How do indirect cost rates work?
Indirect Cost Rates and the De Minimis Option
An indirect cost rate is a percentage applied to a defined base of direct costs to recover shared organizational costs. Organizations either negotiate a rate with a federal cognizant agency or elect the de minimis rate set in the Uniform Guidance. The base matters as much as the percentage.
Current figures — verified 2026-08-11
Item Value Source De minimis indirect cost rate Up to 15 percent of modified total direct costs 2 CFR 200.414(f) Subaward amount inside the base First $50,000 of each subaward; the excess is excluded 2 CFR 200.1 Equipment capitalization threshold (equipment is excluded from the base) Lesser of the recipient’s own capitalization level or $10,000 per unit 2 CFR 200.1 First rate proposal deadline, nonprofits Within three months of the award’s effective date; then within six months after each fiscal year close 2 CFR Part 200, Appendix IV One-time extension of a negotiated rate Up to four years, with cognizant agency approval 2 CFR 200.414(g) State or local proposal submission trigger More than $35 million in direct federal funding per year 2 CFR Part 200, Appendix VII Nonprofits recovering no more than a 10 percent rate on government funding 76 percent; 24 percent paid zero National Council of Nonprofits, citing Urban Institute Median true indirect rate, studied high-performing nonprofits 40 percent, range 21 to 89 percent Bridgespan, Pay-What-It-Takes Philanthropy These figures change. Verify against the linked source before relying on them. Report an outdated figure
Key takeaways
- A rate is meaningless without its base, type, and period.
- The de minimis rate requires no application, negotiation, or documentation.
- Equipment, participant support, and large subaward balances leave the base.
- Rate type determines whether over-recovery must be repaid later.
- Negotiated rates bind all federal agencies absent statutory authority.
What is an indirect cost rate?
An indirect cost rate is the ratio of an organization’s pooled shared costs to a defined base of direct costs, expressed as a percentage and applied to that same base on each award. Within budgets and grant finance, the indirect cost rate is the mechanism that pays for the finance office, the audit, the server, and the rent.
The arithmetic is a division. The indirect cost pool holds allowable shared costs — general management, accounting, human resources, occupancy, audit, general information technology, depreciation on shared assets. The base holds the direct costs of every activity that benefits from that pool, including non-federal programs and unallowable activities such as fundraising. Pool divided by base is the rate (2 CFR Part 200, Appendix IV).
Unallowable costs come out of the pool; unallowable activities stay in the base. Removing a fundraising function from the base is a rate-inflation error and a standard audit finding, because the pool then spreads across fewer dollars (2 CFR 200.413(e)).
An indirect cost rate is never quotable alone. Four attributes travel together: the rate, the base it applies to, the rate type, and the period it covers. A rate stated without its base is not information. Which costs qualify as indirect in the first place is covered in direct versus indirect costs.
What is a negotiated indirect cost rate agreement, and how do you get one?
A negotiated indirect cost rate agreement is a written agreement between an organization and its federal cognizant agency for indirect costs, fixing the rate or rates, the base, the rate type, the applicable period, and any special treatment of particular costs. Once negotiated, the rate “must be accepted by all Federal agencies” unless a different rate is required by federal statute or regulation, or approved through a documented agency deviation (2 CFR 200.414(c)).
The cognizant agency is assigned, not chosen. For nonprofits it is the federal agency providing the largest dollar value of direct federal funding to the organization, and the assignment holds until federal funding shifts for several consecutive years (Appendix IV).
Getting a rate is a documentation exercise rather than a negotiation in the ordinary sense. A typical proposal package includes audited financial statements or a trial balance for the base year, a statement of total costs reconciling to those financials, the indirect cost pool schedule, the base schedule, a schedule of federal awards, an organization chart, written accounting and cost allocation policies, and a certificate of indirect costs signed by an officer (DOL, Guide for Indirect Cost Rate Determination).
The real cost is staff time and accounting maturity. An organization needs a general ledger that already separates pool from base, an unallowable cost account, and consistent cost policies before a proposal can be assembled at all. Deadlines are firm: a first proposal is due shortly after the first federal award becomes effective, and a new proposal is due after each fiscal year closes (see current figures above). State and local government departments follow a parallel process under Appendix VII, submitting only above a funding threshold and otherwise retaining the proposal on file for audit.
What is the de minimis indirect cost rate?
The de minimis indirect cost rate is a standing option in the Uniform Guidance that any recipient or subrecipient without a current federal negotiated rate may elect, applied to modified total direct costs. The regulation is unusually direct about how little process it requires: “The de minimis rate does not require documentation to justify its use and may be used indefinitely” (2 CFR 200.414(f)).
Five conditions define the de minimis indirect cost rate in practice. The rate is a ceiling, and a recipient may elect any rate up to it. No application, negotiation, or cognizant agency is involved. Once elected, the rate must be used for all federal awards until the organization chooses to pursue a negotiated rate. Costs must be charged consistently as either direct or indirect and may not be double charged. And the de minimis rate does not apply to cost-reimbursement contracts issued directly by the federal government under the Federal Acquisition Regulation.
Federal agencies and pass-through entities may not require a recipient to use a rate lower than the negotiated rate or the elected de minimis rate unless a federal statute or regulation requires it (2 CFR 200.414(f)). Many caps encountered in practice are institutional convention rather than law, and convention is negotiable.
The de minimis rate exists as an escape hatch for organizations that cannot carry the accounting burden of a rate proposal. Its consequence is that many organizations stop there permanently, even when their genuine indirect costs run several times higher (see current figures above).
Why does the base matter as much as the indirect cost rate?
The base determines how many dollars the rate is multiplied by, so two organizations with the same nominal rate can recover very different amounts. Modified total direct cost is the standard federal base: all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and part of each subaward (2 CFR 200.1).
Modified total direct cost excludes equipment, capital expenditures, patient care charges, rental costs, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward above the threshold. The logic behind the exclusions is that each is a lumpy or pass-through-like cost that consumes little administrative capacity per dollar. Including a building or a large subaward would let the rate harvest indirect recovery on dollars that generate no proportional overhead.
Worked example A — building the base and applying the de minimis rate. The de minimis rate and the subaward threshold used below are taken from the Current figures callout above and are subject to change; verify them against the linked sources before applying this method to a live budget.
PROPOSED DIRECT COSTS
Salaries $200,000
Fringe benefits $ 50,000
Equipment (one instrument) $ 40,000
Travel $ 15,000
Participant support (20 trainees) $ 25,000
Supplies $ 10,000
Subaward A (total $80,000) $ 80,000
Subaward B (total $30,000) $ 30,000
────────────────────────────────────────────────────────
TOTAL DIRECT COSTS $450,000
BUILD THE MODIFIED TOTAL DIRECT COST BASE
Total direct costs $450,000
− Equipment (excluded) ($ 40,000)
− Participant support (excluded) ($ 25,000)
− Subaward A above the threshold ($80,000−$50,000)($ 30,000)
− Subaward B above the threshold (none) $0
────────────────────────────────────────────────────────
MODIFIED TOTAL DIRECT COST BASE $355,000
APPLY THE DE MINIMIS RATE
$355,000 × 15% = $ 53,250
TOTAL PROJECT COST $450,000 + $53,250 = $503,250
TWO READINGS OF THE SAME ARITHMETIC
Naive error: same rate applied to total direct
$450,000 × 15% = $ 67,500
Overclaim versus the correct base = $ 14,250
Recovery as a share of the whole project
$53,250 ÷ $503,250 = 10.6%Two conclusions follow. Applying the rate to total direct costs instead of the modified base produces an overclaim that a grants officer strips during negotiation or an auditor questions after the fact. And indirect recovery measured against the whole project comes out well below the headline rate, because the base is smaller than the project — the single most under-explained fact in grant budgeting.
Worked example B — one rate, two bases. The hypothetical negotiated rate below is illustrative and is not drawn from any published figure; the exclusions applied to the base come from the Current figures callout above.
Same project as Example A.
BASE OPTION 1 — direct salaries and wages only
Base $200,000
Hypothetical negotiated rate of 30% = $ 60,000
BASE OPTION 2 — modified total direct cost
Base $355,000
Same 30% rate = $106,500
Difference on an identical project = $ 46,500The lesson is that a comparison of two organizations’ rates is meaningless without their bases. A rate quoted against salaries and wages is applied to a much smaller number and is therefore numerically larger for the same real recovery. Any request to “state your indirect rate” should be answered with the rate, the base, the type, and the period.
What are the types of indirect cost rates?
Four rate types appear in negotiated agreements, and each carries a different consequence for cash and for later reconciliation. The table below compares the four indirect cost rate types.
| Rate type | What it is | Adjusted later? |
|---|---|---|
| Provisional | Temporary rate for interim billing and reporting | Yes, trued up to a final rate |
| Final | Rate for a past period based on actual allowable costs | No; it is the true-up |
| Predetermined | Firm rate for a current or future period, based on estimates | No, except in unusual circumstances |
| Fixed with carry-forward | Like predetermined, with the estimate-to-actual difference carried forward | Indirectly, through a future rate |
Definitions come from 2 CFR Part 200, Appendix IV; federal program guidance restates them in operational terms (HHS Office of Head Start, “Types of Indirect Cost Rates”).
Budgeting behavior should follow the rate type. Under a provisional rate, over-recovery must be repaid at true-up, so an organization should budget conservatively and hold a reserve against the adjustment. Under fixed with carry-forward, an under-recovery is not lost; the shortfall raises a later period’s rate. Under a predetermined rate, over- and under-recovery are both permanent, which makes the estimate quality of the proposal a durable financial decision rather than a paperwork step.
Predetermined rates are not permitted on federal contracts, though they are available for grants and cooperative agreements. Fixed rates are unsuitable where major awards expire before an adjustment could be made or where the mix of federal and non-federal work swings unpredictably.
How do caps and subawards limit indirect cost recovery?
Statutory and program caps override negotiated indirect cost rates, and subawards limit recovery structurally because only part of each subaward sits in the base. Both effects reduce recovery below the nominal rate, and both are predictable in advance.
A federal agency must accept a negotiated rate unless a different rate is required by federal statute or regulation, or approved as a documented deviation that the agency publishes and reports to OMB (2 CFR 200.414(c)). Attempts to apply flat across-the-board caps to negotiated rates without that authority have been challenged in federal court by research institutions and their associations (American Council on Education litigation tracker). The durable principle is the one in the regulation: a negotiated rate binds federal agencies absent statutory or regulatory authority to depart from it.
Caps are also written in two incompatible dialects, and the difference is real money.
Worked example C — converting a cap expressed against a total. The figures below are illustrative round numbers, not published thresholds.
CAP EXPRESSED AS A SHARE OF TOTAL PROJECT COST
Total project $100,000
Cap of 15% of total = $ 15,000 indirect
Remaining direct = $ 85,000
Effective rate on direct $15,000 ÷ $85,000 = 17.6%
FIXED AWARD CEILING WITH A RATE APPLIED TO DIRECT
Award ceiling $100,000
Hypothetical rate of 30% on all direct costs
Direct = $100,000 ÷ 1.30 = $ 76,923
Indirect = $ 23,077
Indirect as a share of total = 23.1%A notice that caps indirect costs at a bare percentage, without naming the base the percentage runs against, is ambiguous between those two dialects. Resolve the ambiguity in writing with the agency before submission rather than after award.
Subawards limit recovery differently. Only the first portion of each subaward enters the base, so a project delivered largely through subrecipients recovers far less indirect than the same project delivered in house. That fact makes the subrecipient-versus-contractor determination financially consequential, and it is why the determination follows a substance test rather than the parties’ preference (2 CFR 200.331). Subrecipients set their own rate: a federally negotiated rate that the pass-through entity must accept, a rate negotiated between the two parties, or the de minimis rate (2 CFR 200.332(a)(4)). The monitoring obligations that follow are covered in subrecipient monitoring.
Why do organizations under-recover indirect costs?
Under-recovery of indirect costs is usually mechanical rather than strategic. Six mechanisms account for most of it, and each is fixable independently of funder behavior.
- No rate proposal is ever filed. Negotiating a rate requires an auditable cost accounting system and staff time, so organizations elect the de minimis rate and stay there indefinitely.
- The rate is applied to the wrong base. Omitting fringe, travel, or supplies from the modified base quietly forfeits recoverable dollars on every award.
- Funder caps are accepted without question. Many caps are institutional practice rather than statute, and a negotiated rate is binding on federal agencies absent statutory or regulatory authority.
- Everything is direct-allocated, and then nothing is claimed. Direct allocation is a legitimate method, but using it does not forfeit the residual general administration pool.
- The rate is discounted to look efficient. Requesting below the allowable rate transfers real costs to unrestricted revenue without improving competitiveness.
- The organization does not know its own rate. Without a computed pool and base, there is no number to defend, so the funder’s default becomes the answer.
The cumulative effect is documented. Survey evidence indicates most nonprofits receiving government funding recover little or no indirect cost, while studies of nonprofit cost structure put true indirect rates far higher (see current figures above). The gap is absorbed by unrestricted revenue, reserves, and deferred investment in systems — the self-reinforcing dynamic named the nonprofit starvation cycle, in which funder expectations about overhead drive under-investment and understatement, which then confirm the expectations (Gregory and Howard, Stanford Social Innovation Review).
Over time the effect compounds into organizational fragility: no reserve to bridge reimbursement lag, no capacity to absorb a compliance shock, and no capital to modernize the systems that make compliance affordable. The economics of that pattern are covered in the true cost of running a program.
This article is general information about federal indirect cost rules, not accounting, tax, or legal advice. Rate proposals and rate elections for a specific organization should be reviewed with its accountant and its cognizant agency.
Frequently asked questions
Can an organization charge indirect costs without a negotiated rate?
Yes. Any recipient or subrecipient without a current federal negotiated rate may elect the de minimis rate applied to modified total direct costs, with no application and no supporting documentation required. The election must then be used consistently across all federal awards until a negotiated rate is obtained.
Does electing the de minimis rate prevent negotiating a rate later?
No. The de minimis election lasts until the organization chooses to pursue a negotiated rate. Organizations frequently start with the de minimis rate, build the accounting infrastructure, and file a rate proposal once federal volume justifies the effort.
Which agency negotiates the rate?
The cognizant agency for indirect costs, which for nonprofits is the federal agency providing the largest dollar value of direct federal funding. The assignment is not chosen by the organization and does not change casually; it follows sustained shifts in the funding mix.
Are indirect costs allowed on participant support and equipment?
Generally no. Participant support costs and equipment are both excluded from the modified total direct cost base, so no indirect recovery accrues on them unless a negotiated rate agreement expressly provides otherwise. Moving a cost into or out of those categories changes the recovery on the whole budget.
What happens if actual indirect costs exceed the provisional rate?
Under a provisional rate the difference is settled at true-up when the final rate for the period is established, so an under-recovery may be recoverable and an over-recovery must be returned. Under a predetermined rate the difference is permanent. Under a fixed rate with carry-forward, the difference adjusts a later period’s rate.
Can unrecovered indirect costs count as cost share?
Yes, with permission. Unrecovered indirect costs, including indirect costs on cost sharing, may be included as part of cost sharing with the prior approval of the federal agency or pass-through entity (2 CFR 200.306(c)). The approval must be obtained rather than assumed.
Related topics
- Budgets and Grant Finance — the hub covering cost categories, indirect rates, match, allowability, and grant cash mechanics
- Direct vs Indirect Costs
- The Anatomy of a Grant Budget
- Cost Share and Matching Requirements
- The True Cost of Running a Program
Sources
- Electronic Code of Federal Regulations, 2 CFR § 200.414, Indirect costs. https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-E/subject-group-ECFR4c1052b9e28b95f/section-200.414 (accessed 2026-08-11)
- Electronic Code of Federal Regulations, 2 CFR § 200.1, Definitions (Modified Total Direct Cost, Equipment, Participant support costs). https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-A/section-200.1 (accessed 2026-08-11)
- Electronic Code of Federal Regulations, 2 CFR Part 200, Appendix IV, Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Nonprofit Organizations. https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/appendix-Appendix%20IV%20to%20Part%20200 (accessed 2026-08-11)
- Electronic Code of Federal Regulations, 2 CFR Part 200, Appendix VII, States and Local Government and Indian Tribe Indirect Cost Proposals. https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/appendix-Appendix%20VII%20to%20Part%20200 (accessed 2026-08-11)
- Electronic Code of Federal Regulations, 2 CFR § 200.413, Direct costs. https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-E/subject-group-ECFR4c1052b9e28b95f/section-200.413 (accessed 2026-08-11)
- Electronic Code of Federal Regulations, 2 CFR § 200.331, Subrecipient and contractor determinations. https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-D/subject-group-ECFR031321e29ac5bbd/section-200.331 (accessed 2026-08-11)
- Electronic Code of Federal Regulations, 2 CFR § 200.332, Requirements for pass-through entities. https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-D/subject-group-ECFR031321e29ac5bbd/section-200.332 (accessed 2026-08-11)
- Electronic Code of Federal Regulations, 2 CFR § 200.306, Cost sharing or matching. https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-D/subject-group-ECFR8feb98c2e3e5ad2/section-200.306 (accessed 2026-08-11)
- U.S. Department of Labor, Office of the Senior Procurement Executive, Guide for Indirect Cost Rate Determination for Nonprofit and Commercial Organizations. https://www.dol.gov/sites/dolgov/files/OASAM/legacy/files/DCD-2-CFR-Guide-vvh-508.pdf (accessed 2026-08-11)
- U.S. Department of Health and Human Services, Office of Head Start, “Types of Indirect Cost Rates.” https://headstart.gov/fiscal-management/article/types-indirect-cost-rates (accessed 2026-08-11)
- U.S. National Science Foundation, “Indirect Costs.” https://www.nsf.gov/funding/proposal-budget/indirect-costs (accessed 2026-08-11)
- National Council of Nonprofits, “Common Problems in Government-Nonprofit Grants and Contracts,” citing Urban Institute survey data. https://www.councilofnonprofits.org/trends-and-policy-issues/state-policy-tax-law/common-problems-government-nonprofit-grants-and (accessed 2026-08-11)
- Bridgespan Group, Pay-What-It-Takes Philanthropy, executive summary. https://www.bridgespan.org/insights/pay-what-it-takes-philanthropy-executive-summary (accessed 2026-08-11)
- Ann Goggins Gregory and Don Howard, “The Nonprofit Starvation Cycle,” Stanford Social Innovation Review, Fall 2009. https://ssir.org/articles/entry/the_nonprofit_starvation_cycle (accessed 2026-08-11)
- American Council on Education, “Association Lawsuit: NIH Indirect Cost Rate Cap,” litigation tracker. https://www.acenet.edu/Policy-Advocacy/Pages/Law-Courts/Association-Lawsuit-NIH-FA.aspx (accessed 2026-08-11)