Indirect Cost Rate for Nonprofits: De Minimis, NICRA, and How to Calculate

Indirect cost recovery is one of the most misunderstood aspects of grant budgeting for nonprofits. Many organizations undercharge indirect costs because they do not want to appear inefficient, do not understand the mechanics, or simply have not done the calculation. The result is that grant funding subsidizes overhead expenses rather than programs — a structural financial problem for organizations with large grant portfolios.

What Indirect Costs Are

Indirect costs (also called facilities and administrative costs, or F&A costs) are real organizational expenses that support program delivery without being directly traceable to any single grant. They include:

• Occupancy costs: Rent, utilities, maintenance, property insurance for shared office and program space
• Central administration: Executive director time spent on organizational management rather than specific programs, HR functions, payroll processing, central bookkeeping
• Technology infrastructure: IT support, software licenses, internet, phone systems used across programs
• General supplies: Office supplies, postage, printing for organizational operations
• Depreciation: On organizational equipment and facilities used across programs

These are real costs. Every dollar your organization spends on rent and general administration is a dollar that enables your programs to operate. Indirect cost recovery through grants is how organizations avoid a situation where grant-funded programs are financially subsidized by organizational general funds.

The 10% De Minimis Rate

The simplest path to indirect cost recovery for most small and mid-sized nonprofits is the 10% de minimis rate. Under 2 CFR 200.414(f), any organization that has never had a federally negotiated indirect cost rate may use 10% of Modified Total Direct Costs as an indirect cost charge on any federal grant — without submitting a rate proposal or negotiating with any agency.

MTDC calculation: MTDC is direct costs minus exclusions. Items excluded from the MTDC base:

• Equipment (items above the capitalization threshold, typically $5,000)
• Capital expenditures
• Subcontract costs above $25,000 per subcontract
• Patient care costs
• Tuition remission
• Rental costs for off-site facilities
• Scholarships, fellowships, and participant support costs

Example: A grant has $200,000 in direct costs: $120,000 in personnel, $30,000 in supplies, $20,000 in equipment (one item above $5,000), and $30,000 in a subcontract. MTDC = $200,000 - $20,000 (equipment) - $5,000 (subcontract above $25,000 threshold) = $175,000. At 10% de minimis: $17,500 in indirect costs.

Consistency requirement: If you elect to use the de minimis rate, you must apply it consistently to all federal awards until you formally negotiate a NICRA. You cannot use the de minimis rate on some grants and a different approach on others.

Negotiated Indirect Cost Rate Agreements (NICRA)

A NICRA is a formal agreement between your organization and the cognizant federal agency that establishes your approved indirect cost rate for a specified period. NICRAs are appropriate for organizations that:

• Have a large enough indirect cost pool that the 10% de minimis rate does not adequately recover actual overhead
• Receive federal funding from multiple agencies (the NICRA applies to all of them)
• Are required by a specific federal program to have a negotiated rate

Cognizant federal agency: The agency that provides the most federal funding to your organization is generally your cognizant agency. For many nonprofits, this is HHS (through community health or social service grants) or DOL (through workforce programs). Your cognizant agency reviews and approves your NICRA.

Rate types:

• Predetermined rate: Fixed for the agreement period; no adjustment regardless of actual costs. Provides budget certainty.
• Fixed rate with carryforward: Fixed for the period but over/under-recoveries are carried into the next period’s negotiation.
• Provisional/final rate: Provisional rate used during the year, settled to a final rate after year-end cost analysis.

The rate proposal: To negotiate a NICRA, submit a rate proposal to the cognizant agency that includes:

• Audited financial statements for the most recent fiscal year
• A cost allocation plan describing how you categorize costs as direct versus indirect
• A breakdown of your indirect cost pool (the total organizational overhead)
• The allocation base you propose (typically MTDC, but some organizations use total direct costs or direct salaries)
• Calculation of the proposed rate

The negotiation process takes several months. During the negotiation period, you may use a provisional rate with agreement from the cognizant agency.

How Foundations Treat Indirect Costs

Private foundations are not bound by Uniform Guidance, and many impose their own indirect cost limits:

• No indirect costs allowed: Some foundations, particularly smaller family foundations, will not reimburse any overhead costs. Every dollar must go to direct program costs.
• Fixed percentage cap: Most commonly 10–15% of direct costs. This does not adjust for your organization’s actual overhead rate.
• NICRA acceptance: Some larger foundations accept your organization’s federally approved NICRA rate.

When a foundation’s indirect rate is below your actual organizational overhead rate, the grant is partially subsidized by your operating budget. For grant-dependent organizations, the cumulative effect of this underrecovery across many foundation grants is a structural deficit — a real cost that must be addressed through diversified funding or explicit acknowledgment in financial planning.

Before including a grant in your revenue projections, calculate the actual net revenue: (grant amount) - (unrecovered overhead). A $100,000 grant with 10% indirect allowed but 25% actual overhead rate nets $85,000 against $125,000 in total program cost — the organization absorbs $10,000.

Calculating Your Actual Indirect Cost Rate

Even if you use the de minimis rate, knowing your actual indirect cost rate tells you whether you are underrecovering overhead and by how much.

Step 1: Define your indirect cost pool. List all organizational costs that are not directly attributable to specific programs: executive and administrative salaries, rent and utilities for shared space, general supplies, IT, accounting, and similar costs.

Step 2: Calculate total indirect costs. Sum the indirect cost pool for a full fiscal year from your financial statements.

Step 3: Define your allocation base. The most common base is total direct costs or MTDC. Use the same base definition as the Uniform Guidance MTDC calculation.

Step 4: Calculate the rate. Divide total indirect costs by the allocation base. For example: $180,000 in indirect costs ÷ $600,000 in MTDC = 30% actual indirect cost rate.

Step 5: Compare to what you are recovering. If you are using the de minimis 10% rate, you are recovering $60,000 in indirect costs on a $600,000 MTDC base — and absorbing the remaining $120,000 from other sources. If that gap is not covered by unrestricted donations or other revenue, it represents a structural deficit.

Organizations with actual indirect rates above 20% should seriously evaluate whether negotiating a NICRA is worth the administrative investment. The rate proposal takes time, but the ongoing recovery on a portfolio of federal grants can significantly improve organizational financial health.