Indirect Costs: How We Got Here and Where the Rules Stand

Indirect costs confuse people for a reason that has nothing to do with math. The rules were written separately, three times over, for three different kinds of organization, and then merged into one rulebook barely a decade ago. Most of the conflicting advice still circulating comes from the era before the merge.

Here is the short history, where the rules actually stand today, and what an organization needs in place before it makes a decision about its own rate.

How we got here

The federal government has reimbursed a share of overhead for as long as it has funded work through outside institutions. The problem was that it wrote the rules by entity type. OMB Circular A-21 governed colleges and universities. A-87 governed state and local governments. A-122 governed nonprofits. Same underlying idea, three separate documents, decades of drift between them, and a generation of finance staff who learned whichever one applied to their employer.

In December 2013, OMB consolidated those circulars into a single set of rules at 2 CFR 200, effective at the end of December 2014. One rulebook for cost principles, administrative requirements, and audit. That consolidation also created something new: a de minimis indirect cost rate, set at 10 percent of modified total direct costs, available to organizations that had never negotiated a rate. For the first time, an organization with no rate history had a legitimate number it could charge without asking anyone.

The 2024 revision to 2 CFR 200 moved several of those figures at once, effective October 1, 2024.

That second change matters more than it looks. A larger base with the same indirect pool produces a lower calculated rate, which is worth understanding before you compare your rate to an older number.

Where the rules stand now

The de minimis rate is 15 percent of modified total direct costs. Any organization without a current federally negotiated rate may elect it, for any federal award, without justifying the choice and without asking permission.

If you do have a negotiated rate, federal agencies must accept it. Under 2 CFR 200.414(c), a deviation requires either a statute or regulation that says otherwise, or the approval of the federal awarding agency head with a documented justification that gets made publicly available. That standard is the reason the rate cut headlines of the past two years applied far more narrowly than the coverage suggested. As our breakdown of the indirect cost rate cuts lays out, those actions centered on university research rates that commonly run 50 to 70 percent, not on the rates local governments and nonprofits carry.

Program specific statutory caps are a separate matter and they do bind. The 30 percent cap on USDA NIFA awards is the clearest example. Read the notice of funding opportunity for a cap before you build the budget, every time, because a cap in statute overrides your agreement.

Pass through entities owe their subrecipients the same treatment. A subrecipient gets either its own negotiated rate or the de minimis rate, and a pass through entity does not get to impose a lower one by policy.

One more thing worth stating plainly, because the question comes up in every session: the 2026 Uniform Guidance rewrite does not touch indirect cost rates. OMB said as much directly, and the proposed rule leaves both the rate rules and the negotiation process alone. Timing is the open question rather than content, because the Senate version of the continuing resolution would bar OMB from finalizing the rule before December 11, 2026, and the House has not agreed to that provision yet. Plenty else changes whenever the rule lands, and the sequenced action plan covers all of it, but your rate is not on the list.

The de minimis rate is a floor you are entitled to, not a ceiling on what your organization is worth.

The basics, in the order they matter

Before choosing anything, get four things straight.

Know which of your costs are direct and which are indirect, and be able to defend the line. A direct cost ties to a specific award. An indirect cost keeps the organization running so the award can happen. The mechanics of the calculation, including how the modified total direct cost base works, are worth reading once slowly rather than skimming twice.

Know which of three positions you occupy. You are taking the de minimis rate, you hold a negotiated rate agreement, or you operate under a cost allocation plan. Each carries different documentation obligations, and the difference between an indirect cost allocation plan and a NICRA is the distinction most often blurred in practice.

Know your actual rate before you decide. Plenty of organizations charge 15 percent while their real recovery need sits above 20, which is a permanent discount they chose without running the numbers. Ten minutes with your own figures answers it.

Know your cognizant agency. If you decide to negotiate, the agency you submit to is determined by rule, not by preference, and starting with the wrong one costs months.

None of this requires a decision this week. It requires knowing which position you are in and what it costs you, so the next time a funding opportunity opens you are choosing a rate strategy rather than defaulting into one.

Download Indirect Costs and NICRA, Decoded, the free guide that walks through the de minimis election, the modified total direct cost base, and what a negotiated rate proposal actually requires.