Understanding the Basics
What Is a NICRA and Why Does It Matter?
When your organization receives a federal grant, it incurs two types of costs: direct costs and indirect costs. Direct costs are expenses tied directly to the grant-funded program, like staff salaries for program employees, supplies, or project-specific travel. Indirect costs are the overhead expenses that support your organization as a whole but cannot easily be tied to a single program, like executive leadership, accounting, IT infrastructure, or building occupancy.
Federal grants allow organizations to recover a portion of these indirect costs, but the rate at which you can recover them must be established in advance. A NICRA does exactly that. It is a binding agreement with your cognizant federal agency that sets your approved indirect cost rate for a specified period, typically one to three years. Once established, you apply that rate to your direct costs on federal awards to calculate the indirect costs you can bill to the grant.
For many organizations, indirect costs represent 20 to 40 percent of their actual operating costs. Failing to recover them means subsidizing federal programs with your own unrestricted funds.
The NICRA process involves developing a cost allocation plan or indirect cost rate proposal, submitting it to your cognizant federal agency, negotiating the rate, and executing a formal agreement. Once executed, the NICRA is binding on all your federal awards unless a specific grant program restricts indirect cost recovery.
For nonprofits, the process follows similar principles with some procedural differences. This guide focuses primarily on local and regional government agencies. If you represent a nonprofit, the framework below applies to your situation, with your cognizant agency and submission process varying based on your federal funding sources.
Who This Applies To
Who Needs a NICRA?
Not every organization that receives federal grants needs a NICRA, but many that should have one do not. The consequences of operating without one when you should have one include unrecovered costs, compliance risk, and in some cases disallowed costs on federal awards.
Government Agencies
When local governments need a NICRA
Local and regional governments that receive federal grants are generally expected to have either a negotiated indirect cost rate or a cost allocation plan approved by their cognizant federal agency. A NICRA is appropriate when:
- Your agency receives multiple federal grants across departments
- Your actual indirect cost rate is higher than the 15% de minimis rate
- Your cognizant federal agency requires a negotiated rate
- You want to maximize allowable cost recovery on federal awards
- You are pursuing federal awards that require or encourage a negotiated rate
Nonprofits
When nonprofits need a NICRA
Nonprofits receiving federal grants can use the de minimis rate, negotiate a NICRA, or in some cases use a predetermined or fixed rate. A NICRA is worth pursuing when:
- Your actual indirect costs exceed 15% of modified total direct costs (MTDC)
- You receive significant federal funding on a recurring basis
- Your federal program officers or cognizant agency recommend negotiating a rate
- You want to establish a stable, defensible indirect cost structure
- You are scaling up federal funding and need cost recovery certainty
Understanding Your Options
NICRA vs. the De Minimis Rate: What Is the Difference?
Organizations that do not have a NICRA can use the de minimis indirect cost rate of 15% of modified total direct costs (MTDC) under 2 CFR 200.414. While this simplifies administration, it is often significantly lower than an organization's actual indirect cost rate. Understanding the tradeoff is essential to making the right decision for your agency.
Option A
The De Minimis Rate (15% of MTDC)
Any organization that has never had a federally negotiated indirect cost rate can use the de minimis rate of 15% of modified total direct costs. No negotiation required.
- Available to any eligible organization without a NICRA
- Simple to apply, no negotiation process required
- Rate is fixed at 15% regardless of actual indirect costs
- May result in significant unrecovered costs if actual rate is higher
- Can be used indefinitely unless a NICRA is negotiated
Best for organizations with low indirect costs, limited federal funding, or those early in their federal grant journey.
Option B
Negotiated Indirect Cost Rate Agreement (NICRA)
A NICRA establishes your actual approved indirect cost rate based on your real organizational costs. It requires a proposal and negotiation with your cognizant federal agency but allows full cost recovery.
- Rate is based on your actual indirect costs, often significantly above 15%
- Maximizes allowable cost recovery on federal awards
- Provides a defensible, audited indirect cost structure
- Requires development of a cost allocation plan or indirect cost rate proposal
- Negotiation with cognizant agency typically takes 3 to 6 months
Best for organizations with substantial federal funding, indirect costs above 15% of MTDC, or those scaling their federal grant program.
The NICRA Process
How to Negotiate a NICRA: A Step-by-Step Overview
The NICRA negotiation process is manageable but requires technical precision. Most organizations benefit from working with a federal compliance expert for their first NICRA, particularly to ensure the cost allocation methodology is sound and the proposed rate is defensible under audit.
Identify Your Cognizant Federal Agency
Your cognizant federal agency is the federal agency responsible for reviewing and negotiating your indirect cost rate. For local governments, the cognizant agency is typically determined by which federal agency provides the largest amount of direct federal funding. For nonprofits, the determination follows a similar logic. Knowing your cognizant agency is the first step before beginning any NICRA work.
Common cognizant agencies include HUD, DOJ, HHS, DOT, DOI, and EPA depending on your primary funding source.
Develop a Cost Allocation Plan or Indirect Cost Rate Proposal
The foundation of a NICRA is a cost allocation plan (primarily for government agencies) or an indirect cost rate proposal (for nonprofits). This document identifies all of your organization's indirect costs, describes the methodology for allocating those costs across programs and cost objectives, and calculates the proposed indirect cost rate. The methodology must be consistent, equitable, and compliant with 2 CFR 200 cost principles. This is where most organizations benefit from expert guidance, as errors at this stage can lead to a lower approved rate or disallowed costs.
Submit Your Proposal to the Cognizant Agency
Once your cost allocation plan or indirect cost rate proposal is complete, you submit it to your cognizant federal agency for review. The submission typically includes your proposal document, supporting financial statements, and a description of your cost accounting practices. Submission requirements vary by cognizant agency, so reviewing agency-specific guidance before submitting is important.
Allow 3 to 6 months for the full negotiation process from submission to executed agreement.
Negotiate the Rate
The cognizant agency reviews your proposal and may request additional documentation, clarification, or adjustments to your methodology. This is a negotiation, and the agency may propose a lower rate than you submitted. Understanding which costs are allowable under 2 CFR 200, how to defend your cost allocation methodology, and what adjustments are reasonable versus what you should push back on requires knowledge of both the regulatory framework and your organization's specific cost structure.
Execute the Agreement and Apply the Rate
Once both parties agree on the rate, the NICRA is executed as a formal agreement. You can then apply the approved rate to the modified total direct costs (or base method used) on your federal awards. NICRAs typically cover one to three years and must be renewed. Keeping detailed records of your indirect costs throughout the period is essential for the renewal process and for audit defense.
Apply the NICRA rate to your organization's approved base, which excludes equipment, capital expenditures, patient care charges, rental costs, tuition, and subcontract amounts over $50,000.
Not sure whether your agency needs a NICRA?
The Grant Project works directly with local governments and nonprofits to assess their indirect cost situation, develop cost allocation plans, and negotiate NICRAs with cognizant federal agencies.
Key Terminology
NICRA Terms You Need to Know
Indirect Costs
Costs that benefit multiple programs or cost objectives and cannot be directly assigned to a single grant. Examples include executive salaries, accounting, HR, IT, and building occupancy. Also called facilities and administrative costs (F&A) or overhead.
Direct Costs
Costs that can be specifically identified with a particular grant or program. Examples include the salary of a program-funded staff member, supplies purchased exclusively for the grant, or travel directly related to grant activities.
Modified Total Direct Costs (MTDC)
The most common base to which the indirect cost rate is applied. MTDC includes salaries, wages, fringe benefits, materials, supplies, services, and travel, but excludes equipment, capital expenditures, patient care charges, rental costs, tuition remission, and the portion of each subcontract exceeding $50,000.
Cognizant Federal Agency
The federal agency responsible for reviewing and negotiating an organization's indirect cost rate. For most organizations, this is the agency that provides the largest amount of direct federal funding. The cognizant agency executes the NICRA and is the primary federal point of contact for indirect cost matters.
Cost Allocation Plan
A document prepared by state and local governments that describes the procedures for identifying, measuring, and allocating all costs incurred by central service departments that provide services to operating agencies. It is the basis for negotiating indirect cost rates for government entities.
De Minimis Rate
A 15% indirect cost rate available to any non-federal entity that has never had a negotiated indirect cost rate, under 2 CFR 200.414. It can be used indefinitely as an alternative to negotiating a NICRA, but it is often lower than an organization's actual indirect cost rate.
Free Tool
Not sure what your indirect cost rate actually is?
Before you begin the NICRA negotiation process, you need to know your rate. Use our free Indirect Cost Rate Calculator to estimate it using either the MTDC or Salaries, Wages, and Fringe (SWF) allocation base.
Frequently Asked Questions
NICRA Questions Answered
What does NICRA stand for?
NICRA stands for Negotiated Indirect Cost Rate Agreement. It is a formal agreement between a non-federal entity, such as a local government or nonprofit, and its cognizant federal agency that establishes the approved rate at which indirect costs can be charged to federal awards.
Is a NICRA required to receive federal grants?
A NICRA is not required to receive federal grants. Organizations without a NICRA can use the de minimis indirect cost rate of 15% of modified total direct costs under 2 CFR 200.414. However, for organizations whose actual indirect cost rate exceeds 15%, operating without a NICRA means leaving real money on the table and absorbing legitimate costs with unrestricted funds.
How long does it take to get a NICRA?
From developing the cost allocation plan or indirect cost rate proposal through final execution of the agreement, the NICRA process typically takes 3 to 6 months. This varies by cognizant agency, the complexity of your cost structure, and the completeness of your submission. Well-prepared proposals with clear cost allocation methodologies tend to move through the process more quickly.
What is the difference between a NICRA and a cost allocation plan?
A cost allocation plan (CAP) is the document that describes how a state or local government allocates indirect costs across programs. It is developed by the organization and submitted to the cognizant agency. A NICRA is the formal agreement that results from the negotiation of that plan. The CAP is the input; the NICRA is the output and the binding instrument that governs cost recovery on federal awards. Please note: Cost Allocation Plans are also created to use for internal cost planning outside of the NICRA process.
Can a NICRA be retroactive?
Generally, a NICRA applies prospectively from the date of the agreement or the beginning of the fiscal year covered by the rate. Retroactive application of indirect costs to prior federal awards is typically not permitted. This is one reason why organizations with significant federal funding should initiate the NICRA process as early as possible rather than waiting until they have already received substantial awards. Cost Recovery can occur in some circumstances for open grants within an agreed amount of time based on the Cognizant Agency's recommendation.
How often does a NICRA need to be renewed?
NICRAs are typically issued for one to three years. Fixed rates are set for a specific period and not subject to retroactive adjustment. Predetermined rates are similar but may be used for a longer period. Provisional rates are temporary rates used when final cost data is not yet available and are replaced by a final rate once the year-end cost data is available. Organizations should plan for renewal well in advance of their agreement expiration.
Do local governments and nonprofits have different NICRA processes?
Yes. State and local governments typically develop a central service cost allocation plan (CAP) and submit it under the requirements of 2 CFR Part 200, Appendix VII. Nonprofits develop an indirect cost rate proposal under 2 CFR Part 200, Appendix IV. The underlying principles are similar, but the specific documentation requirements, submission formats, and cognizant agency processes differ. Working with someone familiar with both frameworks helps ensure a compliant and efficient submission.
What happens if my indirect cost rate is audited?
If your indirect cost rate is questioned during a Single Audit or federal program review, you will need to demonstrate that your cost allocation methodology is consistent, equitable, and compliant with 2 CFR 200 cost principles. Costs allocated using an improper methodology or that do not meet allowability requirements can be disallowed, resulting in a repayment obligation to the federal government. This is why building a defensible cost structure before negotiating your NICRA is essential. Learn more about federal compliance and grant readiness.
Building Your NICRA Budget Infrastructure
Your NICRA infrastructure should grow with your organization. As you take on more federal grants, expand programs, or change operational approaches, your systems need to adapt. Build flexibility into ... ...more
Grant Compliance
May 20, 2025•6 min read
Understanding NICRAs for Federal Funding
Understanding NICRAs for Federal Funding ...more
Grant Compliance
May 01, 2025•5 min read
NICRA Vocabulary: Essential Terms for Nonprofits and Local Governments
Clarity on indirect costs saves time, reduces audit risk, and strengthens your funding strategy. This guide defines the core NICRA terms your team needs to communicate clearly across finance, grants, ... ...more
Grant Compliance
March 28, 2025•9 min read
Catherine Riggs, PhD
Need help with your NICRA?
The Grant Project works with local governments and nonprofits to develop cost allocation plans, negotiate NICRAs, and maximize indirect cost recovery on federal awards.
Work With The Grant ProjectIs your organization grant-ready?
NICRA is one component of grant readiness. Find out how your organization scores across all five components of federal grant readiness.
Read the Grant Readiness Guide
View our Privacy Policy and Terms and Conditions here. © 2026. All Rights Reserved.