Grant Budgets
Indirect Cost Rate: How It Works in Grants
Marisa Calderón, GPC
March 3, 2026 · 4 min read
Table of contents
Key takeaways
- An indirect cost rate recovers shared overhead as a percentage of a defined cost base.
- Organizations can negotiate a NICRA or elect the de minimis 10 percent rate allowed under 2 CFR 200.
- The most common base is modified total direct costs, which excludes equipment and large subaward amounts.
- Some funders cap or disallow indirect costs, so always check the guidelines before applying a rate.
An indirect cost rate is a percentage used to recover shared overhead, such as rent, utilities, and administration, that cannot be traced to a single project. You apply the rate to a defined cost base, most often modified total direct costs, to calculate how much overhead a grant will reimburse. Organizations can either negotiate a formal rate with a federal agency or elect the de minimis 10 percent rate allowed under 2 CFR 200, and the right choice depends on your overhead and your funders.
Why the rate matters more than applicants expect
Overhead is real. Your accountant, your office, and your insurance all make funded projects possible, but none of them can be charged to one grant as a line item. The indirect cost rate is how the federal government, and many foundations, let you recover a fair share of that cost. Leave it off and you are subsidizing the grant out of unrestricted funds.
Yet many applicants either skip indirect recovery entirely or claim more than the rules allow. Both are mistakes. To understand which costs are even eligible, read our explainer on how direct and indirect costs differ first, then come back for the rate mechanics.
Two ways to get a rate
There are two legitimate paths, and most organizations use one or the other.
The de minimis 10 percent rate
If your organization has never had a negotiated rate, 2 CFR 200 lets you elect a flat de minimis rate of 10 percent of modified total direct costs. You do not negotiate anything; you simply apply it, and federal funders must accept it when used correctly. This is the practical choice for newer or smaller organizations, and as of the current 2 CFR 200 guidance it remains available indefinitely once elected.
A Negotiated Indirect Cost Rate Agreement
Organizations with significant infrastructure often negotiate a Negotiated Indirect Cost Rate Agreement (NICRA) with their federal cognizant agency. The rate is built from your audited financials and actual overhead, and it can run well above 10 percent. A NICRA takes effort to obtain and maintain, but it can recover far more for organizations whose true overhead exceeds the de minimis floor.
Understanding the cost base
A rate means nothing without the base it applies to. The most common base is modified total direct costs, and what it excludes matters as much as what it includes.
Modified total direct costs includes most direct costs like personnel, fringe, travel, and supplies, but it excludes:
- Equipment and capital expenditures.
- Rent and certain facility costs.
- Participant support costs in some programs.
- The portion of each subaward above the first $25,000.
Those exclusions stop you from charging overhead on large pass-through amounts. If a budget has $100,000 in direct costs but $30,000 of that is equipment, the equipment drops out and the 10 percent rate applies only to the remaining $70,000.
| Step | Figure |
|---|---|
| Total direct costs | $100,000 |
| Less equipment | ($30,000) |
| Modified total direct costs base | $70,000 |
| Indirect at de minimis 10 percent | $7,000 |
Which rate should you choose
The decision between the de minimis rate and a NICRA comes down to a trade-off between recovery and effort. The de minimis option costs you nothing to obtain: you elect it, apply it, and federal funders must honor it. That simplicity is exactly right for a newer or smaller organization whose true overhead sits near the de minimis floor anyway, because negotiating a formal agreement would consume staff time the recovery does not justify.
A Negotiated Indirect Cost Rate Agreement becomes worth pursuing when your actual overhead clearly exceeds the de minimis level and your federal funding is large enough that the difference is material. Picture an organization whose audited financials support a real rate well above the de minimis floor and that runs several federal awards each year. The gap between the two rates, applied across a large modified total direct costs base, can recover tens of thousands of additional dollars annually, which easily repays the cost of obtaining and maintaining the agreement. The maintenance is the catch: a NICRA must be renegotiated on a schedule and defended with current financial data, so it suits organizations with the accounting capacity to support it. Map your expected federal volume against your real overhead before deciding, and remember you can start with the de minimis rate and negotiate later as you grow.
Check the funder's rules before you apply any rate
A rate you are entitled to is not a rate every funder will pay. Many foundations cap indirect costs at 10 or 15 percent, and some refuse them outright. Federal programs sometimes impose statutory caps below your negotiated rate. Always read the Notice of Funding Opportunity for the indirect policy before you plug in a number, because claiming more than the cap means an automatic cut.
Our complete grant budget guide covers how the indirect line sits inside the full budget, and the grant budget builder tool computes the modified total direct costs base and applies your chosen rate automatically.
Document it in the narrative
Whatever rate you use, state it plainly in the budget narrative: the rate, the agreement type, and the base. A reviewer who sees "indirect costs are charged at the 10 percent de minimis rate on modified total direct costs" has nothing to question. Our guide to writing a clear budget narrative shows where this sentence belongs.
If the choice between a NICRA and the de minimis rate is unclear, or the base calculation is getting complicated, our experienced grant writers set up the rate correctly and document it to withstand a later audit.
