Indirect Cost Rates: What You Don’t Know Can Hurt You

Indirect Cost Rates
What you don’t know CAN hurt you

By Eleanor Hasse

At the beginning of my grant writing career, I had no idea how little I knew about some aspects of budgeting. I still remember with embarrassment telling a grant partner that their indirect cost rate could not possibly be over 80%.

It was.

But the partner kindly set me straight, and I learned more about the ins and outs of indirect costs, which vary widely among organizations and institutions. 

The Basics
Indirect costs—also known as facilities and administration, or F&A, or overhead—help an organization get reimbursed for the facilities and services it provides to support a grant project.

Direct costs are part of the grant budget and include such things as salaries, supplies, equipment, contracts, and travel.

Early on, most of my experience was with K-12 public schools. In North Carolina, their indirect cost rates are set by the state’s Department of Public Instruction and typically range from 1 to 5%. I knew universities and other organizations had much higher rates, but I didn’t know why or how these were set.

Widen Your Horizons
If your experience is mostly in one type of organization, you may not realize how much indirect costs rates vary across organizations or understand the underlying principles that govern those differences.

GrantProse works with a wide variety of clients: public and private institutions of higher education, school districts, municipal governments, state government agencies, nonprofits, and for-profit businesses. Each has its own policies and procedures concerning indirect cost rates. Here are some points to keep in mind:

  1. The indirect cost rate is not something you make up when you are building your grant budget. Rather, the indirect cost rate for your institution should be determined by a cognizant agency—often a department of the federal or state government.
  2. Not every institution has an established indirect cost rate. In our experience, nonprofits and local governments (such as cities) often don’t.
  3. If your institution has an indirect cost rate, it will be unique: Every institution has its own rate and rules about which budget categories the rate is applied to.
  4. Once the rate and rules are formally set with one cognizant agency, that same rate must be applied to all grants the institution applies for. Some grant applications require a copy of the indirect cost rate agreement.
  5. These rules mean that expenses that have already been assigned to indirect cost when the rate was calculated may not be used as direct costs. For example, if your building’s utilities (water, electricity) are included in indirect costs you can’t put them in your direct cost budget.
  6. Larger institutions may have more than one negotiated rate for different kinds of projects (e.g., different rates for instructional activities vs. research activities, and for projects taking place on vs. off campus). Check on this early, as approval is likely needed.
  7. Some funding agencies cap the amount of indirect costs or prohibit them entirely. Applying for a grant with capped indirect costs that requires an exception to the applicant’s accounting rules and negotiated rates may require approval by the institution’s financial office or office of sponsored research.

For more information on indirect costs and rates, see guidelines from the US Department of EducationNorth Carolina State University, and the Charles Stewart Mott Foundation.

Eleanor Hasse is a lead research associate for GrantProse who specializes in program evaluation and writing proposals for federal education grants. In her spare time, she enjoys hiking with her family.