Every dollar your organization spends keeping the lights on, running payroll, and maintaining IT systems while executing a federal grant is a real cost of delivering that program. The federal government recognizes this. Under the Uniform Guidance, grantees are entitled to recover these shared operating expenses through indirect cost rates.1 Yet a significant number of organizations either skip indirect cost recovery entirely or handle it so poorly that auditors flag the charges as questioned costs. Both outcomes drain resources from the mission the grant was meant to fund.
This guide explains how indirect cost recovery works, what options your organization has, and where the most consequential mistakes occur.
The Distinction That Drives Everything
Federal grant accounting splits all costs into two categories: direct and indirect. Direct costs can be traced to a specific award. If you hire a program coordinator who works exclusively on a DOJ grant, that salary is a direct cost. If you buy lab supplies for an NSF-funded study, those supplies are a direct cost. The connection between the expense and the award is clear and documentable.
Indirect costs are different. They benefit your entire organization, not just one grant. Your office lease, utility bills, general accounting staff, HR functions, and shared IT infrastructure all fall into this category. These expenses are just as necessary to running the funded program as the direct costs, but they cannot be assigned to a single award without an allocation method.2
This distinction matters because the federal government reimburses these two cost types through entirely different mechanisms. Direct costs get charged line by line. Indirect costs get recovered through a rate applied to a defined base of direct costs. If you do not understand how the rate works, you will either forfeit recoverable funds or charge costs in ways that trigger audit findings.
Three Paths to Indirect Cost Recovery
The De Minimis Rate: 15 Percent, No Negotiation Required
If your organization has never held a negotiated indirect cost rate agreement, you can elect a flat 15 percent rate applied to modified total direct costs (MTDC).3 The 2024 revision to the Uniform Guidance raised this from the prior 10 percent floor.4 You do not need to negotiate with any federal agency to use it. You do not need to submit a cost proposal. You simply include the 15 percent rate in your grant budget and supporting documentation.
MTDC includes direct salaries and wages, fringe benefits, materials, supplies, services, travel, and the first $25,000 of each subaward. It excludes equipment, capital expenditures, rental costs, tuition remission, scholarships, and subaward amounts above $25,000.5
The de minimis rate is available indefinitely. For small organizations or first-time grantees, it removes a major barrier to cost recovery. The tradeoff is precision: if your actual indirect costs run higher than 15 percent of MTDC (and for most organizations with shared office space and administrative staff, they do), you are absorbing the difference out of your own operating budget. On a $500,000 award, the gap between a 15 percent de minimis rate and a 30 percent negotiated rate represents $75,000 in unrecovered costs annually.
Negotiated Indirect Cost Rate Agreement (NICRA)
A NICRA is a formal agreement between your organization and your federal cognizant agency (the agency that provides the largest share of your direct federal funding) establishing an indirect cost rate based on your actual, documented expenses.6 To obtain one, you prepare an indirect cost rate proposal that categorizes your costs, identifies the allocation base, and calculates the resulting rate. The cognizant agency reviews the proposal, requests supporting documentation, and negotiates the final rate.
Negotiated rates for nonprofits typically fall between 15 and 40 percent, though organizations with substantial administrative infrastructure can see rates well above that range. Once established, the NICRA applies across all your federal awards unless a specific program imposes a statutory cap.7 The rate is not permanent; it must be renewed periodically based on updated cost data, which means your financial records need to support the rate you are claiming.
Direct Allocation
Organizations with a single major function or a very small portfolio of grants may allocate shared costs directly to each award using a documented allocation methodology rather than applying an indirect cost rate. This approach demands a clear, consistent, and auditable formula for assigning shared costs. It works for simple cost structures but becomes administratively burdensome as your grant portfolio grows. The methodology must be applied uniformly; cherry-picking allocation methods across awards is a compliance violation.8
Three Mistakes That Cost Real Money
The first and most common mistake is not claiming indirect costs at all. Some organizations omit indirect costs from their budgets because they believe it makes them more competitive, or because no one on staff understands the mechanism. The result is that the organization subsidizes the federal program from its own unrestricted funds. For context, a nonprofit running $2 million in federal awards with a true indirect rate of 25 percent that claims nothing is absorbing $500,000 per year in unrecovered operating costs. The de minimis rate requires zero negotiation and minimal documentation. There is no defensible reason to leave it unclaimed.
The second mistake is charging costs as both direct and indirect on the same award. If your executive director’s salary is included in your indirect cost pool, you cannot also charge a portion of that salary directly to a specific grant. This is called double-charging, and it produces audit findings that can result in the full amount being classified as a questioned cost, plus potential disallowance.9 Your cost allocation methodology must draw a clean, consistent line between what goes in the indirect pool and what gets charged directly.
The third mistake is ignoring award-specific caps. Some federal programs impose statutory or regulatory limits on the indirect cost rate you can charge, regardless of what your NICRA authorizes. The Department of Education, for instance, caps indirect costs on certain training grants.10 Charging above a capped rate is not a gray area; it is a disallowable cost. You must read the terms and conditions of every award and compare the allowed rate against your NICRA before building your budget.
When to Move Beyond the De Minimis Rate
The de minimis rate serves organizations that are new to federal grants or carry minimal overhead. As your grant portfolio expands and your organizational infrastructure grows, the gap between 15 percent and your actual rate widens. If your organization carries more than $500,000 in annual indirect costs, the return on investing in a NICRA proposal almost certainly exceeds the cost of preparing it.
The NICRA preparation process also produces a secondary benefit: it forces your finance team to categorize costs correctly, maintain consistent allocation methods, and document your cost structure with the rigor that auditors expect. These practices strengthen your compliance posture across every federal award you hold, not just the ones where the indirect rate applies.
Evaluate Your Indirect Cost Readiness
Indirect cost management does not exist in isolation. It sits inside a broader financial management infrastructure that includes cost allocation, time-and-effort reporting, procurement, and internal controls. Weaknesses in any of those areas create risk for your indirect cost claims. Our free diagnostic assesses your organization across the same compliance domains that federal auditors examine, so you can identify gaps before they become findings.
Take the Free Grant Readiness Assessment
Notes
1 2 CFR 200.56 defines indirect costs as costs incurred for a common or joint purpose benefiting more than one cost objective that cannot be readily identified with a particular final cost objective.
2 2 CFR 200.412 requires that costs be classified as direct or indirect on a consistent basis; a cost may not be allocated to a federal award as an indirect cost if any other cost incurred for the same purpose in like circumstances has been assigned as a direct cost.
3 2 CFR 200.414(f) establishes the de minimis rate for organizations that have never received a negotiated indirect cost rate.
4 OMB published the final revisions to 2 CFR Part 200 on April 22, 2024 (89 FR 30046), effective October 1, 2024, raising the de minimis rate from 10 percent to 15 percent.
5 2 CFR 200.1 defines modified total direct costs (MTDC) and specifies the included and excluded cost categories.
6 2 CFR 200.414(a) through (e) governs the establishment and use of negotiated indirect cost rate agreements. Cognizant agency assignment is addressed in 2 CFR 200.1 and 200.19.
7 Statutory caps on indirect cost rates vary by program. See, e.g., 34 CFR 75.562 (Department of Education training grants) and individual Notice of Funding Opportunity (NOFO) terms.
8 2 CFR 200.403(a) requires that costs be given consistent treatment as either direct or indirect; 2 CFR 200.405(b) addresses the allocation of costs to federal awards.
9 Double-charging violates 2 CFR 200.403(d), which prohibits assigning a cost to a federal award as a direct cost if any other cost incurred for the same purpose has been allocated as an indirect cost.
10 See 34 CFR 75.562 and specific NOFO terms for Department of Education indirect cost rate limitations on training grants.
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