What is Indirect Cost?
Indirect costs, also known as overhead or administrative costs, are expenses incurred by an organization that cannot be easily attributed to a specific project or activity. In the context of grant proposals and grant funding, indirect costs represent the expenses associated with the general operation and support of an organization or project rather than the direct costs directly tied to the project's activities. These costs are essential for the overall functioning of the organization but are not directly attributable to a particular grant-funded project.
Here's a breakdown of indirect costs in grant proposals:
Direct Costs: These are expenses directly related to the specific project or activity for which the grant is being sought. Direct costs can include items such as salaries of project staff, supplies, equipment, and travel expenses that are directly tied to the project's implementation.
Indirect Costs: Indirect costs are the overhead expenses that support the entire organization or the specific project but are not easily allocable to individual projects. Examples of indirect costs include rent for office space, utilities, administrative salaries, accounting, legal services, general office supplies, and general office equipment.
In grant proposals, organizations often include a request for funding to cover their indirect costs. This is typically done by calculating indirect costs as a percentage of the direct costs associated with a project. The percentage, known as the indirect cost rate, is established by the organization based on its accounting and budgeting practices. The indirect cost rate is often negotiated and approved with a federal or state agency (if applicable) or a grantor.
When including indirect costs in a grant proposal, it's essential to:
Transparently Define Indirect Costs: Clearly explain what the indirect costs cover and how they were calculated.
Use an Approved Indirect Cost Rate: If your organization has a negotiated indirect cost rate with a government agency or grantor, use that rate in your proposal.
Justify the Need: Provide a clear and compelling justification for why the grantor should cover these costs. Explain how indirect costs are necessary for the overall success and sustainability of the project.
Follow Grantor Guidelines: Some grantors have specific guidelines regarding the inclusion of indirect costs. Make sure to adhere to these guidelines when preparing your grant proposal.
It's important to note that not all grant programs or grantors allow for the inclusion of indirect costs. Some grants may be "direct cost only" grants, meaning they only provide funding for the project's direct expenses and do not cover overhead costs. Therefore, it's crucial to carefully review the grant guidelines and requirements to determine whether you can include indirect costs in your grant proposal.
What is an indirect cost rate?
An indirect cost rate is a percentage used to allocate and recover the indirect costs associated with an organization's operations. In the context of grant funding, the indirect cost rate is an established rate that determines the portion of indirect costs to be covered by a grant or funding source. It's a way to calculate the overhead or administrative costs that cannot be easily attributed to a specific project or activity.
The indirect cost rate is typically calculated based on a combination of an organization's actual indirect costs and the organization's allocation methods. The rate is often negotiated and approved with a government agency (such as the U.S. Federal government) or another grantor, ensuring that the rate is fair and reflects the organization's actual costs. Here's how it works:
Four types of indirect cost rates
Provisional rate - A temporary rate which is only applicable for a specified time period and is subject to adjustment pending the establishment of a final rate.
Predetermined rate - This is applicable to a specified current or future periods which is usually the organization’s fiscal year and is based on an estimate of costs to be incurred during the period. Predetermined rates are not subject to adjustment.
Fixed rate - This bears the same characteristics as a predetermined rate except it is subjected to an adjustment. The difference between the estimated base period indirect costs and actual indirect costs is carried forward as an adjustment to the rate computation of a subsequent period.
Final rate - This is applicable to a specified past period which is based on the actual costs of the period. Final rates are not subject to adjustment.
PKS provides Indirect Cost Calculations and Consulting. Reach out to us to have your Indirect Costs assessed!
