How Your Indirect Cost Rate Is Calculated (And Whether You Are Leaving Money on the Table)
Most local governments and nonprofits that receive federal funding have an indirect cost rate. Far fewer know whether that rate is actually recovering their costs. Understanding how the rate is calculated is the first step toward knowing where you stand.
This post walks through the core concepts behind indirect cost rate calculation: what indirect costs are, how the allocation base works, what the 2024 Uniform Guidance updates changed (indirect rates are not impacted but the 2026 proposed changes), and how to read the result. If you have ever looked at a grant budget and wondered whether your overhead recovery was right, this is the post to read first.
Direct Costs vs. Indirect Costs: The Foundational Distinction
Every cost your organization incurs falls into one of two categories. Direct costs are expenses that can be specifically identified with a particular federal award or program. Salaries for staff who work exclusively on a funded project, supplies purchased for that project, and travel taken in direct support of program activities are all direct costs.
Indirect costs are the overhead expenses that keep your organization running but cannot be tied to a single program. Executive leadership salaries, accounting and HR functions, IT infrastructure, utilities, and general administrative costs are all indirect. These are real costs of doing business. Federal awards are required to bear a fair share of them.
Why this distinction matters. Federal agencies will not reimburse indirect costs without either an approved Negotiated Indirect Cost Rate Agreement (NICRA) or the de minimis rate. Getting the classification right is the foundation of both your budget and your audit defense.
Understanding the indirect cost terminology your team needs to know is worth doing before you build your first rate proposal or negotiate with your cognizant agency.
How the Indirect Cost Rate Is Calculated
The calculation itself is straightforward. Your indirect cost rate is the ratio of your total indirect costs to your allocation base.
Total Indirect Costs divided by the Allocation Base equals your Indirect Cost Rate.
The numerator, your indirect cost pool, is the sum of all overhead expenses. The denominator, your allocation base, is the portion of direct costs used to distribute those overhead costs across your programs and awards.
Most organizations use the Modified Total Direct Cost base, known as MTDC. Under 2 CFR 200, MTDC includes salaries and wages, fringe benefits, supplies and materials, travel, and the first $50,000 of each subaward. It excludes equipment costing more than $5,000 per unit, subaward amounts above $50,000 per subaward, and capital expenditures.
2024 Uniform Guidance update. Effective October 1, 2024, the subaward MTDC threshold increased from $25,000 to $50,000. This means more subaward funding now counts toward your base, which can lower your calculated rate. If your organization has significant subaward activity, your rate may look different under the updated rules.
The alternative to MTDC is the Salaries, Wages, and Fringe (SWF) base, which includes only personnel costs. SWF is appropriate when non-personnel direct costs are disproportionately large and would distort the rate. Most organizations use MTDC because it is the standard base under 2 CFR 200 and the most widely accepted by federal agencies.
For a full walkthrough of how to build the financial infrastructure behind a defensible rate, see building the budget infrastructure that supports a negotiated indirect cost rate.
Indirect rates and understanding NICRAs can be a very complex process. Please subscribe below and sign up for our newsletter. We provide weekly updates, tools, and resources to help you along the process. Or reach out to us any time. We are happy to help!
What Your Rate Actually Tells You
Once you have a rate, the number tells you something specific. A rate of 28% means that for every $100 in MTDC-eligible direct costs on a federal award, you can recover $28 in indirect costs. That recovery only happens if you apply the rate in your grant budget and your grant award allows it.
Here is where many local governments and nonprofits leave money on the table. If your actual calculated rate is above 15% but your organization is using the de minimis rate instead of a negotiated rate, you are under-recovering. You are funding the gap between your actual overhead costs and your federal reimbursement out of other revenue sources.
If your calculated rate is above 15%, a NICRA negotiation is not just a compliance exercise. It is a recovery opportunity.
The 2024 Uniform Guidance update also raised the de minimis rate from 10% to 15% of MTDC, which is an improvement for organizations that have not yet pursued a NICRA. But 15% is still a ceiling, not a reflection of what your organization actually costs to operate. Many local governments and nonprofits have true indirect cost rates of 20%, 30%, or higher.
If your calculated rate is below 15%, the de minimis rate may be sufficient for now. A formal NICRA still provides a more defensible cost structure under audit, but the financial urgency is lower. Learn more about what a NICRA is and who needs one before deciding your next step.
Run Your Numbers
The fastest way to know where your organization stands is to put real numbers into the calculation. The TGP Indirect Cost Rate Calculator walks through the MTDC methodology, accounts for the 2024 Uniform Guidance updates, and gives you an estimated rate based on your actual costs.
It takes about two minutes to complete and reflects the current subaward threshold and de minimis rate. Use it as a starting point for understanding your indirect cost position before you build your next federal budget or begin the NICRA process.
Calculate Your Indirect Cost Rate
If your rate suggests you are under-recovering, preparing your indirect cost rate proposal for federal review is the logical next step. Or, The Grant Project can help you prepare and negotiate your rate. Contact us today. We're happy to help.
