638 Contract Budget & Contract Support Costs

The Structure of a 638 Contract Budget

A 638 contract budget has a fundamentally different structure from a competitive grant budget. Where a grant budget starts with a funding ceiling and the applicant proposes how to spend it, a 638 budget starts with a calculation of what the federal government would have spent — and adds the costs the tribe incurs that the government would not have. The total contract amount consists of two components:

• The Secretarial amount — The amount the Secretary of HHS (through IHS) would have spent to operate the contracted PFSAs directly
• Contract Support Costs (CSC) — The additional costs the tribal organization incurs to operate the programs that IHS would not have incurred operating them as a federal agency

Understanding both components — and how to calculate, negotiate, and maximize each — is essential for tribal health program financial sustainability.

The Secretarial Amount

The Secretarial amount (sometimes called the “base amount” or “PFSA funding”) represents the cost of the programs, functions, services, and activities being transferred from IHS to the tribe. Under 25 U.S.C. § 5325(a)(1), the tribe is entitled to “not less than the applicable level of funding” for the PFSAs being contracted.

How the Secretarial Amount Is Calculated

The Secretarial amount should include all costs that IHS would have expended on the contracted PFSAs, including:

• Direct program costs. Salaries, benefits, and travel for IHS employees operating the PFSAs; supplies and equipment used in the programs; contractual services (locum tenens, reference lab, etc.)
• IHS overhead allocated to the PFSAs. A portion of IHS Area Office and headquarters costs that support the contracted programs. This is often the most contested element — IHS may calculate a lower allocation than the tribe believes is appropriate.
• Facility operation costs. If the tribe will operate the programs in an IHS facility, the pro-rata share of facility maintenance, utilities, and operations costs associated with the contracted PFSAs.

Critically, the Secretarial amount is not simply the line-item budget that IHS has allocated to a service unit. It must reflect the actual cost of operating the PFSAs, including all direct and allocated costs. Tribes should request detailed budget documentation from IHS and independently verify the calculations. Underestimation of the Secretarial amount is one of the most common issues in 638 contracting — see the common mistakes guide for how to identify and challenge underestimates.

Contract Support Costs (CSC)

Contract Support Costs are the costs a tribal organization incurs to support the operation of contracted programs that IHS would not have incurred as a federal agency. When IHS operates a program directly, it benefits from the federal infrastructure: centralized payroll processing, government purchasing authority, GSA schedules, federal employee benefits systems, and so on. When a tribe contracts the same programs, it must build or maintain its own administrative infrastructure — and those costs are CSC.

CSC comes in two categories:

Direct Contract Support Costs

Direct CSC are costs that can be directly attributed to operating the specific contracted programs and that are not included in the Secretarial amount. Examples:

• Workers' compensation and unemployment insurance. Federal employees are covered by federal programs (FECA, FUTA exemption). Tribal employees need separate coverage.
• Liability insurance. IHS operates under the Federal Tort Claims Act. Tribal programs may need professional liability, general liability, and directors & officers coverage.
• Audit costs. The incremental cost of the Single Audit attributable to the 638 contract. Federal agencies are not subject to external audit of individual programs.
• Property and vehicle insurance. Federal agencies self-insure. Tribal organizations must purchase commercial insurance for equipment, vehicles, and facilities.
• Personnel costs unique to tribal employment. Recruitment costs (IHS benefits from established federal hiring pipelines), employee assistance programs, and state-required benefits not covered by the Secretarial amount.

Indirect Contract Support Costs

Indirect CSC are overhead and administrative costs that support the contracted programs but are not directly attributable to a specific PFSA. These costs are allocated across all of the organization's programs using an indirect cost rate. Examples:

• Executive management. The tribal CEO, health director, CFO, and other senior leaders whose time is allocated across all programs
• Finance and accounting. Payroll processing, accounts payable, general ledger maintenance, financial reporting, and budget management
• Human resources. Recruitment, benefits administration, personnel policy development, and employee relations
• Information technology. Network infrastructure, email, EHR support, cybersecurity, and help desk services shared across programs
• Facilities overhead. Building maintenance, utilities, janitorial services, and space allocated to administrative functions
• Legal and compliance. Legal counsel, compliance officer, regulatory affairs, and contract management

CSC Calculation Methodologies

The total CSC amount for a 638 contract is calculated by adding direct CSC (identified line-by-line) and indirect CSC (calculated using the negotiated indirect cost rate). The formula:

Negotiating the Indirect Cost Rate

Tribal organizations negotiate their indirect cost rate with the Interior Business Center (IBC), a division of the Department of the Interior that serves as the cognizant agency for indirect cost rate negotiation for most tribal governments and tribal organizations. The process:

• Indirect cost proposal. The tribe prepares an indirect cost proposal identifying all indirect costs, the proposed allocation base, and the resulting rate. The proposal covers a specific fiscal year and is based on actual costs from a completed year (final rate) or projected costs (provisional rate).
• IBC review and negotiation. IBC reviews the proposal, may request additional documentation, and negotiates adjustments. The negotiation focuses on which costs are properly classified as indirect, whether the allocation base is appropriate, and whether costs are reasonable.
• Rate agreement. The final product is a Negotiated Indirect Cost Rate Agreement (NICRA) that specifies the rate, the allocation base, the applicable period, and whether the rate is provisional or final. This agreement is binding on IHS and all other federal agencies that fund the tribal organization.

Indirect cost rates for tribal organizations vary widely, from under 20% to over 50%, depending on organizational size, administrative complexity, and the proportion of direct program costs to overhead. Larger organizations with more direct program activity tend to have lower rates because overhead is spread across a larger base.

The Full Funding Requirement: Salazar v. Ramah

For decades, tribal organizations faced chronic underfunding of Contract Support Costs. Congress would appropriate a fixed CSC amount that was insufficient to cover all tribal contractors' needs, and IHS would prorate payments — paying each tribe only a percentage of its calculated CSC. This practice meant that tribal organizations were effectively subsidizing the operation of federal programs from their own resources.

The Supreme Court addressed this in Salazar v. Ramah Navajo Chapter(567 U.S. 182, 2012), holding that the government's obligation to pay full CSC under each individual contract is not subject to an aggregate cap. The Court held that each contract is a binding obligation, and the government must pay the full CSC amount calculated for each contractor regardless of the total appropriation.

Post-Ramah, Congress has appropriated sufficient funds to cover full CSC for all 638 and Title V contractors. The practical impact for tribal organizations:

• Full CSC is a legal right. If your calculated CSC exceeds what IHS offers to pay, you have legal recourse. The government must fully fund your CSC or face contract claims.
• Retroactive claims. Tribal organizations that were underpaid CSC in prior years have successfully recovered underpayments through contract claims and litigation. If your organization was underpaid CSC before 2012, consult with an attorney experienced in ISDEAA claims.
• Annual CSC recalculation. CSC should be recalculated each year based on actual costs and the current indirect cost rate. If the Secretarial amount increases (due to cost-of-living adjustments, new PFSAs, or program expansion), the CSC amount should increase proportionally.

Budget Categories Unique to 638 Contracts

While the Secretarial amount and CSC form the two main components, a 638 contract budget often includes additional categories that do not appear in competitive grant budgets:

Indirect Cost Rate Negotiation with IBC

The Interior Business Center (IBC) — located in Herndon, Virginia — negotiates indirect cost rates for approximately 1,000 tribal organizations. The quality of your indirect cost proposal directly impacts the rate you receive, which in turn determines the indirect CSC paid under your 638 contract. Key strategies:

• Identify all indirect costs. Conduct a thorough analysis of your administrative infrastructure. Every cost that supports multiple programs — including executive salaries, rent for administrative space, IT systems, and professional services — should be captured.
• Choose the right allocation base. The allocation base determines how indirect costs are distributed. Common bases include Modified Total Direct Costs (MTDC), total direct salaries and wages, and total direct costs. The right base depends on your cost structure — choose the one that most accurately reflects how indirect costs relate to program activity.
• Document everything. IBC will question costs that are not well- documented. Maintain detailed supporting schedules for every cost in the indirect cost pool, including allocation methodologies, cost definitions, and consistency with prior-year practices.
• Submit proposals timely. Late indirect cost proposals create a cascading problem: without a current rate, IHS may apply a default or prior-year rate that understates your actual costs. Submit proposals within six months of your fiscal year end.
• Consider professional help. Many tribal organizations engage accounting firms or consultants specializing in tribal indirect cost proposals. The cost of professional assistance is itself an allowable indirect cost and typically more than pays for itself through a higher negotiated rate.

Carryover and Reprogramming Flexibility

One of the significant advantages of 638 contracting over competitive grants is the flexibility tribal organizations have in managing contract funds. This flexibility derives from ISDEAA's recognition of tribal sovereignty and self-determination:

Fund Carryover

Under ISDEAA, unexpended contract funds at the end of a contract period generally remain with the tribal organization. Unlike competitive grants — where unspent funds may revert to the grantor — 638 carryover funds remain available to the tribe for use within the scope of the contracted PFSAs. Key provisions:

• No prior approval is typically required to carry over unexpended 638 contract funds
• Carryover funds must be used for purposes within the scope of the contracted PFSAs — they cannot be diverted to unrelated tribal programs
• Carryover amounts should be reported on the SF-425 and disclosed in the annual report
• Consistent large carryover balances may prompt IHS questions about whether the contracted programs are being adequately operated — the funds are meant to deliver services, not accumulate

Budget Reprogramming

Reprogramming — moving funds between budget categories within the contract — is generally more flexible under 638 contracts than under competitive grants:

• Tribes can typically reallocate funds within the Secretarial amount categories without prior IHS approval, as long as the reallocation supports delivery of contracted PFSAs
• Some AFAs include specific reprogramming thresholds (e.g., the tribe must notify IHS if a single line item changes by more than 25%). Review your AFA for any restrictions.
• Reprogramming between the Secretarial amount and CSC is generally not permissible — these are separate funding streams with separate purposes

Contrast this with competitive grants under 2 CFR 200, where budget transfers exceeding 10% of the total award typically require prior written approval from the awarding agency. The 638 framework trusts tribal governments to manage funds effectively within the contracted scope.

Program Income: Third-Party Revenue

For tribal 638 health programs, third-party revenue — particularly Medicaid collections — is a critical component of financial sustainability. While program income is not part of the 638 contract budget itself, understanding how it interacts with contract funding is essential:

• 100% FMAP. Medicaid services provided at facilities of Indian Health Service, tribal 638/Title V programs, and urban Indian organizations are reimbursed at 100% federal matching rate. This means the state contributes nothing — the full payment comes from federal Medicaid funds.
• Medicare and commercial insurance. Tribal 638 programs can bill Medicare and private insurance at standard rates. These collections supplement the contract amount.
• Use of program income. Third-party collections must be used to further the objectives of the contracted programs. They can be used to expand services, upgrade equipment, hire additional staff, or fill gaps not covered by the contract amount.
• No offset. Program income does not reduce the Secretarial amount or CSC. The contract funding amount remains the same regardless of how much third-party revenue the tribe collects.

Maximizing third-party revenue — particularly Medicaid billing — is one of the most impactful financial strategies for tribal 638 programs. Many tribal health programs are underutilizing their billing potential, leaving significant revenue on the table. If your program does not have a dedicated billing and revenue cycle function, developing one should be a priority.

Budget Negotiation Strategies

Effective budget negotiation starts before the formal proposal process. Experienced tribal finance officers approach 638 budget negotiations with the same rigor they would bring to any government-to-government fiscal agreement:

• Request the IHS budget detail. Obtain the complete IHS budget for the PFSAs you are assuming, including all allocated costs (Area Office support, headquarters support, facilities costs). Do not accept a summary figure — insist on line-item detail.
• Calculate CSC independently. Do not rely on IHS's CSC calculation. Develop your own detailed CSC calculation based on your organization's actual and projected costs. The common mistakes guide documents how tribes commonly underclaim CSC.
• Include startup costs. For new contracts, negotiate startup costs as a separate line item. These one-time costs — equipment, facility modifications, recruitment, IT setup — are distinct from ongoing operational costs and should not come out of the recurring Secretarial amount.
• Build in annual escalation. Negotiate cost-of-living adjustments or other escalation provisions in the contract so that the Secretarial amount keeps pace with actual costs over time.