How is an Indirect Cost Rate calculated?

An Indirect Cost Pool is the accumulated expenses defined as indirect costs. This will usually include Administrative staffing and functions

A Direct Cost Base is the direct costs to which your indirect cost rate will be applied. The two most commonly used direct cost bases are:

     Modified Total Direct Costs – The base consists of all direct costs, less items passed through because they cause a proportionately smaller administrative burden, dollar-for-dollar. These items include capital asset purchases and major subcontracts. Scholarships and other participant costs are often excluded as well.

     Direct Salaries – The base consists of salary expenses only. In some instances fringe benefits and payroll taxes are also included.

               Indirect Cost Rate = Indirect Cost Pool / Direct Cost Base


Types of Rates

Fixed Rate with Carryforward – a rate established for a given period to permit funding, claiming, and reporting of indirect costs. This rate will not change after the end of the period. Any differences between costs in the Proposal and actual direct and indirect expenses for the period will be carried forward to a future year, usually as an adjustment to the indirect cost pool for the future year’s Indirect Cost Proposal.

Provisional/Final - a temporary rate established for a given period to permit funding, claiming, and reporting of indirect costs pending establishment of a permanent rate for that period. The final rate will be determined after the end of the period based on actual direct and indirect expenses. Indirect Costs charged during the period must be retroactively adjusted to the Final rate.

Predetermined Rate - This rate is based on an estimate of the costs to be incurred during the period. Except under very unusual circumstances, a predetermined rate is not subject to adjustment. This type of rate is best suited for project-specific contracts rather than ongoing program services.

De Minimis Rate (2 CFR 200.414(f)) – if your organization has never held an indirect cost rate, you may use a de minimis rate of 10%, applied to modified total direct costs. Such a rate may be used indefinitely, but documentation of modified total direct costs must be maintained. I recommend an assessment of your organization's funding profile to help you determine whether a de minimis rate makes sense for you. I can help you with that.