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Office of Finance and Operation’s Indirect Cost DivisionWhat are Indirect Costs?
What is an indirect cost rate?
How are indirect cost rates determined?
Cost Policy Statement Sample
Instructions for Fixed Indirect Cost Rate Calculation using IRS Form 990
Request for Technical Assistance
NEW! Cost Allocation Guide for State and Local Governments (2) MB
HHS Implementation Guide for State, Local and Indian Tribal Governments (ASMB C-10)
Indirect costs represent the expenses of doing business that are not readily identified with a particular grant, contract, project function or activity, but are necessary for the general operation of the organization and the conduct of activities it performs. In theory, costs like heat, light, accounting and personnel might be charged directly if little meters could record minutes in a cross-cutting manner. Practical difficulties preclude such an approach. Therefore, cost allocation plans or indirect cost rates are used to distribute those costs to benefiting revenue sources.
Looking at it another way, indirect costs are those costs that are not classified as direct. Direct costs can be identified specifically with particular cost objectives such as a grant, contract, project, function or activity. Direct costs generally include:
An indirect cost rate is simply a mechanism for determining fairly and conveniently within the boundaries of sound administrative principle, what proportions of Departmental/organization administration costs each programs should bear. An indirect cost rate represents the ratio between the total indirect costs and benefiting direct costs, after excluding and or reclassifying unallowable costs, and extraordinary or distorting expenditures. (i.e., capital expenditures and major contracts and subgrants). The indirect costs in the numerator of the equation should bear a reasonable relationship to the direct costs from the denominator. This will allow for each program or activity represented in the direct costs base to assume their fair share of indirect costs when the rate is applied.
The cognizant Federal agency is responsible for approving indirect cost rates for recipients based on an indirect cost proposal submission. The indirect cost proposal or cost allocation plan should:
Step 4 will require judgment on whether to "exclude" any disallowed or distorting costs or reclassify those costs to the direct costs base. The determining factor is if the cost at issue generates overhead or benefits from indirect costs, then it should be reclassified to the base and allocated a fair share of indirect costs. Additional guidance follows on how to obtain an approved indirect cost rate.
Here is a link to a cost policy statement sample . This sample is intended to be used as guidance for non-profit organizations that seek reimbursement for indirect costs under federal awards. The model assumes that the ABC Nonprofit Organization uses the direct allocation basis of charging costs.
Some Department of Education funding streams (e.g., earmarks) are considered fixed-priced grant awards or lump sum funded instruments. In contrast, most cost reimbursement awards generally link claims to costs incurred as progress is made toward performance. For these fixed-priced type grants, individual program offices may authorize the use of fixed indirect cost rates using the IRS Form 990 alternative calculation method.
Here is a link to a set of instructions to calculate the indirect cost rate using IRS Form 990. These instructions may be used in situations where program offices allow this flexibility.
Please send any questions concerning indirect costs to the following mailbox: IndirectCostDivision@ed.gov