TLDR
An indirect cost rate is the percentage applied to a direct-cost base (typically MTDC) to calculate how much overhead a federal grant can reimburse. Nonprofits establish this rate either by negotiating a NICRA with their cognizant agency or by claiming the de minimis rate — raised from 10% to 15% MTDC under the 2024 Uniform Guidance revision.
An indirect cost rate is the percentage applied to a direct-cost base — most commonly Modified Total Direct Costs (MTDC) — to calculate the overhead amount a federal grant can reimburse. The 2024 Uniform Guidance revision raised the de minimis rate from 10% to 15% of MTDC, the first increase since that option was created.
How it works
Indirect costs are real organizational expenses — accounting staff salaries, facility rent, IT systems, HR administration — that support programs without being chargeable to any single one. Federal grant regulations require nonprofits to recover these costs through a defined mechanism rather than burying them in direct-cost line items.
The rate is calculated as:
Indirect cost rate = Total indirect costs ÷ Total direct costs in the chosen base
The most common base is MTDC (Modified Total Direct Costs), which excludes equipment, capital expenditures, sub-award amounts above $25,000 per subcontract, participant support costs, and several other categories. Once calculated, the rate is applied to each award’s MTDC to determine the dollar amount of indirect costs that award supports.
A nonprofit with $250,000 in indirect costs and $1,000,000 in MTDC has a 25% rate. On a new $200,000 award with $160,000 in MTDC, indirect recovery = $40,000.
When it applies
Two pathways establish a nonprofit’s indirect cost rate under 2 CFR 200.414:
Negotiated rate (NICRA). The organization submits a cost allocation plan to its cognizant federal agency — typically HHS for health and social service organizations, ED for educational institutions, or DOL for workforce programs. The cognizant agency reviews, negotiates, and approves a rate. That rate then binds all other federal awarding agencies providing funding to the same organization. Negotiation usually takes 6–12 months from submission of a complete package.
De minimis rate. Organizations that have never had a federally negotiated indirect cost rate may claim 15% of MTDC without any negotiation. This rate is administratively simple but may recover substantially less than a negotiated rate would allow, particularly for organizations with higher overhead ratios.
Negotiated rates can be fixed (no end-of-period adjustment), predetermined (set in advance, no adjustment allowed), provisional (temporary, subject to final adjustment), or final (settled after actuals are known). The type of rate matters because provisional rates leave open the possibility of a retroactive settlement — for better or worse.
Common misconceptions
The indirect cost rate is not a ceiling on overhead. It represents only what is recoverable on federal awards. An organization’s actual overhead ratio may be higher; the unrecovered portion is absorbed from other revenue sources.
A lower rate is not always better. A 15% de minimis rate recovered on a $500,000 MTDC base yields $75,000. A 28% negotiated rate on the same base yields $140,000. Underpricing overhead through an artificially low rate means programs are quietly subsidizing administration.
Statutory caps are not the same as NICRA rates. Some federal programs impose statutory limits on indirect cost recovery that apply even when a nonprofit has a higher NICRA rate. The nonprofit absorbs the difference; it cannot bill another award for the uncapped balance.
Facilities and administrative costs are not interchangeable terms. Many NICRAs separate the rate into an F&A (facilities and administrative) rate with distinct components. Misclassifying costs between pools produces an audit finding even when the combined rate looks correct.
Related terms
- Modified Total Direct Costs (MTDC) — the direct-cost base most commonly used to apply an indirect cost rate.
- De minimis indirect cost rate — the 15% MTDC rate available without negotiation under 2 CFR 200.414(f).
- Cognizant agency — the federal agency responsible for negotiating and approving the NICRA.
- Negotiated Indirect Cost Rate Agreement (NICRA) — the formal agreement establishing an approved rate and base.
- Cost allocation plan — the supporting document describing how indirect costs are identified and distributed.
How GrantPipe handles indirect cost rates
GrantPipe stores each grant’s approved indirect cost rate and base alongside the award budget. The grant ledger automatically calculates indirect recovery as costs are posted, flags any overrun against the approved rate, and surfaces the difference between NICRA rate and any statutory cap so Finance Directors know exactly what is being absorbed and on which award. Indirect cost tracking is part of the grant record — not a separate spreadsheet.
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Source: Urban Institute, National Center for Charitable Statistics
Source: Office of Management and Budget, 2 CFR 200 (2024 revision)
- Indirect costs
- Costs that benefit multiple projects or functions and cannot be specifically identified with a single award — including administration, facilities, accounting, and IT support. Defined at 2 CFR 200.1.
DEFINITION
- Cost pool
- A grouping of indirect costs that share a common allocation basis. An organization may maintain multiple pools (e.g., facilities pool allocated by square footage, administrative pool allocated by salaries).
DEFINITION
- Cost allocation plan (CAP)
- A document describing how a nonprofit identifies, accumulates, and distributes indirect costs across programs. Required for nonprofits seeking a NICRA; governed by 2 CFR 200 Appendix IV for nonprofits.
DEFINITION
- Predetermined rate
- An indirect cost rate that is fixed for a specified period and based on an estimate. Unlike a fixed rate, it is not subject to adjustment.
DEFINITION
Q&A
What is an indirect cost rate?
An indirect cost rate is the percentage applied to a direct-cost base (usually MTDC) to calculate the share of overhead recoverable on a federal award. It is negotiated with a cognizant agency or claimed at the de minimis level under 2 CFR 200.414.
Q&A
How is an indirect cost rate calculated?
The rate equals total allowable indirect costs divided by total allowable direct costs in the chosen base (commonly MTDC). For example, $250,000 indirect / $1,000,000 MTDC = 25%.
Q&A
What is the difference between a fixed and provisional indirect cost rate?
A fixed rate is set in advance and cannot be adjusted; any over- or under-recovery is carried forward to a future period. A provisional rate is a temporary estimate subject to adjustment once actual costs are known, settled in a final rate.
Q&A
Can a nonprofit have more than one indirect cost rate?
Yes. Nonprofits with distinct programs or facilities may negotiate separate rates for different cost pools — for example, a separate on-campus and off-campus rate for a university, or a separate rate for a distinct operating division.
Q&A
What happens if I don't have a NICRA?
Without a NICRA, a nonprofit may claim the de minimis rate (currently 15% of MTDC under the 2024 Uniform Guidance update) if it has never previously had a negotiated rate. Some funders also have program-specific caps that apply in lieu of a NICRA.
Frequently asked