Key Facts
- De minimis rate: 10% of MTDC — available to any organization without a negotiated rate. No documentation required. But 10% is typically far below what organizations actually spend on indirect costs.
- Negotiated rates: typically 20–40% for nonprofits, 50–60%+ for universities (based on modified total direct costs or total direct costs, depending on rate base).
- Cognizant agency: HHS Division of Cost Allocation (DCA) for most nonprofits; DOD Defense Contract Audit Agency (DCAA) for defense contractors; the federal agency providing the most funding for others.
- Process: submit an indirect cost rate proposal (cost proposal workbook) to your cognizant agency; they review and negotiate a rate; the rate is formalized in a Negotiated Indirect Cost Rate Agreement (NICRA).
- Not all programs allow indirect costs: some programs cap indirect recovery at 10% or lower regardless of NICRA. Check your NOFO.
Summary
Indirect costs — also called facilities and administrative (F&A) costs — are the overhead expenses of running an organization that cannot be directly attributed to a specific grant or project: rent, utilities, executive leadership, human resources, accounting, IT infrastructure. Federal cost principles (2 CFR Part 200 Subpart E) allow these costs to be charged to federal awards either at a negotiated rate or at the de minimis rate of 10% of modified total direct costs (MTDC). Most nonprofits receiving federal awards use the de minimis rate because they've never negotiated — leaving substantial overhead recovery unrealized. A negotiated Indirect Cost Rate Agreement (NICRA) with HHS or another cognizant agency formalizes a defensible, auditable rate that accurately reflects actual indirect costs.
What Counts as an Indirect Cost
Indirect costs are legitimate organizational costs that benefit multiple programs or activities and cannot be practically traced to any single project. The two categories under federal cost principles are facilities costs (depreciation on buildings and equipment, operations and maintenance, library costs) and administrative costs (general administration, human resources, payroll processing, accounting, budgeting, purchasing, legal).
The distinction between direct and indirect is not always intuitive. A program director's salary whose time is entirely devoted to one specific grant is a direct cost. The same program director's time spent on organizational administration, grant reporting, and staff supervision across multiple grants is an indirect cost. A specific grant-required evaluation is a direct cost. The organization's general quality improvement and data management infrastructure is an indirect cost. Organizations must have written policies defining what they treat as direct versus indirect — auditors review these policies in Single Audits and in indirect cost rate negotiations.
The De Minimis Rate: Why 10% Isn't Enough for Most Organizations
The 10% de minimis rate, available under 2 CFR 200.414(f) to organizations that have never negotiated an indirect cost rate, is calculated on modified total direct costs (MTDC). MTDC excludes equipment, capital expenditures, subawards in excess of $25,000, patient care charges, and certain other costs. For a grant with $500,000 in MTDC-eligible direct costs, the de minimis rate recovers $50,000 in indirect costs.
The problem: most organizations' actual indirect cost rates — the ratio of actual indirect expenses to direct costs — substantially exceed 10%. A mid-size nonprofit with $3M in total expenses, $1.8M in direct program costs, and $1.2M in management and general expenses has a real indirect rate of about 67% ($1.2M / $1.8M). Using 10% recovers only $180,000 of those overhead costs from federal funders, leaving $1M in organizational overhead that must be covered by other sources. Negotiating a realistic rate — say, 28% — would recover $504,000 from the same portfolio of federal awards.
This is money that already exists as organizational expense. Indirect cost recovery doesn't generate new spending — it reimburses you for overhead you're already incurring. Organizations that rely on the de minimis rate are implicitly subsidizing their federal programs with unreimbursed organizational costs, which creates financial pressure that often manifests as inability to retain staff, maintain facilities, or invest in the administrative infrastructure that actually makes programs work.
GrantMetric Analysis
- The negotiation is not adversarial — the cognizant agency's job is to arrive at an accurate rate, not a low one. Many organizations approach the NICRA negotiation as a contest, expecting the government to push back on every cost. In practice, the HHS Division of Cost Allocation (DCA) is a technical office staffed by cost accountants whose mandate is to determine what your actual indirect costs are and formalize them in an agreement. They scrutinize your cost proposal for accuracy, proper cost allocation methods, and compliance with allowability rules — but they are not trying to minimize your rate. An organization that submits a well-documented, methodologically sound cost proposal typically negotiates a rate close to what they proposed. The most common reason rates come in lower than expected is not agency reluctance but inadequate documentation of costs.
- Not all federal programs allow your negotiated rate — read the NOFO before budgeting. Some federal programs cap indirect cost recovery regardless of your NICRA. Common caps: DOJ programs frequently cap indirect costs at 10% or 15% of MTDC. HRSA programs vary by program type. Some NIH programs for community-based organizations cap at 26%. The NOFO will state the indirect cost policy. If your NICRA is 32% and the program caps at 10%, you can only charge 10% — the negotiated rate is irrelevant. Budget accordingly, and factor the gap into your true cost of participation when deciding whether to apply.
How to Initiate a NICRA Negotiation
Step one is determining your cognizant federal agency. For most nonprofits, this is the Department of Health and Human Services Division of Cost Allocation (HHS DCA). For universities, it is typically HHS or DOD depending on your research portfolio. For defense contractors and subcontractors, it is the Defense Contract Audit Agency (DCAA). If you are uncertain, the agency from which you receive the most federal funding is typically the cognizant agency.
Step two is preparing an indirect cost rate proposal (cost proposal). This is a financial analysis document that presents your organization's total indirect costs from the most recently completed fiscal year, categorized by type (salaries, benefits, rent, utilities, etc.), along with your allocation base (the direct costs against which the indirect costs will be applied). HHS DCA provides a cost proposal template for nonprofits. The proposal must be submitted with supporting financial statements, general ledger detail, and documentation of the cost allocation methodology.
Step three is the review and negotiation. HHS DCA will review your proposal, may request additional documentation, and will propose a rate. Rates can be proposed as predetermined (fixed for one or more years), fixed (set for a period, with a carry-forward adjustment), or provisional (a temporary rate pending determination). For most nonprofits, a predetermined or fixed rate is the goal — it provides certainty for budgeting purposes. The final agreed rate is documented in a Negotiated Indirect Cost Rate Agreement (NICRA), which is signed by both the organization and the cognizant agency official.
NICRA Process Checklist
- Determine your cognizant federal agency (HHS DCA for most nonprofits — portal at rates.psc.gov)
- Gather prior fiscal year financial statements, trial balance, and a complete listing of all grants and contracts active during the year
- Prepare the indirect cost rate proposal using the cognizant agency's template — classify all expenses as direct or indirect with written policy justification
- Submit proposal electronically through the cognizant agency's portal; retain confirmation
- Respond to reviewer questions promptly — delays in your response extend the negotiation timeline
- Once the NICRA is executed, include it in every federal grant budget you submit — awarding agencies verify the rate against the signed agreement