Why Your Organization Needs A Negotiated Indirect Cost Rate 

Why Your Organization Needs A Negotiated Indirect Cost Rate

In today’s world of grants, recovery of indirect costs is extremely vital for nonprofits. With minimum resources and fewer capacity building opportunities, it is important to understand how to recover and budget indirect costs to further enhance your organization’s effectiveness. Most nonprofits underestimate and underreport the actual overhead costs while planning and writing grant programs. In the end, this will set up unrealistic expectations from funders and high indirect costs that will be detrimental to your nonprofit in the long run. In this blog post, we are sharing what indirect costs are and why you need to consider negotiating an indirect cost rate proposal.

What are Indirect Costs??

Costs that are not directly related to a grant, contract, project scope or objective, but are required to complete the necessary activities and for the organizational operations are known as indirect costs. The examples of the indirect costs include rent, utilities, salaries & wages of support personnel, computer usage, general office supplies, public relations etc. Indirect costs are also called overhead costs, facilities and administration costs.

What is an Indirect Cost Rate??

An indirect cost rate is simply a calculation for determining fairly and conveniently using the administrative principles, what proportion of indirect costs should be charged to each program. An indirect cost rate is calculated by taking the indirect costs divided by direct costs.

Question, why would an organization consider negotiating an indirect cost rate?? Right, is that what you are thinking?. Let’s look and see how that will be beneficial for your organization. Here we go:

1.    The de minimis 10% rate barely covers the full cost of the project you are implementing with grant funds which means you will be using your organizational budget to carry the programmatic activities.

2.    Even if some grantees allow 10% to 20% of indirect cost rate, your organization is still not recovering the cost of having to run those program and services but having to cover the deficit with fewer resources.

3.    It will lessen the administrative and financial burden so that you can focus on targeting the additional population, creating and maintaining a new program to add value to the communities you care about.

4.    It directly impacts your sustainability in the long run if your nonprofit is not able to balance its budget year after year.

5.    Consider grant programs that strategically align with your mission and vision so that you can still make a difference in the world along with recovering the much need overhead costs for your nonprofit.

BONUS: If you are a sub-recipient on a federal grant that allows indirect cost, you are eligible to receive 10% de minimis rate to recover some of the indirect costs if you have never negotiated an indirect cost rate.  Keep in mind; however, this de minimis rate may not cover all of your overhead costs or provide as much benefit as negotiating indirect costs.

Be on the look-out for the next blog post which discusses how to obtain and negotiate an indirect cost rate.