Indirect Costs Explanation


What are indirect costs?

The concept of indirect costs – also referred to as “overhead”, “F & A costs”, or “administrative expenses” – may be a hard one to get your head around.  “Wait,” people think, “Isn’t the grant enough?  Why do we need even more money just to accept money?”  The answer is that funders don’t want grantees requesting money for costs not directly associated with their projects, while simultaneously recognizing that all of the other non-project costs – the indirect costs – represent real expenses and that an institution can’t exist on project funding alone.  Since a lot of these indirect costs are hard to calculate – because they result from shared services such as the library, physical plant operation, maintenance, utility costs, administrative expenses, and depreciation for buildings and equipment – funders allow grantees to request indirect costs as a percentage of the overall request. 

Who determines the indirect cost rate?

Now here is where things get a little murky.  Each organization requesting funds from a federal source is required to work with a federal agency to determine how indirect costs will be calculated at their particular organization.  The process to determine this formula is called the indirect cost rate negotiation and as the term negotiation implies, a portion of the process is not based on a mathematical formula but on the art of persuasion.  NMU, like many universities, negotiates with the U.S. Department of Health and Human Services (HHS) to determine its indirect cost rate about every four years.  The two big variables that indirect cost rate agreements encompass are the overall percentage and what line items that percentage is applied to.  With regards to the latter, the percentage is often applied either to Total Direct Costs or Modified Direct Costs.  Total Direct Costs are straightforward:  they are your bottom line request.  Modified Direct Costs means that the percentage is only applied to some of the categories in your budget.  In NMU’s case, we apply our indirect cost rate (which is 36.5%) only against the costs associated with NMU salary and fringe benefits.  However, it is not uncommon for Modified Direct Costs to include travel and supplies as well.

Do all grantors give us indirect costs?

While NMU faculty and staff are required to request indirect costs whenever they are allowed, agencies are not required to provide them.  Thus, if you are writing a proposal and the funder does not provide indirect costs, you are still allowed to submit the grant with the caveat that you need to cut and paste the funding agency’s indirect cost policy into NMU’s Internal Transmittal Form.  Further, not all agencies allow the use of our negotiated indirect rate.  For instance, the U.S. Department of Education is known for simply providing indirect costs at a rate of 8% of the Total Direct Costs.  Again, this is fine at NMU, you just need to cut and paste the specific guidelines into the Transmittal Form if they vary from our negotiated rate.

What does NMU do with the indirect cost money?

Now, let’s assume that you get your grant along with the requested indirect costs.  Where does that money go?  Every university answers this question in a slightly different way.  At NMU, 50% of the indirect costs go directly into the general fund.  The other 50% can go back to the principal investigator/project director who submitted grant.  This does not happen automatically, though; the principal investigator’s 50% share of the indirect costs must be requested.  Further, the principal investigator needs to wait until shortly after the project period (or the project year if it’s a multi-year project) before he or she can make the request.  This is because the funding agency awards indirect costs based not on what is requested but rather, on what is actually spent on salary and fringe during the year.  Thus, there is usually a two-to-six month lag before the funding agency sends the University the indirect funds. 

How do I go about getting my share of the indirect cost money?

If you are a PI needing to make a request for your indirect cost share, please start by contacting your Department Head and explain how you will make use of these funds.  Your Department Head will then need to bring your request to the Dean of Graduate Studies and Research.  If approved, the Dean of Graduate Studies and Research will work with the Controller’s Office to transfer these funds into your Department’s account.

Who can I call if I have more questions?

If you have any questions about indirect costs, feel free to contact us at (906) 227-2456.