By Dr. Liz Shay, Senior Grants Development Consultant
Organizations pursuing grant funding often find budgets to be one of the most complex parts of an application. This is especially true for federal grant programs. These are also the programs that most typically have indirect costs.
In the following sections, we will break down what indirect costs are and how they work. By the end of the article, you will be able to confidently approach future budgets that require indirect costs.
What are indirect costs?
Indirect costs, also known as facilities and administrative (F&A) costs or overhead, are the expenses that are not easily attributable to a single project but are still necessary to enable the operation of the organization and the implementation of its programs. Costs that can be clearly assigned to a single project (such as salaries, travel, and equipment) are direct costs in the project budget.
Indirect costs are usually for things that are difficult to meter for individual projects. For example:
- Facilities expenses, such as heating, lights, and office/lab space
- Administrative expenses, such as accounting services and human resources personnel
How are indirect costs calculated?
There are two main components required to calculate the indirect costs for a given project. Typically, these are calculated for each fiscal year of the project.
The first component of the indirect cost calculation is the Modified Total Direct Cost (MTDC). We will talk more about how to calculate this number below. However, the most important thing to know is that the MTDC is a total of certain categories of the budget. This number is used only for calculating the indirect costs.
The other component of the indirect cost calculation is the indirect cost rate. We will also talk more about how to calculate this rate below. However, the most important thing to know is that this is a number that is usually represented as a decimal between 0 and 1. This number is a measure of the relative amount of indirect costs there are for the organization for every dollar of programmatic monies. You multiply this decimal value by the MTDC to get your total indirect costs.
Organizations must have an indirect cost rate agreement to determine how their Modified Total Direct Cost and indirect cost rate are calculated if they are receiving federal funds. This agreement is made once for each organization across the entire federal government (see the call-out box for more details about how your organization can negotiate this agreement). The exception is if the organization instead just uses the de minimus rate, which we will talk about below.
Calculating the Modified Total Direct Cost
There are two possible ways the Modified Total Direct Cost (MTDC) can be calculated, depending on whether your organization has a negotiated indirect cost agreement.
If your organization does not have a negotiated indirect cost agreement, then you can use the de minimus rate from 2 CRF 200. The MTDC in this case will include:
- Salaries and wages
- Fringe benefits
- Materials and supplies
- Services
- Travel
- Subawards up to $25,000 for the life of each sub-award, regardless of the period of performance of the sub-awards under the award
You simply add up the totals in each of these categories and that is your MTDC.
If your organization has a negotiated indirect cost agreement, then you must use it for every federal grant (see exceptions below). The MTDC in this case will be defined by your agreement. Talk with your internal grants office or finance team (whoever oversees liaising with the federal government for this type of situation) to see this agreement. Often the calculation is the same as for the de minimus rate, however, that is not always the case.
Determining the indirect cost rate
The indirect cost rate is a percentage, represented as a decimal in the calculation.
If your organization does not have a negotiated indirect cost agreement and you are therefore using the de minimus rate, then the indirect cost rate is 15% (0.15) as of October 1, 2024.
If your organization does have a negotiated indirect cost agreement, then your indirect cost rate is found in the same letter as the way you calculate the MTDC. Organizational indirect cost rates can vary wildly, with some larger research organizations having indirect cost rates of 50% (0.5) or more, but other organizations having smaller percentages.
Exceptions
In general, if your organization has a negotiated indirect cost agreement, you must use it for every federal grant that you are pursuing. If your organization does not have a negotiated indirect cost agreement, then you may use the de minimis rate. Additionally, most grantmakers will include indirect costs in the total maximum budget allowed. For example, if you are pursuing an Advanced Technological Education grant from the National Science Foundation in the Small Scale Projects funding track, then your maximum budget of $475,000 will include both direct and indirect costs for the full length of the project (up to three years).
However, there are some cases where there are exceptions to these rules. Occasionally federal grant makers will define how indirect costs work for a particular grant. In some cases, they define a particular indirect cost calculation process, which may be the standard de minimus calculation or something specific to that grant program. In other cases, the grantmaker will note that indirect costs are not allowed for that specific grant. Some grantmakers will also add indirect costs separately from the maximum program budget (the National Institutes of Health typically use this approach, where they give the maximum direct costs in their application guidance and then will calculate indirect costs as part of the grant award agreement if you are awarded). As with other parts of the grant application process, you should always carefully read the grant program guidance before doing your indirect cost calculations.
Regardless of the specifics of how a particular indirect cost is calculated for a particular grant, hopefully, this article can help demystify the process. Indirect costs are calculated through two numbers: the Modified Total Direct Cost (MTDC) and the indirect cost rate. Take this calculation into account when developing your budget for a federal grant and show your work in your budget justification as you do this calculation.