Category: Beginner-level

If you’re a grant manager, financial manager or program manager, you must understand the complexities of developing a negotiated indirect cost rate for your grant program and how indirect costs can impact your budgeting decisions. It’s easy to overlook them – they don’t always appear in an entity’s balance sheet – but understanding these hidden expenses is key to accurately forecasting funding needs. This comprehensive guide provides an overview of indirect costs. It sheds light on successful management strategies when applying for and administering grants so entities can remain efficient and productive.

What are indirect costs?

Indirect or facilities and administrative (F&A) costs help multiple projects and always go towards general overhead and operating expenses. Some indirect costs include utilities, human resources, and other services. 

Determining indirect costs is an essential element to consider when drafting grant proposals. Doing so helps protect the financial sustainability and integrity of the entity. It also helps secure adequate funding to cover all operational costs associated with the implementation of the project. Entities need to account for these costs to ensure they accurately estimate the project’s actual cost because not doing so can lead to budget shortfalls, financial strain, and potential compromise on the quality or scope of a project. Therefore, a thorough understanding and accurate representation of indirect costs in grant proposals are fundamental to any project or organization’s success and financial health.

Estimating and projecting indirect costs

Sometimes indirect costs are referred to as overhead. Estimating these costs involves identifying all the indirect expenses incurred by the entity and allocating them based on specific criteria, such as the proportion of direct labor hours or direct costs. Projecting indirect costs, on the other hand, is crucial for future planning and budgeting. This involves predicting how these costs might change due to inflation, business operations changes or, market environment shifts. It’s an essential part of financial forecasting, helping businesses prepare for potential overhead increases and allowing them to make strategic decisions to manage these costs effectively.

A critical procedure involving indirect costs is collaborating on a negotiated indirect cost rate agreement (NICRA), a rate established between the federal government and a nonfederal entity. This rate is usually expressed as a percentage of the direct costs. Remember that some items might be exempt from these costs, so exclude those from your base amount when calculating.

It is important to understand that each federal agency may have its guidelines and requirements for managing and calculating indirect costs, so always refer to the agency’s specific grant guidance or consult the awarding agency.

Read more about Indirect Cost rates.

Assessing the different types of indirect cost categories

In federal grants management, indirect costs are typically classified within two broad categories:

1. Facilities: This category includes expenses for maintaining and operating the physical space where the grant-funded work is performed. It might include costs for utilities, depreciation on buildings and equipment, operations and maintenance expenses, library expenses, and more.

2. Administration: This category covers the administrative expenses supporting the organization’s overall operation but not directly tied to a specific project. These may include general administration and general expenses such as the salaries and expenses of executive officers, personnel administration, and accounting, among others.

Some entities also separate their costs into three basic categories: (i) General administration and general expenses, (ii) Fundraising, and (iii) Membership development.

Remember, each federal agency may have guidelines and requirements for managing and calculating indirect costs, so always refer to the specific grant guidance or consult the granting agency.

Defining and calculating allowable expenses

In grants management, allowable expenses are those costs eligible under a federal award according to the regulations outlined by the awarding agency. The U.S. Office of Management and Budget (OMB) provides general guidance for determining allowable costs in the uniform guidance (§200.403).

To be considered allowable, a cost must meet several criteria. It must be necessary and reasonable for the performance of the federal award, allocable to the project, and conform to any limitations or exclusions outlined in the federal laws or the grant agreement. It also needs to be consistent with policies and procedures that apply uniformly to federally financed and other activities of the nonfederal entity and be accorded consistent treatment.

The calculation of allowable expenses depends on the specific cost principles provided by the Office of Management and Budget (OMB). For example, direct costs such as salaries of employees who work on the grant-supported project, supplies and materials used for the project, and travel expenses incurred for the project are generally allowable. Indirect costs, like administrative expenses, are often calculated as a negotiated percentage of the direct costs.

Maintaining proper documentation of all costs is important in the case of audits. Any costs that do not meet the criteria or are not correctly documented may be disallowed and must be covered by the grantee organization.

Identifying potential sources of funding for indirect costs

Identifying potential sources of funding for indirect costs in federal grants management involves a few key steps:

1. Understanding the Grant Guidelines: Each federal grant will have specific guidelines about what it covers, including whether it provides funds for indirect costs. Always carefully review the grant solicitation and award documentation to understand the funding provisions.

2. Applying for an Indirect Cost Rate: Many federal agencies allow grantees to collaborate on the NICRA. Once you have an approved NICRA, you can use that rate for indirect costs in your budget proposals for federal grants.

3. Exploring Other Federal Grants: Some federal grants, found at Grants.gov, specifically cover overhead or administrative costs.

Remember, it’s essential to ensure applying federal funding to cover indirect costs should comply with federal regulations and specific grant guidelines. Consult a grants management professional or the granting agency if you need more clarification.

Are you looking for grant opportunities? Check out GrantScape –  The most comprehensive resource of grants opportunities — From Foundations to Federal, State and, Local Governments

How to properly report and document your indirect cost activities

Proper reporting and documentation of indirect cost activities in federal grant management are critical to ensure compliance with grant requirements and for audit purposes. Here are some steps to guide you through the process:

1. Establish Clear Accounting Procedures: Your organization should have established accounting procedures that define how indirect costs are categorized and tracked. This includes defining what expenses are considered indirect costs and how they are allocated among various projects or grants.

2. Maintain Detailed Records: Keep detailed records of all expenses, including receipts, invoices, and payroll records. This documentation clearly shows how each cost is associated with a specific grant and how it contributes to achieving its objectives.

3. Use a Consistent Method for Allocating Indirect Costs: Apply a consistent method for allocating indirect costs to different projects or grants. This could be based on direct labor hours, direct costs, or another equitable distribution measure. This method should be documented and used consistently across all grants.

4. Prepare Financial Reports: Regularly prepare financial reports detailing each federal grant’s direct and indirect costs. These reports should align with the accounting records and be prepared according to the grant’s reporting schedule.

5. Review and Audit: Review your indirect cost calculations and allocations to ensure accuracy and compliance with grant requirements. Auditing your financial statements by an independent auditor is also a good idea.

6. Retain Records: Federal grants often require records to be retained for several years after the grant period ends. Be sure you understand these requirements and have a system for retaining and accessing these records.

7. Avoid “Double-dipping.” Ensure that your costs are defined as direct or indirect, and develop internal controls to prevent charging costs as both direct and indirect.

Remember, each federal agency might have specific requirements for reporting and documenting indirect costs, so always refer to the specific grant guidance or consult the granting agency.

Understanding how to calculate and report indirect costs can be challenging for entities applying for grant funding. However, with the right tools and resources, it is possible to properly research potential funding sources for indirect cost activities, establish accurate estimates and projections for such costs, and identify the specific types of allowable expenses included in each category. Knowing how to craft a precise grant proposal that includes these considerations is vital in securing the financial resources needed to ensure your organization meets its goals. If you are still confused about how this may all work together or need further guidance on understanding indirect costs – fear not! We at Thompson Grants offer detailed training courses with comprehensive instruction on evaluating indirect costs and other related components of successful applications. Check out our next workshop on indirect cost to ensure that your grant proposal includes all essential elements required by funder regulations today!

Please note: This blog post is not official or legal guidance. Recipients should consult the federal awarding agency regarding whether the Uniform Guidance applies to a particular federal award. Subrecipients should consult with the pass-through entity. Thompson Grants is not a grantmaking organization and does not award grants.