FAR 42.705-4—State and local governments.
Plain-English Summary
FAR 42.705-4 addresses how indirect cost rates for State and local governments are handled when those governments receive Federal funding and also perform work under Federal contracts. It points to the OMB Uniform Guidance at 2 CFR part 200, subpart E and appendix V, which contains the cost principles for State and local governments and establishes the cognizant agency concept. The section explains how the cognizant agency is identified and how that agency is responsible for approving indirect cost rates for federally funded programs and activities. It also makes clear that once those rates are negotiated and approved by the cognizant agency for indirect costs, other Federal agencies that award contracts to the same State or local government must use those rates. In practice, this promotes consistency, avoids duplicate rate negotiations, and reduces the risk that different agencies will apply conflicting indirect cost treatments to the same government entity.
Key Rules
Uniform Guidance Controls
Indirect cost treatment for State and local governments is governed by the OMB Uniform Guidance at 2 CFR part 200, subpart E and appendix V. Those provisions supply the cost principles and the framework used to determine and approve indirect cost rates.
Cognizant Agency Concept
The Uniform Guidance establishes a cognizant agency for approving State and local government indirect costs associated with federally funded programs and activities. That cognizant agency is the lead Federal entity for rate approval.
Cognizant Agency Determination
The procedures in the Uniform Guidance are used to determine which Federal agency is the cognizant agency for a particular State or local government. This avoids multiple agencies independently setting different indirect cost rates for the same entity.
Approved Rates Apply Governmentwide
Indirect cost rates negotiated and approved by the cognizant agency for indirect costs must be used by all Federal agencies that award contracts to the same State or local government. Other agencies do not re-negotiate a different rate for the same entity.
Applies to Federally Funded Programs
The rule is tied to indirect costs associated with federally funded programs and activities. The focus is on the allowability and approval of indirect cost rates used in charging Federal awards and contracts.
Responsibilities
Cognizant Agency for Indirect Costs
Determine cognizance under the Uniform Guidance and negotiate and approve the State or local government’s indirect cost rates for federally funded programs and activities.
Other Federal Agencies
Accept and use the indirect cost rates approved by the cognizant agency when awarding contracts to the same State or local government; they should not establish conflicting rates for that entity.
State and Local Governments
Follow the Uniform Guidance cost principles, work with the cognizant agency to establish indirect cost rates, and apply the approved rates consistently across Federal awards and contracts.
Contracting Officers
Use the cognizant agency-approved indirect cost rates when pricing or administering contracts with State and local governments and coordinate as needed to confirm the applicable approved rate.
Practical Implications
Contracting officers should verify whether a State or local government already has a cognizant agency-approved indirect cost rate before negotiating pricing or reviewing indirect costs.
Because all Federal agencies must use the approved rate, contractors and agencies should avoid duplicate rate negotiations or agency-specific exceptions unless the governing guidance allows them.
A common pitfall is assuming the contracting agency can set its own indirect cost rate; for State and local governments, the cognizant agency’s approved rate controls.
Parties should keep documentation showing the approved rate, the cognizant agency determination, and the applicable period of performance to avoid disputes during audit or contract administration.
If the government entity’s indirect cost structure changes, the parties should update the rate through the cognizant agency process rather than informally adjusting the rate in a single contract.
Official Regulatory Text
The OMB Uniform Guidance at 2 CFR part 200 , subpart E and appendix V, concerning cost principles for state and local governments (see subpart 31.6 ) establishes the cognizant agency concept and the procedures for determining a cognizant agency for approving State and local government indirect costs associated with federally-funded programs and activities. The indirect cost rates negotiated and approved by the cognizant agency for indirect costs will be used by all Federal agencies that also award contracts to these same State and local governments.