Funding

Indirect Costs in Grants: How to Budget Them Without Errors

Matt Baskovc24 Oct 202612 min read

Geometric illustration of grant cost allocation

Indirect costs in a grant are the real expenses of running your organization that you cannot tie to one funded project, such as rent, utilities, general administration and leadership time. Funders usually reimburse them through a rate applied to a defined base of direct costs, not by line-item receipts. Get the rate, the base or the classification wrong and your budget gets flagged, trimmed or rejected.

This guide is for owners and finance leads at small and mid-sized companies who are writing their first or fifth federal budget. It covers how the classification works, which rate you can use, a worked example, and the mistakes that cost applicants money.

Betterpresence

Budget Grants With Greater Confidence

Better Presence helps SMEs discover public funding and prepare applications, while its platform streamlines eligibility checks and submission preparation.

Explore Better Presence

TL;DR

Direct costs are tied to one project. Indirect costs benefit several projects or the whole organization, and you recover them through a rate, not receipts.
Without a negotiated rate, many U.S. federal awards let you elect a de minimis rate of up to 15% of Modified Total Direct Costs (MTDC). Check each agency’s rules first.
Apply the rate to the right base. Equipment and pass-through items such as subcontracts do not belong in an MTDC base the way salaries and supplies do.
Never charge a cost as direct and also include it in the indirect pool. That is double-charging.
Indirect cost policies change by agency and by year, so never reuse an old budget template without rechecking the current notice.

Direct vs. indirect costs: the classification that drives everything
Where the rules come from
The three ways indirect costs get recovered
Caps and policy shifts you should know about in 2026
A worked example: MTDC done right and wrong
How to build your indirect cost budget, step by step
Why indirect rates look high, and why that is not a reason to skip them
Perspective: what we see when SMEs hit indirect costs
Where Better Presence fits
Mistakes that cost small companies money
FAQ
Sources

Direct vs. indirect costs: the classification that drives everything

The most common misunderstanding is treating “indirect” as a type of expense. It is not. MIT’s research administration office explains that direct and indirect are classifications: a cost is indirect because it benefits more than one cost objective, such as several projects or the organization as a whole. The same kind of expense can be direct in one organization and indirect in another.

FEMA’s definition of direct costs points to costs that can be identified specifically with a particular award or activity, or assigned to it relatively easily with high accuracy. Everything else that is necessary to run the organization falls toward indirect.

Here is how that typically plays out for a small company:

Expense	Usually direct	Usually indirect
Engineer’s time spent on the funded prototype	Yes
Materials bought only for that prototype	Yes
Travel to the funder’s kickoff meeting	Yes
Office rent and utilities		Yes
Bookkeeper or HR administrator		Yes
CEO time on general management		Yes
General software used by everyone		Yes

“Usually” matters. If your accountant can trace a software license or a part-time administrator to the funded project with solid records, that cost may be direct. What you cannot do is decide per budget whichever looks better. Your classification has to be consistent across all your work, funded or not, and it must be documented.

The double-charging rule

A cost charged directly to a grant cannot also sit inside the pool that your indirect rate is built from. MIT’s guidance stresses that the classification must be applied consistently for this reason. In practice, if you bill the office manager’s salary to the project as a direct cost, you must remove it from the overhead pool when you calculate your rate. Auditors look for this specifically.

Direct salary charge excluded from overhead pool

Where the rules come from

For U.S. federal grants and cooperative agreements, the cost principles sit in the Uniform Guidance, 2 CFR Part 200. The section that matters here is 2 CFR 200.414 on indirect costs. It covers how indirect costs are classified, how rates are negotiated with a cognizant agency, and the de minimis option for organizations that have no negotiated rate.

The Department of Education also keeps a page collecting the Uniform Guidance resources its grantees use, which is a reminder that each agency layers its own requirements on top.

Two cautions up front:

2 CFR 200 applies to grants and cooperative agreements. The research we reviewed notes the de minimis rate does not apply to cost-reimbursement contracts under the Federal Acquisition Regulation (FAR). Contracts follow different cost rules.
Every funding notice can add its own limits. The notice you are applying under always outranks a general guide, including this one.

The three ways indirect costs get recovered

1. A negotiated indirect cost rate agreement

Organizations with significant federal funding negotiate a rate with their cognizant federal agency. They submit their cost pools and bases, the agency reviews them, and both sides sign an agreement that sets the rate for a period. NIH’s indirect cost branch describes the underlying idea using the FAR definition: an indirect cost is one not identified with a single final cost objective but with two or more.

A negotiated rate can be higher than the de minimis rate, but it takes accounting work: a clean general ledger, a documented allocation method and the time to go through review. For a company winning its first award, that overhead often outweighs the benefit.

2. The de minimis rate

If you do not have a federally negotiated rate, 2 CFR 200.414 lets you elect a de minimis rate of up to 15% of MTDC for awards issued since 2024. It can be used indefinitely and does not require you to document the underlying costs.

The rules that trip people up:

Once you elect it, use it consistently across all your federal awards until you negotiate a formal rate.
You generally cannot switch between actual costs and the de minimis rate project by project.
It is a ceiling, not an entitlement. Read the funding notice for any lower cap.

3. A funder-set flat rate or cap

Some programs fix the rate themselves. Others limit what a certain type of applicant can recover. This is where for-profit companies need the most care, as the next section shows.

Caps and policy shifts you should know about in 2026

Indirect cost policy has been moving. Two examples show why a budget copied from last year is a risk.

Department of Energy and for-profits. DOE issued a policy flash, PF 2025-27, adjusting its financial assistance policy for for-profit organizations. In the research we reviewed, agencies are balancing support for for-profit innovation with fiduciary stewardship, and in some cases that means capping reimbursement at 15% of the total project award amount. Note the different base: a cap on total award amount is not the same calculation as 15% of MTDC.

NIH and the 15% cap. NIH tried to impose a flat 15% indirect rate on research it funds. According to a law firm analysis, the First Circuit on January 6, 2026 upheld the decision vacating that guidance, which preserves individually negotiated rates for now. “For now” is the operative phrase. Policy in this area has been litigated and could change again.

The lesson for a small company is practical. Before you finalize any budget, open the current notice of funding opportunity and the awarding agency’s current cost policy. Do not assume the template you used two years ago still complies.

Caps and policy shifts you should know about in 2026 — overview diagram

A worked example: MTDC done right and wrong

Below is a hypothetical budget, not a real award, to show the mechanics. MTDC generally excludes items such as capital equipment. The exact exclusions and any subaward treatment are defined in the regulation, so confirm them against 2 CFR 200 and your funding notice.

Budget line	Amount
Salaries and fringe for project staff	$200,000
Materials and supplies	$30,000
Project travel	$20,000
Capital equipment (excluded from MTDC)	$50,000
Total direct costs	$300,000
MTDC base (salaries, supplies, travel)	$250,000
Indirect costs at 15% of MTDC	$37,500
Total requested	$337,500

Now the common error. An applicant multiplies 15% by the full $300,000 in direct costs and requests $45,000 in indirect costs. That is $7,500 too much, and a reviewer comparing the base to the regulation will see it. The research on this mistake is blunt: applying the rate to the whole budget, including pass-through items, gets applications flagged for budget errors in review.

The cost of the opposite error is quieter. If you leave out indirect costs entirely because you are unsure, you fund part of the project from your own pocket. A grant that looks generous on paper can turn out thin once you account for the rent and admin time it actually consumes.

How to build your indirect cost budget, step by step

Read the funding notice first. Look for the allowed rate, the base, any cap and any rule specific to for-profit applicants.
Decide whether you have a negotiated rate. If yes, attach the agreement. If not, check whether the program allows the de minimis option.
Classify your costs consistently. Write down your own policy: which costs you treat as direct and which as indirect. Apply it to funded and unfunded work alike.
Compute the base. Total your direct costs, then remove anything the base definition excludes.
Apply the rate once. Multiply the base by the permitted rate. Do not layer a second overhead on top.
Check for double-charging. Nothing in the direct lines should also be in the overhead pool.
Reconcile with the budget justification. The numbers in the narrative must match the spreadsheet to the dollar.
Keep records. Even if the de minimis rate needs no justification, your direct costs still need timesheets, invoices and approvals.

NIH’s own advice on building a budget is that requests are reviewed for compliance with the governing cost principles and the policies for the type of recipient and award. That review is where a sloppy indirect line shows up.

Why indirect rates look high, and why that is not a reason to skip them

If you read researcher forums, you will find plenty of complaints that overhead rates look large next to the direct request. That reaction is understandable but it misses what indirect costs are. NSF’s explanation is that they cover costs not readily identifiable with a particular project but still necessary for the general operation of the organization. A funded project that uses your office, your accounting, your insurance and your management time creates real costs.

For a small company, the useful question is not whether the rate is fair but whether your budget recovers what the rules allow. Under-claiming is common among first-time applicants, who are often more worried about looking expensive than about being underfunded.

Perspective: what we see when SMEs hit indirect costs

We build for small and mid-sized companies that do not have a grants team, a bid desk or a PR department. The pattern is consistent: owners are comfortable with their product and their customers, then lose days on a budget form that asks them to classify costs they have never classified.

Three things we would tell any owner:

Treat the budget as part of eligibility. A strong project with a malformed cost base gets queried or scored down. Budget compliance is not a back-office detail.
Choose a consistent policy once. Switching between actual costs and a flat rate from one application to the next is the kind of habit that creates audit problems later.
Spend your effort where you can win. Preparing a full application takes real time, so qualify opportunities before you write them. Our bid/no-bid scorecard for small business is built for that decision.

We also believe the economics should favor the applicant. That is why we charge a flat subscription and no success fee: whatever you win stays with your company, not with a consultant on commission.

— Matevz

Where Better Presence fits

Indirect costs are one of dozens of details that make public funding feel like a second job. Better Presence is an AI platform that finds grants, tenders and awards, checks your eligibility, scores how winnable each one is, assembles the application documents and, under your control, files them. It also supports post-win work such as reporting and claims, which is where cost classification matters again.

Plans are flat monthly or annual subscriptions: Presence at 149 € per month or 1490 € per year, Pipeline at 349 € per month or 3490 € per year, and Growth at 649 € per month or 6490 € per year. Group starts from 1200 € per month. You can compare them on the Better Presence plans page.

Your budget decisions stay yours. The platform prepares and you approve, which matters when a classification choice carries audit consequences.

Mistakes that cost small companies money

Applying the rate to the wrong base. Using total direct costs when the program specifies MTDC, or including subcontracts and equipment that the base excludes.
Mixing methods. Using actual costs on one award and de minimis on another. The guidance generally does not allow per-project switching.
Double-charging. The same salary or expense appearing in both direct lines and the overhead pool.
Reusing old templates. Policies such as DOE’s for-profit adjustments show that caps and bases can change between cycles.
Assuming the rate applies to contracts. The de minimis option is a grants concept and does not cover FAR cost-reimbursement contracts.
Not reading the cap. A funder may limit reimbursement to a share of total award amount, which produces a different number than a percentage of MTDC.

FAQ

What is an indirect cost rate in a grant?

It is a percentage applied to a defined base of direct costs to reimburse the shared expenses of running your organization. The rate may be negotiated with a federal agency, set by the funder or elected under the de minimis option. The base is often MTDC, but the funding notice defines it.

Can a small business without a negotiated rate still claim indirect costs?

Often yes. Under 2 CFR 200.414, organizations without a federally negotiated rate can elect a de minimis rate of up to 15% of MTDC on federal awards. Check the specific program, because some agencies set their own limits for for-profit recipients.

What is the difference between direct and indirect costs?

Direct costs are identifiable to a specific project, such as the salary of a person working on it. Indirect costs support several projects or the entire organization, such as rent, utilities and general administration. The distinction is a classification applied consistently, not a property of the expense itself.

Can I charge the same cost as both direct and indirect?

No. A cost charged directly to a grant must be removed from the pool used to calculate your indirect rate. Doing both is double-charging, and it is a standard audit finding.

Do EU programs treat indirect costs the same way?

No. The rules in this article are for U.S. federal awards. European programs set their own rates and bases, so read the specific call before you budget.