The NICRA Vocabulary Every Local Government and Nonprofit Should Know

Indirect Costs are the most misunderstood costs in organizational budgets, and often the most ignored. They get lost behind the focus on programmatic funding, even though they represent the real cost of running your programs: the finance staff, the systems, the rent and utilities that keep everything moving. When those costs go unaccounted for or simply assumed away, organizations leave real money on the table. For local governments, that is unrestricted funding paid by taxpayers. For nonprofits, it is your donor base absorbing what a federal award was willing to cover. And it usually comes down to language. When your finance team, your grants team, and your program leads each use the same words to mean slightly different things, budgets drift, draw downs get questioned, and audits take longer than they should.

A shared vocabulary fixes that. The terms below give your team a common reference point for negotiating an indirect cost rate, applying it correctly, and communicating clearly across departments and with funders. Whether you manage a single federal award or a portfolio with multiple pass-through subawards, consistent language keeps your budgeting, reporting, and compliance aligned.

These definitions follow the Uniform Guidance (2 CFR 200). Program-specific rules or agency variations may still apply, so always confirm against the terms of your award.

How to use this guide

Start with the building blocks: direct versus indirect costs, the pool, and the base. Once those are solid, the formulas let you check budgets and claims before submission. Then share the definitions with staff and subrecipients so everyone is working from the same language.

Core NICRA Concepts

Negotiated Indirect Cost Rate Agreement (NICRA) A formal agreement between your organization and a federal cognizant agency that establishes your approved indirect cost rate or rates, along with the applicable base, methodology, and period covered. Example: A city department applies its NICRA-approved rate to eligible costs on a federal grant.

Indirect Costs Costs incurred for common or joint objectives that cannot be readily tied to a single project, program, or activity. Example: Finance staff time supporting multiple grants is an indirect cost.

Direct Costs Costs that can be identified specifically with one final cost objective, such as a project, program, or activity. Example: A program coordinator's time spent solely on one grant is a direct cost.

Indirect Cost Rate (ICR) A percentage applied to an approved base to recover indirect costs. Formula: Indirect Cost Rate = Indirect Cost Pool ÷ Indirect Cost Base Example: A $300,000 pool over a $1,000,000 base produces a 30% rate.

Indirect Cost Pool The accumulated indirect costs subject to allocation across one or more cost objectives, consistent with your approved rate methodology. Example: Administrative salaries, accounting software, and occupancy costs that support all programs make up the indirect cost pool.

Indirect Cost Base The measure to which the rate is applied, such as Modified Total Direct Costs, salaries and wages, or total direct cost, as approved in your NICRA. Example: With an MTDC base, you apply the rate only to eligible direct costs within the MTDC definition.

Modified Total Direct Cost (MTDC) A commonly approved base that includes all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $50,000 of each subaward. The $50,000 figure was updated from $25,000 in the 2024 Uniform Guidance revisions, effective October 1, 2024. MTDC excludes equipment, capital expenditures, patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward above $50,000. Example: A $100,000 subaward contributes only $50,000 to the MTDC base.

Total Direct Cost (TDC) All direct costs without the MTDC exclusions. TDC is used only when approved in your NICRA. Example: With a TDC base, you include all direct costs in the base calculation.

Cost Objective A program, grant, contract, function, or other activity for which cost data are needed and accumulated. Example: A single federal award is a final cost objective.

Allocation The process of assigning costs to one or more cost objectives in reasonable proportion to the benefits each receives. Example: Distributing shared copier costs to programs based on staff hours per program.

Allowable Cost A cost that is necessary, reasonable, allocable, and compliant with the Uniform Guidance and the terms of your award. Example: Required audit costs are allowable when consistent with policy and award terms.

Unallowable Cost A cost that cannot be charged to federal awards under the Uniform Guidance or award terms. Example: Alcoholic beverages are unallowable.

Directly Associated Costs Costs incurred solely as a result of incurring another cost. When the primary cost is unallowable, the directly associated cost is unallowable too. Example: Payroll taxes on unallowable compensation are also unallowable.

Fringe Benefits Compensation beyond regular salaries and wages, such as health insurance, retirement, and payroll taxes. Fringe can be treated as direct or indirect, depending on your approved methodology. Example: Employer FICA and health insurance tied to program staff are direct fringe costs.

Facilities and Administration (F&A) A term often used by institutions of higher education to describe indirect costs. Facilities generally covers depreciation and operations; Administration covers general administrative expenses. An F&A rate is functionally equivalent to an indirect cost rate.

Agencies, Partners, and Roles

Cognizant Agency for Indirect Costs The federal agency responsible for negotiating and approving your NICRA, typically the agency providing the largest share of your direct federal funding. Example: If your largest direct federal award is from HHS, HHS is likely your cognizant agency.

Pass-Through Entity (PTE) A non-federal entity that receives a federal award and provides a subaward to a subrecipient to carry out part of the program. Example: A state agency subawards federal funds to a county department.

Subrecipient An entity that receives a subaward from a PTE to carry out part of a federal program. A subrecipient is subject to programmatic compliance requirements. Example: A nonprofit delivering program services under a county's federal grant is a subrecipient.

Contractor An entity that provides goods or services for the non-federal entity's own use. A contractor is subject to procurement standards, not programmatic compliance requirements. Example: A consultant hired to build a reporting dashboard is a contractor.

Rate Types and Negotiation

Provisional Rate A temporary rate applied to funding actions while a final rate for the period is negotiated. Example: You bill at the provisional rate during the year, then settle to the final rate after negotiation.

Final Rate A rate for a specified past period based on actual costs, not subject to adjustment. Example: After year-end, your final rate is negotiated and used to close out the period.

Predetermined Rate A rate for a specified future period, based on an estimate and not subject to later adjustment. Example: Once approved, you apply the predetermined rate without reconciliation.

Fixed Rate with Carryforward A fixed rate for the period, with adjustments applied in a later period to account for under- or over-recovery. Example: Over-recovered indirect costs this year reduce next year's allowable indirect costs through carryforward.

Carryforward The mechanism used to true up the difference between indirect costs recovered and indirect costs actually incurred under a fixed-with-carryforward rate. Example: A positive carryforward increases next period's pool to correct prior under-recovery.

Rate Agreement (NICRA Letter) The official document stating your approved rate or rates, base, period covered, and any special terms or restrictions. Example: Your NICRA letter specifies a 28% MTDC rate and the period it covers.

Indirect Cost Proposal (ICP) or Indirect Cost Rate Proposal (ICRP) The cost documentation submitted to your cognizant agency to justify and negotiate your rate. Sometimes called an Indirect Cost Rate Proposal (ICRP). Example: Your ICP includes the pool, base, allocation methods, and supporting schedules.

Bases, Methods, and Applications

On-Site Rate A rate that applies when activities occur in facilities your organization owns or directly leases. Example: Staff based at headquarters apply the on-site rate to eligible costs.

Off-Site Rate A rate that applies when activities occur primarily at locations you do not own or directly lease, where certain facility costs are not incurred. Example: Field work conducted at partner facilities may use an off-site rate.

Multiple Rates Distinct rates approved for different functions or locations, such as on-site versus off-site or program versus administration, as specified in your NICRA. Example: A 26% on-site MTDC rate and a 20% off-site MTDC rate.

Salary and Wages (S&W) Base An approved base that includes only direct salaries and wages, and sometimes applicable fringe, rather than MTDC or TDC. Example: With an S&W base, you apply the rate only to direct salaries and wages.

Cost Allocation Plan (CAP) A documented methodology describing how shared costs are allocated across benefitting activities. One caution: some people use "Cost Allocation Plan" to refer to the NICRA proposal itself. They are not the same thing. Example: The CAP explains how IT, rent, and utilities are distributed to programs.

Allocation Methodology The basis used to distribute shared costs, such as square footage, headcount, or direct labor hours, consistent with your CAP and the Uniform Guidance. Example: Rent is allocated based on occupied square footage.

Special Topics and Common Choices

15% De Minimis Rate A standard rate of 15% of MTDC that non-federal entities without a current negotiated rate may elect and use indefinitely, unless and until a NICRA is negotiated. This was updated from 10% in the October 1, 2024 Uniform Guidance revisions. The updated rate applies on an award-by-award basis, depending on whether the 2024 revisions govern that specific award. Example: A small nonprofit without a NICRA charges 15% of MTDC across its federal awards.

Choosing De Minimis vs. NICRA Electing de minimis keeps things simple when indirect costs are modest. Pursuing a NICRA makes sense when your actual indirect costs materially exceed 15% of MTDC. Example: If your true indirect burden runs around 25% of MTDC, negotiating a NICRA can recover more of your costs.

Administrative Costs vs. Indirect Costs Administrative costs are defined by specific program rules and can include both direct and indirect costs. Indirect costs are defined by the cost principles and your NICRA. A statutory cap on "administration" does not automatically equal a cap on indirect costs. This is a common point of confusion worth clearing up early.

Direct Charging of Administrative Staff Administrative staff may be charged as direct only when their time benefits a specific cost objective and is documented accordingly. Otherwise, charge that time to the indirect pool. Example: A grants manager directly supporting one award may be direct-charged for those hours with proper timekeeping.

Quick Reference Formulas

• Indirect Cost Rate= Indirect Cost Pool ÷ Indirect Cost Base

• Indirect Costs Charged= Approved Rate × Eligible Base Costs

• MTDC Base= Eligible Direct Costs − MTDC Exclusions + First $50,000 of each subaward

Tip: Make sure your budgeted base excludes items not allowed in MTDC, and apply the rate only to the approved base.

Practical Examples

• Applying the rate: With a $400,000 MTDC base and a 24% MTDC NICRA, you may charge $96,000 in indirect costs.

• Subawards in MTDC: For two subawards of $60,000 each, only $100,000 total enters the MTDC base, capped at $50,000 per subaward.

• Off-site work: When most work happens at a partner facility without your occupancy costs, apply your approved off-site rate.

The Grant Project Perspective

The right rate, applied to the right base, protects your operating capacity and frees your team to deliver on program outcomes. Consistent NICRA vocabulary strengthens internal controls, sharpens budgeting, and reduces rework during audits and monitoring. That is what readiness looks like in practice: language your whole team shares, applied the same way every time.

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