Indirect Cost Rates Explained: What Every Grant Applicant Needs to Know in 2026

By Kwame Asante-Darko, CPA · Mar 22, 2026 · 13 min read

If you've ever submitted a federal grant proposal, you've encountered indirect costs—also known as Facilities and Administrative (F&A) costs. And if you're like most applicants, you've probably been confused by them. Indirect cost rates are one of the most frequently misunderstood, miscalculated, and overlooked components of grant budgets. Getting them wrong can mean leaving substantial money on the table or, worse, having your proposal flagged for budget errors. This guide demystifies indirect costs so you can budget accurately and maximize your funding.

What Are Indirect Costs, Exactly?

Indirect costs are the real expenses your organization incurs to support grant-funded work that can't be directly attributed to a single project. Think of them as the infrastructure costs of doing research or running programs:

• Facilities costs: Building depreciation, equipment depreciation, interest on debt for buildings and equipment, operations and maintenance (utilities, janitorial services, building repairs)
• Administrative costs: General administration and general expenses (accounting, HR, legal), departmental administration, sponsored programs administration, library costs

These are real costs your organization bears. Without indirect cost recovery, your institution literally subsidizes federal research from its own budget—which is why negotiating an appropriate rate matters enormously.

How Indirect Cost Rates Are Calculated

Your organization's indirect cost rate is expressed as a percentage applied to a specific base. Understanding the base is critical because it determines how much you actually recover:

Modified Total Direct Costs (MTDC)

The most common base for federal grants. MTDC includes all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $25,000 of each subaward. It excludes equipment (items over $5,000), capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, and the portion of subawards exceeding $25,000.

Example Calculation

If your negotiated F&A rate is 55% on MTDC and your direct costs include $200,000 in salaries, $60,000 in fringe benefits, $30,000 in supplies, $10,000 in travel, and a $100,000 subaward:

• MTDC base = $200,000 + $60,000 + $30,000 + $10,000 + $25,000 (first $25K of subaward) = $325,000
• Indirect costs = $325,000 × 55% = $178,750
• Total budget = $400,000 (direct) + $178,750 (indirect) = $578,750

Negotiating Your Rate: The Process

Federal indirect cost rates are negotiated with your organization's cognizant federal agency—the agency that provides the most direct federal funding. For most universities, this is the Department of Health and Human Services (HHS). For many nonprofits, it's their largest federal funder.

For Organizations Without a Negotiated Rate

If your organization has never had a negotiated rate, you have several options:

1. De minimis rate: 2 CFR 200.414(f) allows any organization that has never negotiated a rate to use a de minimis rate of 10% of MTDC. This is easy but almost certainly underestimates your actual costs
2. Negotiate a provisional rate: Submit an indirect cost rate proposal to your cognizant agency. This requires a cost allocation plan but results in a rate that reflects your actual costs
3. Use a rate approved by a state or local government: Some organizations, particularly those funded primarily by state agencies, may have state-negotiated rates

For Organizations With an Existing Rate

Rates are typically negotiated every 2-4 years. During negotiation, your institution submits detailed cost data showing actual expenditures in each indirect cost category. Common strategies to maximize your rate:

• Ensure all allowable costs are properly classified and included
• Document facility investments and improvements
• Maintain accurate space surveys (how space is used matters for the facilities component)
• Work with experienced financial staff or consultants who specialize in rate negotiations

Common Indirect Cost Mistakes That Cost You Money

1. Voluntarily Reducing Your Rate

Some applicants reduce their indirect cost rate to make their proposals appear more affordable. This is almost always a mistake. Reviewers evaluate scientific merit and broader impacts—they don't compare indirect cost rates between proposals. By reducing your rate, you're simply absorbing costs your institution legitimately incurs.

2. Miscalculating the MTDC Base

Including equipment or the full amount of subawards in your MTDC base inflates your indirect cost request and can trigger audit findings. Conversely, excluding allowable costs from the base shortchanges your institution.

3. Ignoring Sponsor-Specific Caps

While federal agencies generally honor your negotiated rate, some funders cap indirect costs:

• USDA NIFA: Often caps at 30% of total federal funds
• Many private foundations: Cap at 10-15% or provide a fixed dollar amount
• Some state agencies: Impose their own caps regardless of your federal rate

When a sponsor caps your rate below your negotiated rate, the difference becomes unrecovered indirect costs that your institution must absorb.

4. Not Budgeting for Rate Changes

Multi-year grants should account for potential rate changes. If your rate is renegotiated during the award period, the new rate typically applies. Budget accordingly and include language in your proposal about rate adjustments.

The 2026 Landscape: What's Changing

Several developments are affecting indirect costs in 2026:

• Uniform Guidance updates: Recent revisions to 2 CFR 200 have clarified several indirect cost provisions, including requirements for nonprofit organizations
• Increased scrutiny: Federal auditors are paying closer attention to indirect cost calculations, particularly for organizations receiving large ARPA and IRA-funded awards
• Technology investments: Cybersecurity and data management costs are increasingly recognized as legitimate indirect costs, potentially raising rates for research-intensive institutions
• Remote work implications: Hybrid work arrangements are affecting facility utilization calculations, which can lower the facilities component of F&A rates

Best Practices for Grant Applicants

1. Know your organization's current negotiated rate and when it expires
2. Understand your MTDC base and what costs are included versus excluded
3. Check each sponsor's indirect cost policies before budgeting
4. Work closely with your sponsored programs office—they deal with these calculations daily
5. Keep detailed records of all cost categories to support future rate negotiations
6. Consider the total cost of a project, not just direct costs, when evaluating whether a grant is worth pursuing

Indirect costs may not be the most exciting topic in grant writing, but they represent real money that supports the infrastructure your work depends on. Understanding them ensures you budget accurately, recover what you're entitled to, and avoid compliance issues that could jeopardize future funding. If you're unsure about your organization's rate or how to apply it, consult your grants office or a financial advisor experienced in federal cost principles before submitting your next proposal.