Indirect Costs Example & Uses How To Calculate Indirect Costs

indirect costs formula

This document provides introductory guidance to NEH applicant and recipient organizations on calculating indirect costs as part of an NEH grant or cooperative agreement application budget. For federally-sponsored projects, indirect costs are typically determined by applying the campus’s negotiated F&A rate to the modified total direct cost (MTDC) base. The indirect rate is calculated by taking the cost pool balance and dividing it by the allocation base. This calculation shows you how much of your indirect costs each unit of the allocation base must cover. What you’ll need to do before making this calculation is organize your various indirect costs into pools.

indirect costs formula

The most common problem involved the lack of documentation of salary costs. Many organizations used timesheets as documentation for payroll expenses, but the timesheets only reflected the number of hours each employee worked, and not the allocation of those hours across various funding sources. Time sheets serve as the base for allocating salaries and wages and must reflect the distribution of labor costs among multiple funding sources. Hours charged to funding sources on timesheets must match the way in which those hours were charged to the organization’s funding sources or those expenses can be disallowed. Many smaller foundations often provide a capped amount to an award and then allow a certain percentage of that award to go to indirect cost recovery.


Indirect costs can be confusing because there is conflicting information about indirect cost rates for nonprofits, what is considered an indirect cost, and how to calculate the costs. Nonprofits are often justified in their confusion about indirect costs because government agencies and foundations have different policies and rules around indirect costs, so there is more than one way to calculate a cost. Unrestricted grants carry an indirect cost rate of 10% TDC for any award $1000 or more.

indirect costs formula

A well-structured COA allows accounts to be grouped to allow cost to flow into the cost pools that accumulate your direct, indirect, and unallowable costs. Unless the sponsor has a published policy disallowing them, indirect costs must be budgeted – see below for more details. You will need to know your organization’s applicable indirect cost base (or MTDC), the applicable indirect rate, and proposal budget in US dollar values.

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If you want to reduce indirect expenses like utilities, cut your bills down by conserving energy. You can power down equipment when you aren’t using it, purchase energy-conserving equipment, or switch utility providers. Examples of direct expenses include manufacturing materials, direct materials, and direct labor. These benefits are a form of payment for services beyond the direct compensation paid to employees.

  • To determine what costs fall under indirect procurement, companies will need to consider their unique business situation.
  • A fourth column is added just so we can make notes for our own use about how we derived certain numbers, or decided how to allocate something between the direct, indirect and unallowable columns.
  • Enter value of M – current month in “IDC Calc Period” in the award flexfield.
  • Nevertheless, indirect costs are real costs to the university and the government recognizes the university’s right to claim them as expenses related to sponsored projects.

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