Understanding Indirect Costs

Funding News Edition: April 19, 2017
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Having trouble distinguishing between direct and indirect costs for your federally funded research project? Check out the Office of Extramural Research’s (OER) YouTube presentation Indirect Costs 101. Pressed for time? Not to worry. We’ve listed a few key points below to help you better understand indirect costs.

NIH Has a Long History With Indirect Costs

NIH first began paying indirect cost rates during the 1950s, which were initially capped at 8 percent of the total award, then later increased to 20 percent. Additional guidance released in the 1958 Office of Management and Budget (OMB) Circular A-21 further defined indirect costs and explained what these costs could cover. In 1991, the indirect cost rate cap was again raised to 26 percent of the Modified Total Direct Cost (MTDC), but this cap applied to only administrative costs at universities and institutions of higher education.

Lastly, Uniform Guidance released in 2014 explained that federal agencies must accept and apply negotiated indirect cost rates to all federal awards, grants, and cooperative agreements. Exceptions are made to cap indirect costs only when the cap is required by a statute or is approved by the awarding federal agency head. This means that indirect cost rates are not typically required to adhere to a rate cap, depending on the program.

Knowing Which Costs to Consider Is Half the Battle

Totaling and attributing the sum of indirect costs can be as simple as a math equation, if you know what costs to consider.

Direct costs can be directly linked or assigned to a specific research project and consist of line items, such as equipment, personnel, and travel.

Indirect costs (also referred to as “facilities and administrative” or “F&A”) are infrastructure costs that are not directly related to the project itself but are required to conduct the research and are critical to the success of the project and organization as a whole. Indirect costs would include line items such as payroll, departmental administration, building depreciation, student services, and the like.

Indirect Cost Rates Are Not Established by NIH, Except in Specific Cases

Indirect cost rates for colleges, universities, nonprofits, hospitals, and state and local governments are established in good faith by “cognizant agencies,” other than NIH. This determination, referred to as “cost negotiation cognizance,” is set by the HHS Division of Cost Allocation or Department of Defense’s (DoD) Office of Naval Research. Your project’s indirect cost rate will be set by the agency you are receiving most of your funding from; e.g., HHS or DoD. However, once a federally-funded rate is negotiated and established, it applies to all government funding agencies that are going to support your grantee institution.

NIH sets indirect cost rates only when the grantee is a commercial organization. In these cases, the Division of Financial Advisory Services, Office of Acquisition Management and Policy will set the rate for the grantee organization.

In instances where the grantee institution does not have a negotiated rate at the time of its award and it does not wish to pursue negotiations to establish one, it can elect to receive a "de minimus" rate, which is 10 percent of MTDC. If the grantee institution does elect to use the de minimus rate, such rate must be used for all federal awards granted to that grantee institution, unless it chooses to negotiate for a rate, which it may apply to do at any time.

NIH also provides F&A costs without the need for a negotiated rate for certain classes of awards. See the following for additional information: What F&A costs will NIH provide for training, education, and career development grants? and What F&A costs will NIH provide for awards to foreign organizations, international organizations, and domestic grants with foreign components?

Total Cost Awards Have Drawbacks Too

Total Cost Awards (TCA) provide grantees with a previously determined funding level for an award, regardless of the indirect cost rate. Using a TCA, the funding federal agency can provide a total available award amount up front, but the grantee will need to work backwards and determine which portions of the award can be spent on indirect and direct costs.

TCA grants at NIH are rare. Though Total Cost Awards tend to be easier for the funding agency to budget, we've seen investigators misjudge the amount of money available to complete their research. For this reason, NIH prefers to specifically list the amount of the award designated to direct and indirect costs.

Furthermore, to maximize fairness and competitiveness in peer review, NIH typically specifies the funds available for awards in direct costs. This way, peer reviewers judge applications' science in the context of comparable costs (e.g., direct costs).

Note that a funding opportunity announcement that specifies a cap on direct costs is not necessarily a TCA, and in fact, it usually isn’t. Capping direct costs is simply a means by which NIAID can control costs and maximize the number of awards for that initiative.

One Hundred Percent of NIH Research Funding Supports Research

NIH research funding supports both direct and indirect costs associated with research. But non-research and research activities costs must be separated since NIH negotiates the indirect cost rate based on the F&A costs associated with research activities only. Instructional activities and other activities should be explicitly separated from research activities costs.

Additionally, facilities costs are also limited to the spaces that will be used only for research. Though separating activity costs may not seem beneficial, doing so ensures that the reimbursements issued on NIH grants solely support the conduct of research.

To learn more about indirect costs, see OER's Develop Your Budget, including What is the difference between allowable direct costs and allowable facilities & administrative (F&A) costs? For questions, contact NIH’s Division of Financial Advisory Services (DFAS).

More information is also available at Grants and Funding.

Contact Us

Email us at deaweb@niaid.nih.gov for help navigating NIAID’s grant and contract policies and procedures.

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