How to document indirect costs without a federal NICRA

The problem with leaving indirect costs off the budget

Small and mid-sized nonprofits often submit federal budgets with no indirect costs at all. Sometimes they believe they are not allowed to charge them without a negotiated rate. Sometimes they think a lean budget scores better. Neither is a good reason. Rent, accounting, HR, IT, insurance and the executive director's time are real costs of running a federal program. If the award does not pay for them, unrestricted funds do, and the organization quietly subsidizes the federal government.

Without a Negotiated Indirect Cost Rate Agreement, you still have three legitimate paths under 2 CFR 200: the de minimis rate, direct charging of certain administrative costs, and negotiating a first rate with your cognizant agency. Each has documentation requirements, and choosing well depends on your size, your cost structure and how much federal money you expect to manage.

Option one: the 15 percent de minimis rate

Under 200.414(f), any recipient or subrecipient without a current federally negotiated rate may charge a de minimis rate of up to 15 percent of modified total direct costs. The 2024 revision raised it from 10 percent and made two useful clarifications. The rate does not require documentation to justify its use, and it may be used indefinitely. You do not need to prove your actual indirect costs are at least 15 percent.

What you do need is a correct base. MTDC, defined in 200.1, includes salaries and wages, fringe benefits, materials and supplies, services, travel, and the first $50,000 of each subaward. It excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward above $50,000. Applying 15 percent to total direct costs instead of MTDC is one of the most common budget errors grants management staff send back.

• Build the MTDC base line by line in the budget spreadsheet
• Show the base and the rate in the budget justification
• Apply the same treatment across all federal awards
• Check the NOFO for any program-specific cap on indirect costs

The consistency rule you must document

The de minimis rate is simple, but it comes with an obligation that auditors test: costs must be charged consistently as either direct or indirect, and never both. If your finance manager's salary is part of what the 15 percent is meant to cover, you cannot also charge 20 percent of her time directly to the award. If you treat IT support as an indirect cost on one award, you cannot charge it directly on another.

Write a short indirect cost policy that lists which cost categories your organization treats as indirect and which it charges directly. Two pages is enough for most organizations. Have the board finance committee or the CFO approve it, date it, and keep it with your accounting policies. When an auditor or a federal grants specialist asks how you decided what goes where, this document is the answer.

Option two: charge administrative costs directly

Some organizations recover more by charging specific administrative costs directly instead of using the de minimis rate. Under 200.413(c), the salaries of administrative and clerical staff may be charged directly when the services are integral to the project, the individuals can be specifically identified with it, the costs are explicitly included in the approved budget or have prior written approval, and the costs are not also recovered as indirect costs.

This works when a program has a dedicated data coordinator or a grants accountant who spends a documented share of time on the award. It requires time and effort records that meet the standards in 200.430, which means records that reflect the work actually performed, not budget estimates. It also means you cannot then layer the de minimis rate on top of the same costs. Run both scenarios in your budget model and pick the one that recovers more while staying defensible.

Option three: negotiate your first rate

If federal funding is becoming a large share of your budget, a negotiated rate may recover more than 15 percent. For a nonprofit, the cognizant agency for indirect costs is generally the federal agency that provides the largest share of direct federal funding. Many nonprofits negotiate with HHS Cost Allocation Services or the Department of the Interior's Interior Business Center, depending on their funding mix. Appendix IV to Part 200 sets out the principles for nonprofit rate proposals.

A first-time proposal requires audited financial statements, a statement of total costs reconciled to the audit, a breakdown of direct and indirect costs by function, and a calculation of the proposed rate. Expect the negotiation to take months, and expect the cognizant agency to examine your allocation methods closely. Organizations with clean audits, a written cost allocation plan and a chart of accounts that already separates program and administrative costs move through faster.

Pass-throughs and the subrecipient case

Many nonprofits receive federal money only as subrecipients of a state agency, county or university. Under the revised regulation, a pass-through entity must accept a subrecipient's federally negotiated rate. If the subrecipient has no negotiated rate, the pass-through may negotiate a rate with it or the subrecipient may use the de minimis rate. Read your subaward agreement closely, because some pass-throughs still use templates written before October 2024.

ELIXIR CONSUMERS' budget builder calculates MTDC from your line items, applies the rate type stored for your organization, and writes the indirect cost paragraph of the justification from your saved policy. None of that replaces a finance review. The organizations that recover their real costs are the ones that decide on a method, write it down, apply it consistently and explain it in plain words in every budget they submit.