Every program your organization runs depends on things no single program pays for: rent, the finance office, payroll, IT, insurance and the executive director's time. When a grant budget leaves those costs out, the rest of your budget quietly covers them. Win enough grants that way and growth itself becomes a financial problem.
Indirect costs are real costs. This article explains what they are, how federal rules let you recover them through a negotiated rate or the de minimis rate, how the base those rates apply to works, what to expect from foundations and how to present overhead without apologizing for it.
What counts as an indirect cost
Indirect costs benefit more than one program and can't easily be assigned to any one of them. Under 2 CFR 200.414, the federal rule on indirect costs, typical examples for many nonprofits include depreciation on buildings and equipment, the costs of operating and maintaining facilities and general administration, such as the salaries and expenses of executive officers, personnel administration and accounting.
The test is the relationship to the award, not the type of expense. The same section says the association of a cost with a federal award is what determines whether it's direct or indirect. A data analyst who works only on one funded project can be a direct cost of that project. The IT staff who support the whole organization are usually indirect.
Two ways to recover indirect costs on federal awards
A negotiated rate
Organizations with substantial federal funding often negotiate an indirect cost rate agreement, commonly called a NICRA, with their cognizant agency for indirect costs. 2 CFR 200.1 defines that as the federal agency responsible for reviewing, negotiating and approving indirect cost proposals on behalf of all federal agencies.
Under 2 CFR 200.414(c), negotiated rates must be accepted by all federal agencies. An agency can use a different rate only when a federal statute or regulation requires it, or when it approves a deviation under policies it has made public. Agencies must include their indirect cost policies in the notice of funding opportunity, so read the notice for any program-specific limit. Pass-through entities must also accept a subrecipient's federally negotiated rate.
An organization with a current negotiated rate can apply for a one-time extension of that agreement for up to four years, subject to the cognizant agency's approval.
The de minimis rate
If you don't have a current negotiated rate, 2 CFR 200.414(f) lets you charge a de minimis rate of up to 15 percent of modified total direct costs (MTDC). The key points from the rule:
- You choose the rate, up to 15 percent. Federal agencies and pass-through entities can't require you to use a lower rate than the one you elect, unless a statute or regulation requires it.
- No documentation is required to justify it, and you can use it indefinitely.
- Once you elect it, you use it for all your federal awards until you choose to negotiate a rate.
- Charge each cost one way. Costs must be consistently charged as either direct or indirect, never both.
- It's optional. You aren't required to use it.
The 15 percent figure comes from OMB's revision of the Uniform Guidance, published in the Federal Register in April 2024, which raised the de minimis rate from 10 percent. The revision took effect October 1, 2024. Agencies could choose to apply it to awards made before that date but weren't required to, so if you're working under an older award, check its terms for the rate that applies.
How the MTDC base works
A rate is only as good as the base it's applied to. 2 CFR 200.1 defines MTDC as all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel and up to the first $50,000 of each subaward. It excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs and the portion of each subaward above $50,000. The 2024 revision raised that subaward threshold from $25,000.
Here's how it works on a hypothetical project budget:
| Budget line | Amount | Counts toward MTDC |
|---|---|---|
| Salaries and wages | $120,000 | $120,000 |
| Fringe benefits | $36,000 | $36,000 |
| Travel | $8,000 | $8,000 |
| Supplies | $6,000 | $6,000 |
| Equipment | $15,000 | $0 |
| Participant support costs | $20,000 | $0 |
| Subaward to a partner | $80,000 | $50,000 |
| Total | $285,000 | $220,000 |
At the full de minimis rate, indirect costs are 15 percent of $220,000, or $33,000. Applying 15 percent to the full $285,000 would claim $42,750, which is more than the rule allows. Two mistakes come up again and again: applying the rate to total direct costs instead of MTDC, and forgetting that the $50,000 limit applies to each subaward separately.
If you work with partners, see how this fits into the line-by-line budget justification, where each subaward and its share of the base should be explained.
Foundations set their own rules
The federal rules don't bind private foundations. Each foundation sets its own indirect cost policy, and the policies differ. Some cap indirect costs at a fixed percentage, some don't pay them on project grants and some build them in generously. The MacArthur Foundation, for example, provides indirect cost recovery of 29 percent of project costs on its project grants, under a policy effective January 1, 2020.
Before you build a foundation budget:
- Read the guidelines and FAQ for an indirect cost policy.
- Ask the program officer if nothing is published. It's a routine question.
- Look for general operating support. Where a funder offers unrestricted grants, the indirect question largely goes away.
Stop apologizing for overhead
Low overhead isn't the same as efficiency. An organization that underinvests in finance staff, data systems or supervision struggles to manage grants, report accurately and keep good people, and funders feel those failures later. Indirect costs pay for the parts of the organization that make a program work.
When you present them:
- Explain them in the budget narrative: the rate, where it comes from (a negotiated agreement or the de minimis rate) and the base it applies to.
- Treat them as part of the program's cost, because they are. A budget that tells a story includes the support that makes the work possible.
- Don't shave the rate to look lean when the funder allows full recovery. A rate you leave unclaimed is money your general budget now has to find.
Indirect costs also follow the award after you win it, through reporting and audits. The federal grant lifecycle shows where they come up again.
Your next step
This week, find out which situation your organization is in. Ask your finance lead whether you have a current negotiated indirect cost rate agreement, and if you do, get a copy and note its expiration date. If you don't, confirm whether you've elected the de minimis rate and that your budgets apply it to MTDC rather than total costs. Check any change with your auditor or grants officer before you make it.
When the notice calls for a budget narrative, SoliContraX drafts one from your own materials alongside the rest of the application, so you start from a draft instead of a blank page. The numbers are still yours to check with your finance team. Start your next application.