Non-Profits: Introduction to Indirect Cost Rate

Did you know there are 1.5 million registered nonprofits in the United States of America?? Each and every day these nonprofits serve and provide various services to individuals in need which includes men, women, children, and families. I can't imagine what America would look like if these nonprofit organizations didn't exist. Being a grants and an accounting professional, I understand the need for having enough funds to support the direct and indirect costs of a nonprofit. According to 2 CFR 200, direct costs are those costs that can be identified specifically with a particular final cost objective. On the other hand, indirect costs are described as: 

“Indirect costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective.” In 2 CFR 200, these indirect costs are also called Facilities & Administrative (F&A) costs and explained as follows: 

  • “Facilities” are defined as depreciation on buildings, equipment and capital improvement, interest on debt associated with certain buildings, equipment and capital improvements, and operations and maintenance expenses.
  • “Administration” is defined as general administration and general expenses such as the director's office, accounting, personnel and all other types of expenditures not listed specifically under one of the subcategories of “Facilities” (including cross allocations from other pools, where applicable). 

In my definition, indirect costs are those we cannot tie to a certain project, grant, or funder but they are required and essential for your organization to operate. For example: you will probably use the same computer for researching, writing, submitting, and managing various grants from multiple funders and for you to allocate the percentage used for each grant to each funder will be highly difficult and if you include the utilities it even gets more complicated.

It’s not the Money that Matters it’s how you use it that determines its True Value.

So, you see that's why your nonprofit should have a negotiated indirect cost rate because it is designed to provide a method for full cost recovery and it is an equitable, logical and consistent process for allocating costs not directly associated with a single grant. The negotiated rate will allow your organization to recover those funds so that they can go back into your program and make your organization more sustainable. If you have never had an indirect cost rate and your grant funding is under the Federal threshold you may be able to use the de minimis rate. Let us help you review if you could use the de minimis rate or if you should apply to negotiate an indirect cost rate with the Federal government. Every dollar adds up. 

Contact us today to see how we can help your nonprofit establish an indirect cost rate. If you have enjoyed reading this post; please share. Like us on Facebook.