- ✓ $800B+ in federal grants distributed annually across 26+ agencies (Grants.gov, FY2025)
- ✓ All federal grants require SAM.gov registration with a UEI number — allow 2–4 weeks before applying
- ✓ NIH success rates average 20–22%; NSF averages 25–28% — preparation and resubmission are critical
- ✓ From application to award typically takes 3–12 months; NIH review cycles run ~9 months
- ✓ Post-award reporting requirements are governed by 2 CFR Part 200 (OMB Uniform Guidance) for all federal awards
Federal Grant Indirect Costs Explained: F&A Rates, Negotiation, and Compliance
Indirect costs are among the most misunderstood and most underfunded components of federal grant budgets. Whether you are applying for your first federal award or managing a portfolio of grants, understanding how F&A rates work, how they are negotiated, and how to apply them correctly can mean tens of thousands of dollars in recovered costs — and keeps you on the right side of auditors.
Indirect costs (F&A costs) are overhead expenses that support grant work but cannot be tied to one project. They are recovered by applying a negotiated rate to Modified Total Direct Costs (MTDC). Organizations without a negotiated rate can use the 10% de minimis rate under 2 CFR 200.414(f). Always check the NOFO — some programs cap indirect costs below your negotiated rate.
What Are Indirect Costs
When a federal grant funds a project, it covers two broad categories of costs: direct costs (expenses that can be clearly attributed to the specific project) and indirect costs (expenses that benefit multiple projects and cannot be pinpointed to any single activity). Indirect costs are also called Facilities and Administrative (F&A) costs in federal grants terminology.
The facilities component covers depreciation on buildings and equipment, interest on debt associated with capital assets, and operation and maintenance of physical space. The administrative component covers general organizational functions — executive management, accounting, human resources, legal, IT support, payroll processing, and similar centralized services that keep the organization running regardless of which specific projects are active.
Consider a university running a research grant. The principal investigator's salary is a direct cost — it goes directly to grant work. But the university's grants and contracts office, the shared research computing infrastructure, the library, the facilities maintenance staff that keeps the laboratory clean and operational — those are indirect costs. They are real costs of performing the research, but they cannot be cleanly allocated to one project among the dozens the university may be running simultaneously.
Federal law and regulation — primarily 2 CFR Part 200 (the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, commonly called the Uniform Guidance) — establish the framework for how indirect costs are defined, calculated, and recovered from federal awards. Understanding this framework is essential for grant budget compliance and for maximizing cost recovery.
The practical importance of indirect costs extends well beyond regulatory compliance. For many research universities, F&A recovery represents a substantial revenue stream that subsidizes research infrastructure, laboratory renovations, and new program development. For nonprofits — which have historically been underfunded on overhead — properly recovering indirect costs is critical to organizational sustainability. A grant that pays 100% of the direct project costs but zero indirect costs may actually cost the organization money to execute, because the real costs of administration, facilities, and support functions must be paid from unrestricted reserves.
Direct vs Indirect Cost Categories
The distinction between direct and indirect costs is not always intuitive, and misclassification is one of the most common sources of federal audit findings. The governing principle under 2 CFR 200 is that a cost must be treated consistently — if your organization charges administrative salaries as indirect costs on one award, you cannot charge them as direct costs on another without proper justification and documentation of why the treatment differs.
Typical Direct Costs include salaries and wages of project staff whose work can be specifically attributed to the grant; fringe benefits for those directly employed on the project; consultant and contractual costs for services directly supporting the project; materials and supplies consumed in project activities; equipment purchased specifically for and used on the project; travel directly related to project objectives; and subrecipient costs under subawards.
Typical Indirect Costs include executive and general administrative salaries (CEO, CFO, HR directors); accounting, payroll, and financial management functions; general legal services; building depreciation, utilities, and rent for general-purpose facilities; IT support and network infrastructure shared across programs; purchasing and procurement department functions; centralized library services at universities; and grant and contracts administration offices.
Some costs can be either direct or indirect depending on how they are used and how your organization has structured its cost allocation methodology. A project coordinator who splits time equally between three grants could be charged as a direct cost to each grant based on actual time documented through effort reporting, or could be classified as an indirect cost if the organization consistently treats similar positions that way across all awards. Either approach is acceptable — what matters is consistency and documentation.
The governing test is the benefit test: costs should be charged direct when they benefit the specific project; indirect when they benefit the organization broadly. If a cost benefits multiple projects and identifying the exact proportional share is impractical, it belongs in indirect costs. Never split costs based on what is most advantageous for any particular grant — base the allocation on the actual benefit relationship.
- Governing regulation: 2 CFR Part 200 (Uniform Administrative Requirements, Cost Principles)
- De minimis rate: 10% of MTDC — available to organizations without a negotiated rate
- Negotiated rates for research universities: typically 25–60% of MTDC
- Negotiated rates for nonprofits: typically 10–25% of MTDC
- Some programs cap indirect at 8–15% regardless of negotiated rate
- MTDC excludes equipment over $5,000 and subaward costs beyond $25,000 per subaward
Negotiated F&A Rates: How They Work
Organizations that receive substantial federal funding are expected to develop and negotiate a formal indirect cost rate with their cognizant federal agency — the agency responsible for reviewing and approving indirect cost rates for that type of organization. For most research universities and healthcare organizations, the cognizant agency is the Department of Health and Human Services (DHHS) Division of Cost Allocation. For institutions primarily funded by the Department of Defense, it is typically the Office of Naval Research (ONR) or the Defense Contract Audit Agency (DCAA).
The negotiation process begins with the organization preparing an indirect cost rate proposal. This document analyzes the organization's actual expenditures over the most recent completed fiscal year, identifies which costs are direct and which are indirect, and calculates proposed rates based on that analysis. The proposal must follow the cost principles in 2 CFR 200 Subpart E and typically includes a detailed schedule of all organizational expenditures, identification of the allocation base for each rate pool, a description of the cost allocation methodology, financial statements and independent audit reports for the base year, and a signed certification that the costs claimed are allowable, allocable, and reasonable.
Once submitted, the cognizant agency reviews the proposal, may request additional documentation or adjustments, and ultimately negotiates a rate. The outcome is a Negotiated Indirect Cost Rate Agreement (NICRA) — a formal document specifying the approved rates, the type of rate (provisional, predetermined, fixed, or final), and the periods for which each rate applies. The NICRA is binding across all federal awarding agencies, not just the one that negotiated it.
Rate types matter for budget planning. Provisional rates are temporary estimates used for interim billing pending final determination and are subject to retroactive adjustment. Predetermined rates are fixed for a specified period and cannot be changed retroactively even if actual costs differ. Fixed rates with carry-forward are set for the current period, but differences between estimated and actual costs are incorporated into the next rate negotiation. Final rates are established after the close of a fiscal year based on actual costs and are used to settle any billing differences from provisional rates charged during the year.
The rate negotiation cycle typically follows your organization's fiscal year. Most organizations submit their indirect cost rate proposals within 90 days of fiscal year close. The review and negotiation process can take 3 to 12 months depending on the cognizant agency's workload and the complexity of the proposal. During the negotiation period, organizations typically bill at their prior year approved rate or a provisional rate agreed upon with the cognizant agency.
The 10% De Minimis Rate
The de minimis indirect cost rate was introduced under the 2014 Uniform Guidance to address a long-standing inequity: small nonprofits and new organizations that had never received enough federal funding to justify the cost of formal rate negotiation were often forced to absorb all overhead costs themselves, effectively subsidizing their federal grants with unrestricted organizational reserves.
Under 2 CFR 200.414(f), any non-federal entity that has never had a negotiated indirect cost rate — and that does not choose to negotiate one — may elect to use a flat 10% rate on Modified Total Direct Costs. This rate can be applied indefinitely as long as the organization remains eligible — meaning it has not subsequently entered into a formal rate negotiation agreement.
The de minimis rate simplifies administration significantly. Rather than maintaining detailed cost pools, performing annual rate calculations, and engaging in multi-month negotiations with a federal agency, an organization can simply apply a flat percentage to its eligible direct costs. For small community nonprofits, faith-based organizations, and first-time federal grant recipients, this simplicity has real value.
However, the de minimis rate has important limitations that organizations should understand before electing it. It applies only to MTDC — the same exclusions that apply to negotiated rates (equipment over $5,000, subaward costs beyond $25,000, etc.) apply here as well. It cannot be used if the organization has ever had a negotiated rate, even an expired one. Some NOFOs explicitly exclude the de minimis rate and require either zero indirect or a formally negotiated rate. And if your actual indirect costs significantly exceed 10% of MTDC — which is common for organizations with real estate costs, significant administrative overhead, or multiple federally funded programs — the de minimis rate leaves substantial cost recovery unrealized.
For organizations whose federal grant revenue exceeds $750,000 per year (which also triggers single audit requirements under 2 CFR 200.501), it is worth conducting an analysis to determine whether negotiating a formal rate would recover more indirect costs than the de minimis rate. The investment in negotiation — typically 40 to 100 hours of finance staff time in the first year — can pay for itself quickly if the negotiated rate significantly exceeds 10% of MTDC.
The de minimis rate is not automatic — you must elect to use it in your budget and document the eligibility basis. Some federal agencies require a written statement confirming that your organization has never had a negotiated rate. If you later negotiate a formal rate, you must transition all active federal awards to the new rate; you cannot selectively apply different rates to different grants based on which is more favorable in a given period.
How to Include Indirect Costs in Your Budget
Correctly including indirect costs in a federal grant budget requires understanding the regulatory base, your approved rate, and any program-specific restrictions. The mechanics are straightforward once these three elements are clear.
Step 1: Calculate your MTDC. Begin with your total direct costs for the budget period. Remove the MTDC exclusions: equipment with a unit cost over $5,000, capital expenditures, patient care costs, tuition remission, costs of rental for off-site facilities, and the portion of each subaward cost that exceeds $25,000 per subaward per budget period. The remaining amount is your MTDC base.
Step 2: Apply your approved rate. Multiply the MTDC by your negotiated rate (from your current NICRA) or by 10% if you are using the de minimis rate. The result is the indirect cost recovery amount for that budget period.
Step 3: Document in the budget narrative. Every federal grant budget justification should include a clear indirect cost calculation. The standard format is: "[Rate]% of MTDC ($[base amount]) = $[indirect cost total]. Our negotiated indirect cost rate agreement is on file with [cognizant agency] and is effective through [date]." If using the de minimis rate, state: "This organization elects to use the 10% de minimis rate under 2 CFR 200.414(f). We have not previously had a negotiated indirect cost rate."
For multi-year awards, project indirect costs for each budget period. If your NICRA covers the full project period, use the approved rate for each year. If the current rate expires before project end, use the most recent approved rate for future periods and note in the budget justification that future rates will be applied as negotiated. When working with subawardees, each subawardee applies their own indirect cost rate to their own direct costs — you apply your rate only to the first $25,000 of each subaward in your own MTDC calculation.
When Funders Restrict Indirect Costs
One of the most frequent frustrations in federal grant development is discovering that a funder caps indirect costs below the organization's negotiated rate. Understanding why this happens, which programs restrict indirect costs, and what your options are prevents budget surprises and helps you make informed go/no-go decisions.
While 2 CFR 200 generally requires federal awarding agencies to honor an organization's negotiated indirect cost rate, Congress sometimes writes program-specific restrictions into authorizing legislation or appropriations acts. Common examples include NIH training grants (T32, T15, T34), which are frequently capped at 8% of direct costs rather than a percentage of MTDC. Many USDA competitive grant programs cap indirect at 25-30% of total project costs. Some EPA environmental justice and community programs cap indirect at 15-20%. AmeriCorps and other community service programs often limit or prohibit indirect cost recovery entirely.
When a federal program cap is lower than your negotiated rate, you are bound by the cap for that award. The gap between your negotiated rate and the allowed rate represents an unrecovered cost — sometimes called an indirect cost shortfall — that your organization must absorb from other sources. This shortfall can, in some circumstances, be treated as cost sharing (match) on the award if the program allows voluntary cost sharing and if you properly document and report it.
Private foundations operate entirely outside the 2 CFR 200 framework. They are free to impose any indirect cost policy they choose, and most do. Common foundation approaches include a flat cap of 10-15% of direct project costs; a fixed dollar amount for overhead; or a prohibition on indirect cost recovery entirely, with the expectation that the organization will fully subsidize its own overhead. Before accepting a foundation award with indirect cost restrictions significantly below your negotiated rate, calculate the true cost of the award to your organization and confirm the program value justifies the implicit subsidy.
State agencies that serve as pass-through entities for federal funds are required under 2 CFR 200.332(a)(4) to honor subrecipients' negotiated indirect cost rates unless restricted by the federal program terms. If a state agency imposes indirect cost restrictions that conflict with the federal program's cost principles, you have grounds to challenge the restriction by citing the Uniform Guidance and requesting a written explanation of the regulatory basis for the cap.
Common Mistakes and Audit Triggers
Indirect cost errors appear consistently in federal grant audit findings. The following mistakes are frequent enough that every grants manager, finance officer, and project director should recognize them before they occur.
Applying indirect costs to excluded MTDC items. Many organizations incorrectly include equipment over $5,000, the full value of subawards (beyond the $25,000 threshold), or patient care costs in their MTDC base. This results in overcharging indirect costs — an audit finding that typically requires repayment of the excess recovered amount. Verify your MTDC calculation on every budget period and budget modification.
Using an expired NICRA without authorization. Negotiated Rate Agreements have expiration dates. If your NICRA expires before a new one is approved, you must use either a provisional rate agreed upon with your cognizant agency, or the de minimis rate — not the most recently expired rate. Continuing to bill at an expired rate without authorization is a compliance violation.
Inconsistent treatment of costs across awards. If you charge department administrative salaries as direct costs on certain grants but as indirect costs on others without documented justification for the different treatment, auditors will flag this as a potential double-charging situation. Federal awards may be charged for the same cost only once — either as a direct cost to one award, or as an indirect cost recovered across all awards through the rate.
Charging indirect costs to unallowable cost categories. Indirect costs can only be recovered to the extent that the underlying direct costs are allowable. If entertainment, fundraising, lobbying, or other unallowable costs are in your direct cost base, your indirect cost calculation is tainted by the inclusion of unallowable items. Remove unallowable costs from the base before applying your rate.
Failing to recalculate indirect when direct costs change. When you return unexpended funds, reduce project scope, or execute a budget modification that changes direct cost totals, your indirect cost amount must be recalculated based on the revised direct costs. Charging indirect on project costs that were never incurred — or on a budget amount larger than what was actually spent — constitutes an overcharge.
Inadequate recordkeeping. Your NICRA, the indirect cost rate proposal that supported it, and the methodology used to allocate costs between direct and indirect pools must all be retained for at least three years after the close of the last award to which they apply (and longer if litigation, audit, or investigation is pending). Organizations that lose this documentation through staff turnover or poor records management face serious vulnerabilities in audits that occur years after awards close.
Frequently Asked Questions
Indirect costs (also called Facilities and Administrative or F&A costs) are expenses that support grant activities but cannot be directly attributed to a single project. They include building rent, utilities, administrative salaries, IT infrastructure, accounting, and HR functions. Federal agencies allow grantees to recover these costs by applying an approved percentage rate to eligible direct costs.
The 10% de minimis rate is a simplified indirect cost option under 2 CFR 200.414(f) for organizations that have never negotiated a formal indirect cost rate. It allows organizations to charge 10% of Modified Total Direct Costs (MTDC) as indirect costs without formal negotiation. It can be used indefinitely as long as the organization has not previously had a negotiated rate.
Submit an indirect cost rate proposal to your cognizant federal agency (typically DHHS for nonprofits and health organizations, ONR for universities). The proposal documents your actual expenditures, cost allocation methodology, and proposed rate. After review and negotiation, the agency issues a Negotiated Indirect Cost Rate Agreement (NICRA) valid across all your federal awards.
Yes. Some federal programs have legislatively mandated caps below negotiated rates — NIH training grants, certain USDA programs, and EPA community grants often restrict indirect to 8-20%. Private foundations routinely cap indirect at 10-15% regardless of your negotiated rate. Always verify the indirect cost allowance in the NOFO before building your budget.
MTDC is the calculation base for indirect costs. It includes salaries, fringe benefits, materials, supplies, services, and travel. It excludes equipment over $5,000 per unit, capital expenditures, patient care costs, tuition remission, off-site rental costs, and subaward costs above $25,000 per subaward. Applying your indirect rate to the MTDC (rather than total direct costs) ensures excluded categories are not double-charged.
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This article was researched and written by the GrantMetric editorial team using primary sources: official federal Notice of Funding Opportunity (NOFO) documents, the Code of Federal Regulations (CFR), OMB Uniform Guidance (2 CFR Part 200), agency budget justifications, and direct data from the Grants.gov API. Program details — funding amounts, eligibility criteria, deadlines — are cross-referenced against the issuing agency's official website before publication.
Editorial Notice: This article was reviewed by the GrantMetric editorial team. Federal grant programs change frequently — funding amounts, eligibility, and deadlines are subject to annual appropriations. To report an inaccuracy, contact dev@grantmetric.com.