Indirect Costs in Federal Grants

Unlike many private foundations, the Federal Government acknowledges that it costs money to run your agency, above and beyond the costs of providing direct services. These administrative overhead or “indirect” costs are the things that keep your organization operating smoothly and efficiently, but are not tied to any one . They can include such things as:

  • Administrative staff: the Executive Director, Finance Director, Human Resources, the receptionist, clerical staff not dedicated to specific programs
  • Office space used by those staff, including costs of rent and utilities
  • Equipment and services used by everyone: copiers, phone systems, janitorial service, IT support, etc.
  • Board expenses
  • Fundraising & marketing expenses
  • Grants management, the audit, liability insurance, staff training, etc.

The federal government has a standardized, and fairly complex, method of determining your indirect costs, which results in a negotiated Indirect Cost Rate. As a grantwriter, you don’t have to know how to negotiate an Indirect Cost Rate, but you certainly need to understand how they work.

If you’re working on a federal grant proposal, ask the organization’s financial manager if the agency has a negotiated federal Indirect Cost Rate. If so, then in most cases you can just plug that percentage into your budget on the “Indirect” line. If you don’t have a rate, talk to the Finance Director and Executive Director about whether to apply for one. If  you decide your organization needs an approved rate, work with the controller or accountant to pursue an application. If your organization is not large enough to have a controller, you should think twice about whether the organization is large enough to successfully manage a federal grant.

Federal Indirect Cost rates are negotiated with one government agency, then that rate is honored in any federal grant from any agency. This may be the agency which is awarding your first federal grant, or (if you have multiple grants) the agency that awards the greatest share of your federal funding, or your “cognizant audit agency”.

There are several types of rates: Provisional, Final, Predetermined, Fixed Rate with Carry-Forward, and Multiple Indirect Cost Rates. The provisional/final rates are preferable for most nonprofits because they are easier to budget and account for actual costs.

There are two calculation methods: Direct Salaries & Wages and Total Modified Direct Costs. Which one you use will depend on your organizations finances.

Your program and staff people work together do develop a pool of costs by department, then allocate them according to a reasonable formula. Then they figure a proposed indirect cost rate by one of the two calculation methods and propose it to the appropriate federal agency. After negotiations, an official or the federal agency approves the rate and you receive an indirect cost agreement.[1] The approval will be formalized by a rate agreement signed by the an agency official and an authorized representative of your organization. Each agreement will include:

1. The approved rate(s) and information directly related to the use of the rates, e.g., type of rate, effective period, and distribution base;

2. The treatment of fringe benefits as either direct and/or indirect costs, or an approved fringe benefit rate;

3. General terms and conditions; and

4. Special remarks, e.g., composition of the indirect cost pool.

Other Considerations

Of course, it’s not always this straightforward. After all, we’re talking about the federal government. Here are a few exceptions or special cases:

If you don’t have a negotiated indirect cost rate, some agencies will let you use a temporary administrative fee, often 15%. In some cases, if you don’t expect to apply for many federal grants, you can just use this rate and not apply for a negotiated rate. If you’re doing this, be sure to exclude all indirect-cost items from the budget.

Some agencies will put a cap on the indirect costs they will pay, often 20%. A few agencies or specific RFP’s may not pay any indirect costs at all. If a funder refuses to acknowledge eligible indirect costs when negotiating a grant award, you have to be prepared to bargain or even walk away if absorbing the administrative costs is too much of a burden to your agency.

When figuring your indirect costs, refer to the appropriate OMB circular to make sure you’re only including allowable costs.

Using Line Items Instead of Indirect Costs

Some organizations assume that because they don’t have an indirect cost agreement, or a particular RFP doesn’t allow indirect costs, that they can’t recover any administrative costs. In fact, many of these can be included as direct “line item” costs. For example, figure out how much of your Executive Director’s or accountant’s time will be spent administering the grant and include them under personnel. If the grant will force you to pay for an A-133 audit, that’s a cost of the grant. Calculate a reasonable percentage of our telephone, copying, insurance, janitorial, etc. expenses and include them as line item direct costs. Make sure these are all legitimate costs and reasonable allocations of operating the grant project. In some cases you’ll recover most or all of what you would have received under a percentage using an indirect rate.


[1] This is, of course, not complete instructions for developing your indirect cost rate, which will vary from agency to agency. However, there is a good overview and instructions from the U.S. Department of Labor downloadable from: http://www.dol.gov/oasam/programs/boc/costdeterminationguide/main.htm. If you are involved in developing an indirect cost rate, contact the agency you’re working with and ask for guidance.