GRANTS AND INDIRECT COSTS: A PRIMER FOR GOVERNMENT GRANTS

Abstract. Perhaps one of the most controversial, confusing, and complex features in grant budget building is the notion of indirect costs. In this blog, we attempt to defuzzify the indirect cost issue as it applies to federal and state government grants.  In a follow-up blog, we will address three different approaches when submitting grants to private foundations.

Some Nagging Questions. Questions abound.  “Should you include them?”  “How much should you include?” “What do you do when they don’t allow indirect costs?” “Should you ask for a percentage of your direct costs and if so, what percentage figure should you use?” “Do you use the same indirect cost rates for government, foundation, and corporate funders?” “Can you cost share on indirect costs?” “What do you do if the application guidelines don’t specify the funder’s indirect cost policy?”  “How much justification do you need to prove your indirect cost rate?”  “What elements do you include in indirect costs?” “Can you use a federal rate with private foundations?” The answers to these questions must be considered in the context of the type of grantmaker, since policies and practices vary widely.

Definition of Indirect Cost. Indirect costs are real costs incurred by organizations in support of sponsored activities but cannot be directly identified with a specific grant or contract.  The costs results from shared services such as utility costs, physical plant operations, administrative expenses, and depreciations for building and equipment. The costs are real.  The indirect cost dollars received are not extra dollars, but are part of the budget and are used to carry out the grant.

Federal Grantmakers. If you apply often for federal grants, you should obtain a federally approved indirect cost rate, known in federal parlance as a “Facility and Administration” (F&A) rate.  The initial catch is this: you have to hold a federal grant before you can apply for an F&A rate. If you are applying for your first federal grant, you can request a “provisional” F&A rate. A provisional rate is a temporary rate established for a given period of time to permit funding, claiming and report of F&A costs. It is a prelude to obtaining a final, permanent rate once your actual F&A costs are known.  Normally negotiations occur on an annual basis. F&A definitions are as follows.

“Facilities” is defined as depreciation and use allowances on buildings, equipment and capital improvements; interest on debt associated with certain buildings, equipment and capital improvements; and operations and maintenance expenses.

“Administration” is defined as general administration and general expenses such as the director’s office, accounting, personnel, library expenses and all other types of expenditures not listed specifically under one of the subcategories of “Facilities”, (including cross allocations from other pools, where applicable).

Often, F&A rates are calculated on the basis of salaries and wages (S&W) for organizations receiving less than $3 Million in federal grants annually. To illustrate, if your organization receives a grant for $100,000 in direct costs, including $40,000 and your F&A rate 25% S&W, you would receive an additional $10,000 in F&A money to administer the $100K grant.  Your total award would be $110,000.

If your organization receives more than $3 Million in federal grants annually, your F&A rate will probably be calculated on the basis of what is called “Modified Total Direct Costs” (MTDC). Briefly, you look at your total direct costs and exclude certain items (hence the “modification). These cost exclusions include “Equipment Cost, Alterations and Renovations, Patient Care, Tuition Remission, Off-campus Rental Costs, Scholarships and Fellowships, and Subawards in excess of $25,000.”  To explain, if you received a $100,000 federal grant and after exclusions your MTDC base with $80,000 and you have an MTDC rate of 40%, you would receive an additional $32,000 to administer the grant or a total grant award of $112,000. The numbers cited in these two examples are for mathematical illustration purposes only and do not necessary reflect what the actual F&A rates might be under these two different bases for calculation.

Not all government grants allow you to include your federally negotiated rate.  For example, many government education grants have a fixed F&A rate of 8-10%.  Some equipment grants will not permit the inclusion of any F&A costs. Often, applicants will cost share the difference between their actual F&A rate and the fixed limitation. If your actual rate was 30% MTDC and the grant guidelines permitted only a 10% F&A rate, then you might cost share the remaining 20%, provided the federal agency encourages cost sharing; some agencies prohibit cost sharing, e.g., National Science Foundation.

Takeaways: if you don’t have a federally approved F&A rate and you plan to apply for federal grants, you should begin the process by talking with your program officer to learn the process for applying for first a provisional and eventually a permanent rate. They will get you started and refer you to the appropriate cognizant agency, the agency with which you will negotiate you F&A rate.

State Government Grantmakers. While all kinds of guidelines and regulations apply to federal government grants and a Google search will yield tons of information, uniformity is absent regarding state government grants. While you will never “make” money off of grants, you should never “lose” money as well and since your indirect costs are real, how do you recover them from state government grants?

One option would be to include the federally approved rate, provided the State government policy allows this approach. An alternative approach would be to “deconstruct” for F&A costs and include them as direct cost items; that is, calculate your space costs on a square footage basis, computer use charges, bookkeeping and accounting costs, and administrative costs. While it takes extra effort to come up with such calculations, the benefit is one of recovering project administration costs that would otherwise be left on the table.

  • Space Costs: 1200 sq. ft @ 14.27/sq ft = $17,124
  • Computer Use: 65 hours CPU time at $82/hour = $5,330
  • Fiscal Accounting Services: 120 hours at $45/hour = 5,400
  • Administrative Costs: CEO 50 hours at $185/hour = $9,250

Again, the examples are meant to illustrate budgeting strategies and do not represent actual numbers. You may well have other deconstructed F&A cost items to include beyond those illustrated above.

In a follow-up blog, we will be discussing three strategies for dealing with indirects when approaching private foundations.

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