What Is An Indirect Cost?

What is an Indirect Cost?

When determining your project’s budget for the grant proposal, you will likely see the term “Indirect Costs” in the Notice of Funding Opportunity. 

In most grants, indirect costs are allowable costs.  This is often negotiated through an indirect cost rate agreement that factors in a reasonable portion of operating costs.  Different grants and agencies have varied policies when it comes to indirect costs covered by grant funding, but in general this definition by the National Science Foundation applies:

“Indirect costs are those costs which are not readily identifiable with a particular cost objective, but nevertheless are necessary for the general operation of an organization.  Examples of indirect costs include the salary and related expenses of individuals working in accounting, personnel, purchasing functions, rent, depreciation, and utilities.”

These are costs not directly applicable to the grant project, and not directly spelled out in eligible costs.  For example, if personnel are hired specifically for the purposes of working on the grant, their salary and benefits would be a direct cost in the project budget.  However, if an administrator who works for the organization regardless of whether or not the project is funded, but if the project is funded a portion of their work will support the grant project, their salary is an indirect cost. 

A common way to account for indirect costs is using an indirect cost rate.  Each NOFO will have information on how to calculate the indirect cost rate, and how to negotiate the indirect cost rate agreement.  The gist of this rate is that it is a mechanism to determine the ratio between the total indirect costs and direct costs and can be calculated by first identifying all activities carried out by the organization or department applying for the grant.  Next, take that list and classify all activities as either direct or indirect.  Eliminate all major costs that distort expenditures (major capital expenditures, abnormal large expenditures, etc.) and eliminate all costs unallowable under the requirements of the grant.  Then, add up the remaining direct costs, add up the remaining indirect costs, and divide the indirect cost total by the direct cost total. 

Be sure to check the NOFO and check in with the grantor to ensure that indirect costs are appropriately listed and accounted for.