General Guidance on Calculating Indirect Costs 

General Guidance on Calculating Indirect Costs (PDF)

Introduction

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. This guidance is meant to summarize information and requirements on the development, calculation, and application of indirect costs and indirect cost rates found in 2 CFR Part 200—Uniform Administrative Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and the General Terms and Conditions for Awards to Organizations (for awards issued October 1, 2024, or later).

Refer to the Notice of Funding Opportunity (NOFO) for statutory or administrative information regarding the allowability of indirect costs. NEH does not reimburse indirect costs under the following types of awards:

• construction
• endowments
• general operating support costs to State Humanities Councils (SHC)
• awards to individuals 

What are Indirect Costs?

NEH Project Budget

Applicant organizations submit an NEH project budget using the Research and Related budget form, unless otherwise instructed in the NOFO. You should prepare a project budget in coordination with your organization’s Institutional Grant Administrator (IGA) and/or office of sponsored projects.

When preparing your budget, you must treat costs that you classify as direct or indirect consistently. You cannot assign a cost to an NEH award as a direct cost if you have allocated any other cost incurred for the same purpose to the award as an indirect cost (2 CFR § 200.403(c)).

Direct Costs

Direct costs are salaries, services, and goods that are directly related to the project and are accounted for with a high degree of accuracy. Direct costs must align with the cost principles, including allowability (2 CFR § 200.403), reasonableness (2 CFR § 200.404), and allocability (2 CFR § 200.405). Examples include salaries and benefits for staff and consultants working on the project, project-related travel, and supplies and equipment used on the project.

Indirect Costs

Indirect costs represent administrative expenses associated with the cost of doing business that are not readily identified with project activities. Indirect costs, also referred to as facilities and administrative costs (F&A), are incurred for the benefit or joint objectives of a specific project and organizational activities. These costs are allocated equitably across all of your organization’s activities. Examples include costs for clerical and managerial staff, depreciation, office space rental, and utilities.

To recover indirect costs related to an NEH award, your organization must either negotiate an indirect cost rate with your “cognizant agency” prior to a federal award or elect to use a de minimis rate of up to 15% of modified total direct costs (MTDC) (see 2 CFR § 200.414(f)).

Per 2 CFR § 200.1, your cognizant agency is the federal agency responsible for reviewing, negotiating, and approving cost allocation plans or indirect cost proposals on behalf of all federal agencies. It is typically the federal agency that provides the largest amount of direct funding to a recipient.

In your application for federal funds, your project budget must include the base, rate, and amount of indirect costs you will recover during the period of performance.

Negotiated Indirect Cost Rate Agreements

A Negotiated Indirect Cost Rate Agreement (NICRA) is a formal written agreement between your organization and its cognizant agency describing how the organization will calculate indirect costs. A NICRA establishes the following to calculate indirect costs:

• base(s)
• rate(s)
• applicable period(s)

The rate(s) established in a NICRA are typically effective for a two- to four-year period. If your organization has a NICRA, you may apply to your cognizant agency for a one-time extension of a current agreement for a period of up to four years, in accordance with 2 CFR § 200.414(g).

De Minimis Rate

Organizations without a current or provisional NICRA

Per 2 CFR § 200.414(f), if you do not have a current or provisional negotiated rate (except for local governments claiming central service costs under 2 CFR § 200, Appendix VII D.1.b), you may choose to use a de minimis rate of up to 15% of MTDC. If you choose the de minimis, you must use the rate consistently for all federal awards until your organization chooses to negotiate its own indirect cost rate.

Organizations with a NICRA but without an applicable rate

Your organization may also selectively apply the de minimis rate in cases in which it does not have an applicable rate. For example, research rates are not applicable to the scholarly research that NEH funds, except in rare circumstances. In cases in which an organization has only negotiated a research rate (see below for an explanation of rate types), the organization may apply the de minimis rate.

The de minimis uses an MTDC base, which consists of:

“All direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $25,000 of each subaward (regardless of the period of performance of the subawards under the award). MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs and the portion of each subaward in excess of $25,000. Other items may only be excluded when necessary to avoid a serious inequity in the distribution of indirect costs, and with the approval of the cognizant agency for indirect costs (2 CFR § 200.1).”

Acceptance of Indirect Cost Rates

NEH must accept valid and applicable indirect cost rates (2 CFR § 200.414(c)(1)), or if no current or provisional negotiated rate exist, accept the de minimis rate, if requested in the application budget. NEH must use the negotiated rates in effect at the time of the initial award throughout the life of the award, except as provided in 2 CFR § 200.414(c)(1). If the rate agreement in effect at the beginning of the period does not cover the entire period of performance, then NEH will use the rate in effect for the last year of the negotiated rate agreement to determine indirect costs for the duration of the period of performance (2 CFR Appendix III (C)(7)(a)).

Once NEH issues an award, it is not obligated to make adjustments due to increases in your organization’s indirect cost rate. 

Likewise, recipient organizations that issue subawards must accept subrecipients’ applicable federally negotiated indirect cost rates. If no approved rate exists, the pass-through entity may negotiate an indirect cost rate with the subrecipient or accept the de minimis rate (2 CFR § 200.332(b)(4)).

Negotiating New Indirect Cost Rates

If your organization does not have a current negotiated (including provisional) rate or has an expired rate, your organization may choose to negotiate a rate with its cognizant agency. If your organization wants to negotiate a NICRA and NEH is its cognizant agency, see Guidance for Negotiating an Indirect Cost Rate Agreement with NEH.

Reviewing and Calculating Indirect Costs using a NICRA

NICRA Structure

Applying the correct indirect cost rate requires an understanding of the structure of your NICRA. A NICRA generally includes the following information:

Calculating Indirect Costs

When calculating indirect costs, select the appropriate cost base, as established in the NICRA, to determine the direct costs to be multiplied by the applicable negotiated indirect cost rate. The result of this calculation represents the allowable indirect costs for the project.

This section provides two examples of calculating indirect costs using the following sample budget:

Example 1: Applying a 34% Indirect Cost Rate using an MTDC base

Example 2: Applying a 34% Indirect Cost Rate using base of direct salaries and wages, excluding fringe benefits

References

• 2 CFR § 200.332 (Requirements for pass-through entities)
• 2 CFR § 200.414 (Indirect (F&A) Costs)
• 2 CFR 200 Subpart E—Cost Principles
• 2 CFR Part 200, Appendix III—Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Institutions for Higher Education (IHEs)
• 2 CFR Part 200, Appendix IV—Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Nonprofit Organizations