Indirect Costs and the De Minimis Rate Explained

Indirect costs are the shared costs of running your organization, such as rent, accounting, IT and leadership time, that support many projects at once. Under 2 CFR 200.414(f), an organization without a current negotiated indirect cost rate may charge a de minimis rate of up to 15 percent of modified total direct costs (MTDC) on a federal award. It needs no documentation to justify, it can be used indefinitely, and once elected it applies to all of your federal awards until you negotiate a rate.

This guide explains what indirect costs are, how the de minimis rate works, how to calculate the MTDC base, and the mistakes that lead to disallowed costs. The rules quoted here come from 2 CFR 200.414 and the definitions in 2 CFR 200.1, as of October 2026.

Direct costs versus indirect costs

A direct cost can be tied specifically to one project. The salary of a coordinator who works only on your grant, the supplies used in its workshops, and travel to its sites are direct costs.

An indirect cost supports the organization as a whole and benefits more than one project, so it cannot easily be assigned to just one. Common examples are office rent for shared space, the finance team, the executive director's general oversight, insurance, and IT systems. Federal rules let you recover a fair share of those costs through an indirect cost rate rather than trying to split each bill by hand.

The same type of cost can be direct in one organization and indirect in another. What matters is consistency. 2 CFR 200.403 requires that costs be treated consistently, so you cannot charge a cost directly to a grant if you treat similar costs for the same purpose as indirect elsewhere.

Two ways to recover indirect costs

A negotiated indirect cost rate

Organizations that receive significant federal funding usually negotiate a rate with their cognizant federal agency. The result is a negotiated indirect cost rate agreement that sets the rate and the base it applies to. If you have a current negotiated rate, including a provisional one, you use it, and the de minimis option is not available to you.

The de minimis rate

If you have never had a negotiated rate, or your rate has expired, you can elect the de minimis rate instead. Here is what 2 CFR 200.414(f) says, in plain terms:

• Who can use it: recipients and subrecipients that do not have a current federal negotiated indirect cost rate, including a provisional rate.
• How much: up to 15 percent of modified total direct costs. You decide the rate up to that limit.
• Protection from lower rates: federal agencies and pass-through entities may not require you to use a de minimis rate lower than the rate you elect, unless a federal statute or regulation requires it.
• Not required: you do not have to use the de minimis rate. You can also choose not to charge indirect costs.
• No documentation needed: the rate does not require documentation to justify its use, and you can use it indefinitely.
• Consistency: costs must be charged consistently as either direct or indirect, and may not be double charged.
• Applies across awards: once elected, you must use the de minimis rate for all federal awards until you choose to receive a negotiated rate.
• Not for FAR contracts: the rate does not apply to cost reimbursement contracts issued directly by the federal government under the Federal Acquisition Regulation.

Why the rate is 15 percent now

The 15 percent ceiling came from the Office of Management and Budget's 2024 revision of 2 CFR 200, which applies to awards made on or after October 1, 2024. Before that revision the de minimis rate was 10 percent. Older awards keep the terms they were made under, so an award from before October 2024 may still show 10 percent in its terms. Always check the terms and conditions of the specific award.

Modified total direct costs: the base

The de minimis rate is a percentage of modified total direct costs, not of the whole budget. 2 CFR 200.1 defines MTDC as including:

• All direct salaries and wages, and applicable fringe benefits.
• Materials and supplies.
• Services.
• Travel.
• Up to the first $50,000 of each subaward, regardless of the period of performance of the subawards under the award.

And it excludes:

• Equipment and capital expenditures.
• Charges for patient care.
• Rental costs.
• Tuition remission, scholarships and fellowships.
• Participant support costs.
• The portion of each subaward above $50,000.

Other items may be excluded only when needed to avoid a serious inequity in how indirect costs are distributed, and only with approval from the cognizant agency for indirect costs.

A worked example

Suppose a two-year project has these direct costs:

• Salaries and fringe benefits: $180,000
• Travel: $12,000
• Supplies: $8,000
• Equipment (one item at $25,000): $25,000
• Participant support stipends: $20,000
• One subaward to a partner: $90,000

Total direct costs are $335,000. To find MTDC, include salaries, fringe, travel and supplies ($200,000), add only the first $50,000 of the subaward, and leave out equipment and participant support. MTDC is $250,000.

At the full de minimis rate of 15 percent, indirect costs are $37,500. The total budget is $335,000 plus $37,500, or $372,500. A common mistake is to take 15 percent of the full $335,000, which would give $50,250 and overstate indirect costs by $12,750. Our Grant Budget and Indirect Cost Calculator runs this calculation for you.

When the notice limits indirect costs

Some programs cap indirect costs below your rate because the program's authorizing statute or a regulation requires it. The funding notice should cite the limit. The de minimis protection in 200.414(f) only stops agencies from forcing a lower rate when no statute or regulation requires it. If the funding notice cites a legal limit, follow it. If a notice sets a limit without explanation, ask the program contact which authority applies.

When indirect costs are capped, the costs you cannot recover do not become direct costs. You cannot move rent or accounting costs into the direct cost lines to make up the difference, because that breaks the consistency rule.

Subrecipients and pass-through entities

If you receive a subaward from a state agency, university or larger nonprofit, the same rule protects you. The pass-through entity must accept your negotiated rate, or let you elect the de minimis rate if you do not have one. It cannot force a lower de minimis rate unless a statute or regulation requires it.

If you are the one making subawards, remember the $50,000 rule: only the first $50,000 of each subaward goes into your MTDC base, however many years the subaward lasts.

Should you negotiate a rate instead?

The de minimis rate is simple, but it may not cover your real indirect costs. If your actual shared costs are higher than 15 percent of your direct cost base, a negotiated rate can recover more. Negotiating takes work: you prepare a rate proposal from your financial statements and submit it to your cognizant agency. It usually makes sense once federal awards are a meaningful part of your budget.

Remember that the election applies to all of your federal awards. You cannot use the de minimis rate on one award and a negotiated rate on another.

Common mistakes

• Applying the rate to total direct costs instead of MTDC.
• Including the full subaward in the base rather than the first $50,000.
• Charging a cost both ways, for example charging part of the finance manager's salary directly while also recovering finance costs through the rate.
• Using the de minimis rate while holding a current negotiated rate, which the rule does not allow.
• Ignoring a statutory cap stated in the funding notice.
• Assuming an old award uses 15 percent. Awards made before October 1, 2024 may carry the earlier rate in their terms.

A note on audits

Indirect cost charges are a frequent audit topic. Under 2 CFR 200.501, an organization that spends $1,000,000 or more in federal awards during its fiscal year must have a single or program-specific audit for that year. Even below that threshold, records must be available for review. Keep a written description of which costs you treat as direct and which as indirect, and apply it the same way every year.

For the rest of the budget, see our guide to writing a federal grant budget and justification.

Questions to answer before you elect the rate

1. Do we have a current negotiated indirect cost rate, including a provisional one? If yes, the de minimis option is not available.
2. Have we written down which costs we treat as direct and which as indirect?
3. Do any of our current or planned awards have a statutory cap on indirect costs?
4. Is 15 percent of MTDC enough to cover our real shared costs, or would a negotiated rate recover more?
5. Are we ready to apply the same choice to all of our federal awards?

Writing the answers down creates a short record of your decision. That record helps when a pass-through entity, auditor or new finance staff member asks how your indirect costs work.

If you are unsure whether a cost is direct or indirect, ask how it would be treated on a project with no federal funding. The answer should be the same on your federal awards.