Indirect cost rate, direct vs. indirect costs, examples, cognizant agency

An indirect cost rate is simply a device for determining fairly and conveniently what proportion of indirect cost each program should bear. The County's Cost Allocation Plan (CAP) and indirect cost rates are generated by the budget office. A separate rate is prepared for each County department and division.

Obtain indirect cost rates by department or view the Cost Allocation Plan
(Contact Michale Podsiad in Budget (x66673) for assistance in finding and applying your department's rate)

Guidelines for determining direct and indirect costs charged to federal awards are provided in Subpart E - Cost Principles in the Uniform Guidance, §200.56 Indirect (facilities & administrative (F&A)) costs.

Why use an indirect cost rate?

General operational costs are necessary for any program to exist. For instance, all programs will use certain services other departments provide such as contracts, purchasing, payroll checks, and personnel management. Without the benefit of an indirect cost rate, there would be no standard way for each program to contribute its share of the general management costs without spending a lot of staff time having to account their time to each activity. By using an indirect cost rate, the County has a standardized, efficient way to recover a share of general operational costs for individual programs.

Direct vs. Indirect costs

There is no universal rule for classifying certain costs as either direct or indirect. A cost may be direct with respect to some specific service or function, but indirect with respect to the federal award. Therefore, the general rule is that each item of cost incurred for the same purpose must be treated consistently in like circumstances, either as a direct or an indirect cost, in order to avoid possible double-charging of federal awards. For example, the County cannot charge the Federal Government for a direct cost that it charges another non-federal entity as an indirect cost.

Direct costs

Direct costs are for activities or services that benefit specific projects, e.g., salaries for project staff and materials required for a particular project. Because these activities are easily traced to projects, their costs are generally charged to grant projects on an item-by-item basis. These costs are always identified in the proposed budget submitted to the grantor and then are contained in the grant award.

Indirect costs

Also referred to as overhead or facilities and administrative costs (F&A), indirect costs are the expenses or ongoing operational costs incurred by the County on behalf of it’s grant activities and projects, and because they benefit more than one project their precise benefits to a specific project are often difficult or impossible to trace. For example, it may be difficult to determine precisely how the activities of the county administrator benefit a specific project.


Costs usually charged directly:

  • Project staff working on the project
  • Consultants
  • Project materials and supplies
  • Equipment
  • Publications
  • Travel

Costs usually allocated indirectly:

  • Utilities
  • Rent
  • Audit and legal
  • Administrative staff
  • Equipment rental

Costs either charged directly or allocated indirectly:

  • Telephone charges
  • Computer use
  • Project clerical personnel
  • Postage and printing
  • Miscellaneous office supplies

Cognizant agency

Federal indirect cost rates are negotiated with one government agency, known as the cognizant agency. It is the agency either identified in the Federal Register, or that from which the County receives the greatest amount of federal funding.

Once the negotiated indirect cost rates are approved by the cognizant agency they must be accepted by all federal awarding agencies, unless the class of federal awards or a single federal award requires a different rate by federal statute or regulation, or when approved by a federal awarding agency head or delegate based on documented justification that the agency makes publicly available detailing that their programs will follow to seek and justify deviations from negotiated rates.

The County's cognizant agency is the US Department of Health and Human Services (DHHS). 

Negotiated Indirect Cost Rate Agreement (NICRA)

The approval of indirect cost rates are usually formalized by a rate agreement signed by the federal awarding agency and the county administrator, who is the authorized organizational representative (AOR) for the County. However, the DHHS does not provide an NICRA, but simply requires the County to have an annual Cost Allocation Plan prepared which details how the County derives its indirect cost rates.

For more information regarding the DHHS agreement policy, email Michael Stack at DHHS
or call (212) 264-0944.

Using indirect cost rates

If indirect costs are allowed, the indirect cost rate can be used to budget the maximum amount of indirect costs allowable for a program and then to claim the actual amount of indirect costs after the program expenditures have been made.

When recovering/charging indirect costs, the indirect cost rate is applied to the amount actually expended, not the total amount budgeted.

  • Example of budgeting for indirect costs: Assume a department's approved indirect cost rate is 8.00 percent and the grant amount is $10,000. Since the grant amount is for $10,000, and indirect costs are part of the grant amount rather than in addition to it, you must back into a budgeted indirect cost amount that keeps the grant from exceeding $10,000. To do this, divide $10,000 by 1.08, which equals $9,259.26. Then subtract $9,259.26 from $10,000, which equals $740.74. The $740.74 is the maximum amount the department could budget for indirect costs.
  • Example of charging indirect costs: Assume a department's approved indirect cost rate is 8.00 percent and the grant amount is $10,000. During the year, the department's actual grant expenditures totaled $8,000, of which $786 was for capital outlay (an excluded cost). The maximum amount that can be charged to the grant for indirect costs is $577.12, which is $7,214 ($8,000 minus $786) times 8.00 percent. 

Do we have to charge the entire amount of indirect costs allowed?

A department may choose to claim less than the amount of indirect costs allowed by its indirect cost rate, but any amount not claimed under one award may not be shifted to another award. However, with grantor approval, unrecovered indirect costs may be used to fulfill cost sharing requirements.

Last Modified: 4/5/2024, 11:56:19 AM

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