What Is an Indirect Cost? Definitions, Calculations, & More

indirect costs formula

This requires setting up a DCAA-compliant accounting system that can be used to support forward pricing, provisional billing, and final rates for contract closeout. A compliant accounting system needs to track all the organization’s costs and allow costs to be separated by what is allowable (direct and indirect), and what is unallowable. Your accounting system must also help produce timely and accurate job cost reports that demonstrate that your indirect cost allocation methodology is fair and equitable and can withstand the scrutiny of a government audit. The primary way to allocate the costs to the different functional expense categories is using resource allocation (or percentage allocation) based on time and function. For example, Colleen is a program director at the local community center that offers senior programs and afterschool programs for youth. Many nonprofit professionals wear different hats, so allocating an employee’s time helps create program budgets and calculate indirect costs.

How do you calculate indirect costs?

Subtract direct costs from the modified total costs amount.

The result is the dollar amount of indirect costs. In this example, $80,000 minus $69,565 equals $10,435 in indirect costs.

Another reason to use the indirect cost rate formula is so you can decide whether your expenses are too much. If your indirect costs are too high, you can find ways to reduce your expenses. If set up correctly, your COA will facilitate the calculation of indirect rates. As the COA below illustrates, the Direct, Fringe, Overhead, G&A, and Unallowable costs are all captured using a series of sub-accounts that can be rolled up to calculate the cost pool balance needed to calculate indirect rates. If an indirect cost rate changes for an award or task, the IDC Calc Period must be updated to indicate the period for which indirect cost should be recalculated. Refer to “IDC Rate Change Scenarios” in this document for examples of the process for various indirect cost changes.

How to reduce indirect expenses

Later you can address those issues once you’ve got the basics squared away. Finally, we show the entire independent research & development (IR&D) budget to be unallowable. This is because some Federal agencies, notably National Institutes of Health (NIH) and National Science Foundation (NSF), refuse to pay it, and therefore it is unallowable if we are submitting our SBIR/STTR proposal to either of those agencies. If we were submitting to the other agencies that does allow IR&D, then it would be moved to the Indirect column. In this example, we have come to the conclusion that, in the coming calendar year, we will have a corporate budget of about $473,000 including all of our known and expected costs.

The “IDC History Report” is available to view the history of changes entered on the indirect cost rate, base, or period type field. For a report description refer to IDC History Report in EPSS under Reports/Queries, Grants Management, GM Oracle Reports. If the sponsor does not allow, or limits the indirect cost rate, the sponsor guidelines or other published sponsor policy must be provided to your business manager and to OPAS. For a video-streaming service, data storage could be considered a direct cost because the product is literally storing videos to be shared online.

Understanding cost allocation and indirect cost rates under the Uniform Guidance (2 CFR Part I & II

Given the dominance of federal funding at UC, applying a rate from a federally-negotiated rate agreement to the federally-defined MTDC base is the most common approach used to calculate indirect cost recovery. A common misconception is that indirect-cost rates are expressed as a percentage of the total grant, so a rate of 50% would mean that half of the award goes to overheads. Instead, they are expressed as a percentage of the direct costs to fund the research. So, a rate of 50% means that an institution receiving $150 million will get $100 million for the research and $50 million, or one-third of the total, for indirect costs. But there are multiple caps that lower the base amount from which the indirect rate is calculated, or that limit the amount of money that a research institution can request.

  • The allocation base is made up of the overhead labor account, fringe benefits applied to overhead labor, plus fringe benefits applied to bid and proposal labor.
  • When selecting an accounting system, you want to make sure that the system includes the functionality to configure cost pools.
  • Knowing how to reduce expenses in business is essential if you need to increase your profits.
  • You will need to know your organization’s applicable indirect cost base (or MTDC), the applicable indirect rate, and proposal budget in US dollar values.
  • Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.
  • NEH Project BudgetApplicant organizations submit an NEH project budget using the Research and Related budget form, unless otherwise instructed in the NOFO.
  • At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

U of I’s web-based retention and advising tool provides an efficient way to guide and support students on their road to graduation. The chart below summarizes what is https://www.bookstime.com/articles/indirect-cost needed when setting up a DCAA-compliant accounting system to handle each cost category. Enter value of M – current month in “IDC Calc Period” in the award flexfield.