Understanding Indirect Cost Rates for Grants

What Are Indirect Costs?

Indirect costs — also called facilities and administrative (F&A) costs or overhead — are expenses that support your organization's overall operations but cannot be attributed to a single specific project. They include building maintenance, utilities, administrative staff, accounting, human resources, information technology, library services, and general organizational infrastructure.

Every project benefits from these shared resources, but charging the full cost of the building's heating system to a single grant would be unreasonable. Instead, these costs are pooled and allocated to projects through an indirect cost rate, which is expressed as a percentage of a defined base.

Understanding indirect costs is important for grant writers because they significantly affect your budget, your institution's revenue, and your competitiveness with funders who cap or restrict them.

How Indirect Cost Rates Are Determined

Federally Negotiated Rates

Organizations that receive federal funding negotiate their indirect cost rate with a cognizant federal agency — the agency that provides the most funding. For universities, the cognizant agency is typically the Department of Health and Human Services. For nonprofits, it may be their largest federal funder.

The negotiation process involves a detailed cost study in which the organization documents all of its indirect expenses, categorizes them, and proposes an allocation method. The cognizant agency reviews the study and agrees on a rate. This negotiated rate applies to all federal grants from any agency.

University rates typically range from 40 to 65 percent of modified total direct costs, though some institutions have rates above 70 percent. Nonprofit rates tend to be lower, often between 10 and 30 percent. The variation reflects differences in infrastructure, labor markets, and the types of costs included.

De Minimis Rate

Organizations that have never had a federally negotiated rate may use a de minimis rate of 10 percent of modified total direct costs. This rate is available under the Uniform Guidance (2 CFR 200) and requires no negotiation. It is a practical option for smaller nonprofits and organizations new to federal funding.

Understanding the Base

The indirect cost rate is applied to a base, and the definition of that base matters. The most common base is modified total direct costs (MTDC), which typically includes all direct costs except equipment (items costing more than $5,000), patient care costs, rental costs, tuition remission, scholarships, fellowships, and subaward costs exceeding $25,000.

The MTDC base means that not all of your direct costs generate indirect cost recovery. For example, if your budget includes a $200,000 subaward, only the first $25,000 of that subaward is included in the base for calculating indirect costs. Understanding these exclusions is essential for accurate budgeting.

Applying Indirect Costs in Grant Budgets

Calculating the Amount

To calculate indirect costs, multiply the MTDC base by your indirect cost rate. If your MTDC base is $300,000 and your rate is 55 percent, your indirect costs are $165,000, making your total budget $465,000.

Showing Your Work

In the budget justification, state your indirect cost rate, the base to which it applies, the resulting calculation, and the effective date of your negotiated rate agreement. Many funders require a copy of your negotiated rate agreement as a supporting document.

Multi-Year Projects

If your negotiated rate agreement covers a specific period, explain how you will handle years beyond the agreement's expiration. Most institutions apply their current rate with the expectation that the rate may be renegotiated during the project. Some agencies require you to use a provisional rate for out-years.

When Funders Cap Indirect Costs

Many funders — particularly private foundations and some federal programs — cap the indirect cost rate at a level lower than your negotiated rate. Common caps include 10, 15, or 20 percent. Some foundations do not allow indirect costs at all.

Handling the Gap

When a funder's cap is below your negotiated rate, your institution absorbs the difference — the unfunded portion of indirect costs. This gap can be significant. A grant with $300,000 in MTDC and a funder cap of 15 percent generates $45,000 in indirect cost recovery, compared to $165,000 at a 55 percent rate. That $120,000 gap represents real institutional costs that are not covered.

Before applying to funders with low indirect cost caps, discuss the budget with your sponsored programs office. Some institutions have policies about accepting grants with restricted indirect costs, and your grants office can advise on institutional expectations.

Strategies for Restricted Budgets

When indirect costs are capped, consider whether any expenses that would normally be charged as indirect could legitimately be charged as direct costs. Some expenses — such as dedicated project administrative support, project-specific computing, or space exclusively used for the project — may qualify as direct charges under certain circumstances. Consult your institution's cost accounting policies before reclassifying expenses.

For Organizations Without a Negotiated Rate

If your organization does not have a federally negotiated rate and you need one, you have two options. First, you can negotiate a rate with your cognizant federal agency by submitting a cost proposal based on your organization's financial records. Second, you can use the 10 percent de minimis rate, which requires no formal negotiation.

For small nonprofits applying for their first federal grants, the de minimis rate is often the simplest starting point. As your federal portfolio grows, negotiating a full rate that reflects your actual costs becomes worthwhile.

Common Pitfalls

• Applying the indirect cost rate to the wrong base (total direct costs instead of modified total direct costs)
• Failing to exclude items from the MTDC base that should be excluded (equipment, subawards over $25,000)
• Not providing a copy of the negotiated rate agreement when required
• Assuming all funders accept your full negotiated rate without checking their policies
• Neglecting to budget for indirect costs, which shortchanges your institution

Indirect costs are not administrative bloat — they represent the real infrastructure that makes your research or programs possible. Understanding how they work, how to calculate them, and how to navigate funder restrictions ensures that your grant budgets are accurate, compliant, and fair to your organization.