Grant Budgets
Indirect Cost Rate: How It Is Set and How to Apply It
Grant Writing Service Editorial Team
June 12, 2026 · 6 min read
Table of contents
Key takeaways
- An indirect cost rate is your indirect cost pool divided by a direct cost base, applied to the same kind of base in each budget.
- Since October 1, 2024, organizations without a current negotiated rate may elect a de minimis rate of up to 15 percent of modified total direct costs.
- Modified total direct costs now include up to the first $50,000 of each subaward and exclude equipment, rent, participant support costs and tuition remission.
- Your rate is what you may charge; the notice of funding opportunity tells you what that program will actually pay.
An indirect cost rate is the percentage an organization charges to a grant to recover shared overhead, such as accounting, executive management, rent and utilities, that cannot be traced to one project. It is calculated by dividing the organization's pool of indirect costs by a base of direct costs, and it is then applied to the same kind of base in each grant budget. For federal awards, you either use a rate negotiated with your cognizant agency or, if you have no current negotiated rate, elect the de minimis rate of up to 15 percent of modified total direct costs, which replaced the old 10 percent rate on October 1, 2024.
Which costs belong in the pool and which belong in the budget as direct lines is a separate question, covered in direct vs indirect costs. This page is about the rate itself: how it is built, which rate to use, and how to apply it without overclaiming.
How the rate is calculated
The arithmetic is a single division. The work is in deciding what goes on each side.
| Step | Illustrative nonprofit, one fiscal year |
|---|---|
| Indirect cost pool (finance, human resources, executive director, shared rent and utilities, audit, insurance) | $310,000 |
| Direct cost base (the same kinds of costs the rate will later be applied to) | $1,800,000 |
| Indirect cost rate ($310,000 ÷ $1,800,000) | 17.2 percent |
Two rules keep the number defensible. First, a cost cannot sit in the pool and also be charged directly to any award; 2 CFR 200.413 requires costs incurred for the same purpose in like circumstances to be treated consistently. Second, the base used to compute the rate must match the base you apply it to. A rate built on modified total direct costs and then applied to total direct costs overstates every request.
For federal negotiation, the methods are set out in the appendices to 2 CFR 200 (Appendix III for colleges and universities, Appendix IV for nonprofits, Appendix VII for state and local governments and tribes). Your cognizant agency for indirect costs reviews the proposal and issues the agreement.
Applying a rate: the modified total direct costs base
Most federal rates, and the de minimis rate, apply to modified total direct costs. The current definition in 2 CFR 200.1 includes all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $50,000 of each subaward, counted once per subaward regardless of how many years it runs. It excludes:
- equipment and capital expenditures
- rental costs
- charges for patient care
- tuition remission, scholarships and fellowships
- participant support costs
- the portion of each subaward above $50,000
The $50,000 figure is new. Before the 2024 revision it was $25,000, and many templates still carry the old number.
A worked example shows how much the base matters. These figures are illustrative.
| Direct cost line | Amount | In the base? |
|---|---|---|
| Salaries and wages | $180,000 | Yes |
| Fringe benefits | $50,400 | Yes |
| Travel | $8,000 | Yes |
| Supplies | $12,000 | Yes |
| Equipment (one $25,000 instrument) | $25,000 | No |
| Participant support (stipends, participant travel) | $30,000 | No |
| Subaward to a partner university | $120,000 | First $50,000 only |
| Rent for a dedicated field office | $18,000 | No |
| Total direct costs | $443,400 | |
| Modified total direct costs | $300,400 | |
| Indirect at 15 percent de minimis | $45,060 |
Applying the same 15 percent to total direct costs would produce $66,510, an overclaim of $21,450 that a grants officer will cut and an auditor would question. Our online budget calculator separates these lines so the base is computed for you.
The de minimis rate after the 2024 revision
The rule now lives in 2 CFR 200.414(f), and several details changed with the October 1, 2024 revision:
- Who can elect it. Any recipient or subrecipient that does not have a current federal negotiated rate, including a provisional rate. The old restriction to organizations that had never had a negotiated rate is gone.
- How much. Up to 15 percent of modified total direct costs. The organization decides the rate up to that limit.
- Documentation. None is required to justify using it.
- Duration. It may be used indefinitely, but once elected it applies to all of your federal awards until you choose to negotiate a rate. You cannot use it on one award and a different approach on another.
- Protection. Federal agencies and pass-through entities may not force you below the rate you elected unless a statute or regulation requires it.
- Exclusion. It does not apply to cost reimbursement contracts issued directly by the federal government under the Federal Acquisition Regulation.
- Consistency. Costs must be charged either direct or indirect, never both.
One practical note: the de minimis rate is a ceiling for recovery, not proof that your real overhead is 15 percent. If your actual overhead is lower, nothing stops you from electing a lower rate, and if it is much higher, the de minimis rate is leaving money on the table.
Negotiated rates
A negotiated indirect cost rate agreement (often called a NICRA) is issued by your cognizant agency for indirect costs, usually the federal agency that provides the most direct federal funding to your organization. It is built from your audited financial statements and an indirect cost proposal, and it can be higher or lower than 15 percent depending on your actual cost structure.
Under 2 CFR 200.414, federal agencies must accept a negotiated rate unless a statute or regulation requires a different rate or the agency approves a deviation under policies it has published, and pass-through entities must accept a subrecipient's negotiated rate. An organization with a current negotiated rate may also apply once for an extension of up to four years, which spares it a renegotiation cycle.
Choosing between them
The choice is recovery versus administrative effort. An illustrative comparison for an organization running $400,000 a year in modified total direct costs across federal awards:
| Approach | Annual recovery | What it takes |
|---|---|---|
| De minimis at 15 percent | $60,000 | An election and consistent charging |
| Negotiated rate of 24 percent | $96,000 | An indirect cost proposal, audited financials, periodic renegotiation |
A $36,000 annual gap usually justifies the work of negotiating. A gap of a few thousand dollars usually does not. Organizations with a small federal portfolio, or with real overhead near 15 percent, are generally best served by the de minimis rate, and they can move to a negotiated rate later as federal volume grows.
The rate you hold versus the rate a program pays
Holding a rate does not guarantee a program will pay it. Some federal programs carry statutory caps on indirect or administrative costs, and 2 CFR 200.414 requires agencies to state their indirect cost policies in the notice of funding opportunity, so that document is where to look first. Foundations set their own policies, often a flat percentage of the request or no indirect at all, and many do not use the federal base. Read the funder's rule, apply it to the base it names, and do not assume a federal rate carries over. Our notice of funding opportunity guide shows where indirect policies usually sit in the document.
Stating the rate in your budget
On a federal application the indirect amount goes on line 6j of the SF-424A budget form, and the budget narrative should state the rate, its source and the base in one or two sentences:
Indirect costs are requested at the organization's de minimis rate of 15 percent of modified total direct costs ($300,400), totaling $45,060. Equipment, participant support costs, rent and subaward costs above the first $50,000 are excluded from the base.
If you hold a negotiated rate, name the agreement date and attach it if the funder asks. For how the indirect line sits alongside every other part of a proposal budget, see our complete grant budget walkthrough, and for the wider rules behind these figures, the Uniform Guidance overview.
