Financial Reconciliation Workgroup Toolkit

Indirect Costs Guide

Introduction and Purpose

The purpose of this guide is to:

Provide context and information on indirect costs
Share methods and examples of how indirect costs are calculated and applied

What are Indirect Costs?

Indirect costs, often referred to as overhead, are all costs shared by the organization as a whole.OMB Uniform Guidance §200.414categorizes indirect costs under two headings:

Facilities: Depreciation on buildings, equipment and capital improvement, interest on debt associated with certain buildings, equipment and capital improvements, and operations and maintenance expenses.
Administration: General administration and general expenses such as the director’s office, accounting, personnel and all other types of expenditures not listed specifically under one of the subcategories of ‘‘Facilities’’

Often federal and state entities will refer to these indirect costs as facilities and administration cost or F&A.

Examples of Indirect and Direct Costs

OMB Uniform Guidance §200.412 explains that there is no universal rule for classifying if a cost is direct or indirect. What this means is that the method and rationale for classifying and allocating direct and indirect costs must be:

Allowable by the terms of the grant
Reasonable and necessary
Consistently applied
Rationally allocated
Adequately documented

Since grantees provide a wide variety of services, the way they classify costs--even costs commonly determined to be indirect, will vary.

Here are a few expenses and ways they could classified as direct or indirect.

Rent:

Anorganization rents an office and does not use that office for any particular programs. Rent would be an indirect cost because the expense of renting an office would be allocated across programs.
An organization rents a building which it then uses to provide low-income housing to its clients. This is a direct expense. This is because it is billable to one particular program and not the entire organization.

Printing:

An organization requires people to punch in a code for printing on a particular (grant funded) project. They generate a report of all printing done using this code and bills it to the grant. This would be a direct cost.
An organization does not track printing for each program. The cost is indirect since it is allocated across all programs.

Executive Director (ED)’s Salary:

The ED is providing programmatic support.Their hours providing this support could be billed as a direct cost.
The ED only provides organization wide support (i.e capacity or systems building). Then since this work benefits all programs within the organization, the salary cost is indirect.

Minnesota Statute 16B.98, Subd. 1 requires grant recipients of state fund appropriations to minimize administrative costs and directs granting agencies to negotiate appropriate limits so the state receives optimum benefit for grant funds.

Factors inAnalyzing Indirect Costs

The source and purpose of the grant fund contains key pieces of information for granting agencies to use when reviewing and approving indirect costs. Grantees should follow their internal policies, financial procedures, funding regulations, and true program cost of providing services in determining indirect costs.

A key principle to keep in mind is that no one funding source will cover all of a grantee’s indirect costs. Indirect cost reimbursement contributes to the costs a grantee has for running its programs, including grant-funded projects and programs.

When reviewing and analyzing indirect cost rates, it is important to balance transparency with efficiency.

Direct billing is the most transparent. The state grant reimbursesthe expenses directly related to a grant project. This requires the grantee to clearly track and verify direct grant expenditures.
Indirect allocations can be more efficient to process since they are based on a grantee’s reasonable and fair assessment of cost. This optionrequires a grantee to provide back-up documentation to demonstrate actual expenditures that contributed to the cost allocation that the state granting agency will review as part of the pre-grant award process and/or the grant monitoring process.
State granting agencies have discretion to consider the benefits and draw backs of each method and determine the way they choose to handle billing.

The 10% de Minimis (flat rate)

A simple way to determine an indirect cost rate is to follow the federal government’s 10% flat rate.OMB Uniform Guidance § 200.414points to the instances where this can be used. Under this option, state agencies would calculate 10% of the modified total direct costs (MTDC) and that would be the maximum that could be reimbursed for indirect expenses.

MTDC is determined by OMB Uniform Guidance § 200.68 which defines MTDC as consisting of all direct salaries and wages, fringe benefits, materials and supplies, services, travel, and the first $25,000 of each sub-award.

MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs and the portion of sub-awards which exceeds $25,000. Grantees and grant making agencies are responsible for making sure costs are consistently charged to avoid charging the same eligible expenses to the grant twice or “double dipping”

Line Item / Cost
Direct Salaries for project x / $94,000
Travel for project x / $5,000
Materials for project x / $1,000
Rent / $200,000
Total MTDC for project x / $100,000
10% indirect rate / $10,000

Calculating an Indirect Rate Using the De Minimis Rate

To calculate a de minimis rate, take all modified total direct costs and then take 10%. This becomes the amount a grantee can charge for indirect costs. An example calculation is shown below:

Assume a grant is given for $110,000 to a nonprofit. They provide the following breakdown of expenses:

Notice that since rent is not part of MTDC, it is not included in the 10% calculation. Another key principle in this option is that the $10,000 does not completely cover rent, an indirect cost. Remember,no one funding source will cover all of an organization’s indirect costs.

Key Themes:

There is no absolute rule as to what is and what is not an indirect cost.

State agencies are not responsible for reimbursing all of a grantee’s indirect costs for a project.

State agencies must balance transparency and accountability with efficiency when they determine if a direct or indirect billing method is acceptable.