Indirect cost rates are one of the most misunderstood — and most consequential — elements of federal grant budgets. Organizations that do not have a negotiated rate, or that use the de minimis rate without understanding the alternative, leave significant money on the table with every federal award.
Indirect costs are the real expenses your organization incurs to support grant-funded programs: rent, utilities, accounting, IT, human resources, and executive oversight. These costs are just as real as the direct program expenses, but they are shared across the organization rather than attributable to a single project.
Federal agencies allow grantees to recover indirect costs through a negotiated indirect cost rate agreement (NICRA). If your organization has never negotiated a rate, you can use the de minimis rate of 10 percent of modified total direct costs. For many organizations, a negotiated rate would be significantly higher — often 15 to 25 percent for nonprofits, and sometimes much more.
The process of negotiating a rate is straightforward but requires preparation. You need an indirect cost rate proposal that allocates your costs between direct and indirect categories using a consistent methodology. Your cognizant federal agency reviews and approves the proposal, and the resulting rate applies across all federal grants.
If your organization receives or plans to pursue multiple federal grants, investing the time to negotiate an indirect cost rate is almost always worthwhile. The additional revenue can fund administrative infrastructure, build organizational capacity, and reduce the gap between grant budgets and true program costs. Talk to your accountant or a grants consultant — this is one of the highest-return investments in grant management.
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