t be implemented until 2025, according to the agency’s response to the audit findings. There are eight individuals managing the indirect cost workload at USAID. The agency did not immediately respond to queries about whether that was an appropriate number of staff to handle the workload around indirect costs. “USAID has this tiny team of people responsible for negotiating these [indirect cost] rates, and those are the people they’ve gone and audited,” said Tim Boyes-Watson, who leads Fair Funding Solutions, a consultancy company that specializes in nonprofit financial management. “There isn’t a top-line recommendation to resource the team adequately. There’s criticism of recordkeeping, among other things. But that’s a symptom, not a cause.” And the ripple effects of those symptoms are widespread. Organizations typically wait years for the NICRA process to be complete, shuffling from a provisional overhead rate to a negotiated agreement once a NICRA is established. Charles Pope, who heads Pope International — a consulting company focused on international development contracting — said that one of his clients has been waiting two years for USAID to respond to its latest communication on a NICRA. “I have partners that approach me wanting help getting a NICRA, and I always tell them: This is not going to be a quick or easy process,” said Pope. Not the only challenge The audit pointed out another long-standing issue around NICRAs, one that comes at loggerheads with USAID’s efforts to localize its programming. “It tends to be that U.S. organizations and big international partners are the ones that get NICRA agreements negotiated, while foreign organizations — like local partners in different countries — tend to end up with the de minimis,” said Brian Honermann, the deputy director of public policy at amfAR, a nonprofit organization focused on HIV/AIDS research, prevention, and advocacy. Honermann, who analyzed indirect cost rates among PEPFAR grantees from 2007 to 2016, said such NICRA procedures leave gaps for subgrantees — with USAID letting a prime partner take responsibility for negotiating overhead costs for any of their sub-grantees on a project. “That creates problems for small organizations, who are then unable to pay for some of their executive and administrative staff as opposed to those focused purely on the program,” he added. “If we’re looking at investing in the longer term, there are costs to not paying [for overhead].” The audit’s authors recommended USAID should share the responsibility — or at least, take over additional monitoring — of sub-awardees’ indirect cost rates. But in its response back to the auditors, the agency disagreed, stating that creating new protocols within USAID would be redundant. But some feel it’s less about protocol and more about money. “This looks like a resourcing issue,” said Boyes-Watson. “And for something so important, why wasn’t this resourced earlier?” What happens next USAID agreed with four of the six recommendations laid out by the OIG in the audit: developing procedures to collect, report, and analyze indirect cost data more systematically; clarifying rules around documentation retention; developing documentation checklists to guide the NICRA negotiation process; and implementing a centralized document control and tracking system. Most of those changes will coincide with the agency’s pre-planned rollout of an automated NICRA system, and some of those changes have already been put in place, such as an expanded checklist system created in 2023. Kaylan Swartz, the director of legislative and public affairs at the OIG, said her office will continue working with USAID to come to an agreement on the disputed recommendations, and together, set a plan toward what Swartz called “corrective actions.” “If they disagree with one of the recommendations, we don’t just take that at face value and say: well, I guess they disagree,” said Swartz. “We try to work with them on a way forward.” The timeline for that, Swartz said, is vague. But in the meantime, the OIG will track the implementation of the audit’s recommendations as time goes on, and report the progress back to Congress on a semi-annual basis.