When it comes to dealing with indirect costs in the budgeting process, it is important to be familiar with the concept of indirect costs, what they can be budgeted for, and exactly how much can be allocated toward these expenses. This publication describes indirect costs, gives examples of what they can be used for, and explains how they are calculated in the grants management process.

Understanding Indirect Costs

Generally speaking, indirect costs are the costs related to the management of an award and/or a signed contract. The U.S. Department of Health and Human Services defines indirect costs as “those costs of an institution that are not readily identifiable with a specific project or activity, but are nonetheless necessary to the general operation of an institution and how activities are conducted.” When you are budgeting for a project, it is important to classify and document any indirect costs appropriately. These costs represent an attempt to compensate award recipients for the expenses incurred in housing and maintaining a project. In business terms, these costs are referred to as “overhead.”

Examples of indirect costs are:

• Costs associated with operating and maintaining buildings and grounds
• Equipment depreciation
• General salaries
• Administrative services
• Office supplies and equipment

For example, a community-based art project to paint a mural on a public facility may require indirect costs related to personnel time to supervise volunteers, the use of scaffolding or other painting equipment owned by a city, and administrative costs associated with the public unveiling of the completed mural.

Indirect costs are generally divided into specific areas and represent the basis of an indirect rate, which is used to formulate the percentage of project costs that may be used for indirect costs. The indirect rate is a calculated percentage of total direct costs, modified direct costs (i.e., direct costs minus equipment costs), personnel costs, and salaries/wages. Some funding agencies have an upper limit to what award recipients can charge on what is indirect, but any difference between the agency’s indirect rate and your organization’s indirect rate can be calculated and charged to a grant as a donated amount.

Indirect cost allowances vary by applicant, so it is important for you to know exactly what your organization’s allowable indirect cost rate is and on what basis it is calculated. You should verify whether your agency has a negotiated indirect cost rate or inquire with the funding agency about how to obtain an indirect cost rate.

Since the nature and use of indirect costs are not specific, they can be scrutinized closely in an audit or involve meticulous documentation in a final report that may be required by a funding agency. Keep these points in mind when determining how much funding to propose for your project’s indirect costs.

Despite its name, indirect costs are important to the execution of a project. Indirect costs are not readily identifiable with a particular project or activity, but they are part of a common objective that funding agencies recognize and support. Having an awareness of what indirect costs may be used for and how much grant funding can be used for indirect costs will allow you to better allocate your resources to ensure that your project is able to meet its objectives.