In accordance with 2 CFR 200.414(f), nonprofits that have not received a negotiated indirect cost rate previously can now utilize the 10% de minimis rate.
Direct cost rates are rates that can easily be quantified within a contract. They include the cost of materials, wages of workers directly assigned to a project, subcontractors, etc. while indirect rates are rates that cannot be calculated without great effort.
Indirect Cost Rate
Nonprofits that intend to charge indirect costs through the use of an indirect cost rate must have a Federally-approved indirect cost agreement or must use the de minimis indirect cost rate of 10% of modified direct total costs. Please include a copy of a current, signed Federally-approved indirect cost rate agreement. If you wish to use the de minimis rate, please refer to ---- or other resources (some available free online) that explain what items the rate is calculated against and what items are not included.
Non-federal entities, other than State and local governments that have never received a Federally-approved indirect cost rate, may elect to charge a de minimis rate of 10% of modified total direct costs which may be used indefinitely. If chosen, this methodology once elected must be used consistently for all Federal awards until such time as a non-federal entity chooses to negotiate a rate.
You will be required to calculate an indirect rate if you are awarded a federal contract (or grant) in which cost is reimbursed. It is a manner of assuring fair and equitable reimbursing across different businesses and organizations. Indirect rates are used for Incurred Costs Proposals.
Indirect cost rates are also known as indirect rates or Facility and Administrative rates (F&A rates). Though the Federal Acquisition Regulations (FAR) will recognize indirect rates grouped in any logical manner, they usually fall into one of three categories:
- Employee benefits: Costs involved in benefits of the employees, such as health benefits, paid leave, employee pension plans, etc.
- Overhead costs: Costs involved with running the company. Including research and development, shared facility costs, heat and electricity, etc.
- General & Administrative costs (G&A costs): Costs associated with the management of the business. This includes office space, salaries for management where management oversees more than one project, salaries of workers that are shared between projects, etc.
The de minimis rate can be charged at 10% of Modified Total Direct Costs (MTDC). MTDC is defined at 2 CFR 200.68 as being:
“All direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $25,000 of each subaward (regardless of the period of performance of the subawards under the award). MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs and the portion of each subaward in excess of $25,000.”
The first $25,000 of subawards can be taken when each subaward is initially issued, separately negotiated, or renegotiated over the Federal grant’s period of performance (i.e. not $25,000 for each entity’s fiscal year).
Nonprofits may find it helpful to have two separate subaward general ledger accounts: one account that tracks the awards and another account that records costs in excess of the award.
The Nonprofit will want to ensure that direct costs of the Federal grant do not already include recovery of indirect costs (double charging) when using the de minimis rate. This type of issue is most prevalent when the Nonprofit’s Federal grant supports a large majority, if not all, of the activities of the Nonprofit. It could also occur, however, if the Nonprofit has historically recovered indirect costs from Federal grants by means of direct allocations. The Nonprofit must also be consistent in how direct and indirect costs are charged to Federal grants.
Should a nonprofit enter into Federal grants that allow for use of the 10% de minimis rate, it is important that the nonprofit establish a system of internal controls over the calculation of the de minimis rate. It is also important that the nonprofit monitor the calculation when invoicing the grant.
Miscalculation will most often occur when those costs identified in the above definition (rental costs, subawards, etc.) are not properly deducted from total direct costs for purposes of calculating the de minimis recovery.
Nonprofits may be able to automate calculation of the de minimis recovery in their accounting systems to reduce the risk of error. Alternatively, the nonprofit could develop a form to document the calculation of the de minimis recovery. This form would ensure that the grant billing preparer takes into consideration all deductions that arrive at the MTDC. It would also allow for easy review of the de minimis calculation prior to grant billing submission.
It is important that the data you submit is accurate. Mischarging could result in criminal penalties.