Indirect Costs
1. What is the difference between a direct cost and an indirect cost?
A direct cost is any cost that can be easily identified with a specific project (grant/contract): e.g., Salaries and Wages, Materials & Supplies, Subcontracts, Consultants.
An indirect cost is any cost that cannot be easily identified (or it would not be cost effective to identify) to a specific project, but identified with two or more final cost objectives. There are three types of indirect costs: Fringe Benefits: services or benefits provided to employees, e.g., Health Insurance, Payroll Taxes, Pension Contribution, Paid Absences, etc
Overhead: indirect costs associated with the performance of a project, e.g., Facility Costs (rent, heat, electricity, etc.), General Laboratory Supplies, etc.
G&A: indirect costs associated with the overall management of an organization, e.g., President’s Office, Human Resources Office, Accounting Office, office supplies, etc.
2. What is an F&A rate?
An F&A rate is a Facility and Administrative rate – a term which is synonymous with an indirect cost rate.
3. How does the process start for obtaining a negotiated indirect cost rate with a commercial organization?
The grants management/contract specialist should contact the DFAS Indirect Cost Branch (301-496-2444 or dfas-idc@nih.gov) at the first indication that a commercial organization will most likely be receiving an award. This notification would enable DFAS to start the process of negotiating an indirect cost rate(s). DFAS’ initial step is to send the organization a letter requesting an indirect cost rate proposal – refer to DFAS' Indirect Cost Submission page for more information.
The notification to DFAS needs to include the following information:
The notification to DFAS needs to include the following information:
- Organization’s Representative’s Name, Title and Email Address
- Organization’s Name
- Organization’s Address
- Grant Number or RFP/Contract Number
- Grant Specialist’s/Contract Specialist’s Name
4. If a commercial organization’s provisional indirect cost rate has recently expired, what rate should be used for funding a new NIH award?
There is no simple answer to this question. The grants management/contract specialist should contact the DFAS Indirect Cost Branch (301-496-2444 or dfas-idc@nih.gov) for advice. If a commercial organization’s provisional indirect cost rate(s) recently expired and DFAS has not received a new rate proposal, DFAS typically would recommend that the expired provisional rate(s) be used for funding purposes. If a long period of time has transpired since the rate(s) expiration date, DFAS may need an updated indirect cost proposal before recommending funding rates.
5. How can I determine if a commercial organization has an indirect cost rate negotiated with NIH?
NIH indirect cost rate agreement information for agreements negotiated with Commercial (For-profit) organizations after July 1, 2002 is available under the Commercial Rate Agreement Distribution Services (C-RADS). (Access to C-RADS is restricted to registered HHS employees only.)
6. Who is responsible for negotiating indirect cost (F&A) rates for subrecipients that receive no prime awards?
If the subrecipient does not have any prime awards, it is the prime contractor’s/grantee’s responsibility to establish the reasonableness of the subrecipient’s indirect cost (F&A) rates.
Yes, if a major portion of the grant/contract funds is for the subaward, as determined on a case-by-case basis.
Yes, if a major portion of the grant/contract funds is for the subaward, as determined on a case-by-case basis.
7. Is the DFAS Indirect Cost Branch responsible for negotiating indirect cost rates for universities, hospitals, non-profit organizations and state and local governments?
No, the HHS Division of Cost Allocation (DCA) negotiates these rates. The Program Support Center website has more information about the DCA. (Some page elements are Gov't access only).
8. How can I obtain the HHS negotiated indirect cost rate for a college/university or non-profit organization?
Indirect cost/F&A rate agreements negotiated by the HHS, Division of Cost Allocation are available to authorized government personnel electronically via the Department’s Rate Agreement Database.
9. Why are indirect cost rates required for cost reimbursement type awards?
Indirect cost rates are required for cost reimbursement type awards to provide an equitable method for allocating indirect costs to all awards and provide a uniform method to fund and reimburse indirect costs on grants and contracts.
10. I represent a commercial organization. This is our first time preparing an indirect proposal, we're not sure how to do this?
You should seek the help of an accountant or accounting firm with experience in government contract/grant accounting and the preparation of indirect cost proposals. Also, you will find helpful and useful information under the Indirect Cost Branch link on the DFAS Home Page.
11. How is an Indirect Cost Rate Computed?
An indirect cost rate is a device for equitably allocating indirect costs to projects.An indirect cost rate is a mathematical computation that is the ratio between the total indirect costs (pool) and an equitable direct cost base. The indirect cost system an organization develops depends primarily on the size and type of organization. The following are examples of indirect cost systems.
- One Tier System: One Pool
Pool includes Fringe Benefits, Overhead and G&A - Two Tier System: Two Pools
(Go to Excel File Two Tier System for a detailed example)
Fringe Benefits Pool
Overhead and G&A Pool - Three Tier System: Three Pools (Go to Excel File Three Tier System for a detailed example)
Fringe Benefits Pool
Overhead Pool
G&A Pool
An organization should chose a Base for allocating indirect costs that will equitably distribute indirect costs to all projects.
12. Which rate structure should I use when submitting my indirect rate proposal?
It depends. The rate structure depends on the size and complexity of your organization as well as types of costs your organization incurs.In general the smaller the organization - the simpler the rate structure. A larger organization with many projects and a complicated accounting system should use the more complex two or three tier system. For detailed examples of two and three tier systems go to Two Tier Example and Three Tier Example
13. Is there a standard or average indirect cost rate for Commercial Organizations?
No, the rate(s) varies by organization, and some of the factors that can impact the rate(s) are:
- Size of Organization
- Type of Organization (e.g.; research or manufacturing)
- Age of Organization
- Location of Organization
- The rate structure used
- The indirect cost base used
14. Is the Organization required to negotiate a rate prior to submitting a grant application/contract proposal?
No, a rate will not be negotiated until there is a firm indication that an organization is going to receive an award. However, the rate(s) and base(s) the organization proposes should be consistent with the rate(s) submitted to the Indirect Cost Branch for review.
NOTE: Phase I SBIR/STTR grantees that do not have rates negotiated with a federal government agency should not propose in the grant application a rate in excess of the 40% (of total direct costs) ceiling rate specified in the SBIR/STTR Omnibus Solicitation.
15. If a Grantee, receiving a Phase II SBIR grant award, does not have a negotiated indirect cost rate at the time of award, should the 40% rate referred to in the SBIR/STTR Omnibus Solicitation be used as a temporary rate for funding indirect costs under the grant?
If the applicant SBC does not have a currently effective negotiated indirect cost rate with a Federal agency, the applicant should propose an estimated F&A rate in the application. If the requested F&A cost rate is 40 percent of total direct costs or less, no further justification is required at the time of award, and F&A costs will be awarded at the requested rate. However, SBCs are reminded that only actual F&A costs may be charged to projects. If awarded at a rate of 40 percent or less of total direct costs, the rate used to charge actual F&A costs to projects cannot exceed the awarded rate unless the SBC negotiates an indirect cost rate(s) with DFAS. DFAS—the office authorized to negotiate indirect cost rates with SBC's receiving NIH SBIR/STTR awards—will negotiate indirect cost rates for SBCs receiving Phase II awards that requested a rate greater than 40 percent of total direct costs.
16. If an organization has negotiated rates with the Defense Contract Audit Agency (DCAA), can these rates be used for funding NIH grants/contracts?
Yes, if the rates are current. However, if the rates include Independent (self-sponsored) Research & Development (IR&D) costs they may need to be adjusted to reflect the treatment as specified in 45 CFR 75.476 i.e., IR&D costs must be excluded from the pool containing G&A expenses and included in the base. Cost data relating to IR&D should be readily available from the organization. Contact the DFAS Indirect Cost Branch for assistance (301-496-2444 or dfas-idc@nih.gov).
17. How long does it take to negotiate an indirect cost rate(s) once the DFAS Indirect Cost Branch receives the proposal?
It varies, depending on: the adequacy of the proposal; the organization’s responsiveness to the Indirect Cost Branch’s questions regarding the proposal; and the Indirect Cost Branch’s workload at the time the proposal is received.
18. What is fixed fee, i.e., is it an indirect cost?
Fixed fee is a profit factor that an organization receives under an award. Fixed fee is not an indirect cost.
19. Is an indirect cost rate good forever?
No, indirect cost rates are usually negotiated annually and are based on the organization’s fiscal year and not on the government’s fiscal year or grant/contract period.
20. The NIH Grants Policy Statement states that patent costs are “unallowable as a direct cost unless specifically authorized on the grant award” but “may be allowable as F&A costs, provided they are authorized under applicable cost principles, and are included in the negotiation of F&A cost rates.” Does that mean patent costs may be allowable F&A costs for commercial organizations?
No, Part 31 of the Federal Acquisition Regulations, cost principles for commercial organizations, clearly states in 31.205.30 “other than those for general counseling services, patent costs not required by the contract [or grant] are unallowable.”
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