Federally Negotiated Indirect Cost Rate vs. De Minimus Rate

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Federally Negotiated Indirect Cost Rate vs. De Minimus Rate

I recently attended a gathering of grant writing professionals. It was a neat experience. I was flattered and humbled by the overwhelming reaction of a long-time reader I ran into who compared meeting me to running into a celebrity in an airport (I still blush when I think about it). This event was clearly for early career professionals and for the most part, I was there to show my support for a friend involved in the organization (and I may have been doing a little head-hunting). I tried to keep quiet through the sessions I sat in, except when someone recognized me and specifically called on me to contribute. I was trying to keep a low profile, listen, and see if there was any talent lurking around.

But, in one session, I could not resist speaking up when a presenter said something that was outright incorrect. It is still bugging me, so I thought I’d better enlighten everyone I can. This speaker tried to tell a room full of pretty small nonprofits that they all needed to go out and get themselves a federally negotiated indirect cost rate. That was absolutely wrong advice. Many of the nonprofit organizations represented at the event can barely afford an audit and the vast majority don’t receive enough grant revenue to be subject to state audit in our home state. Telling them to drop a relatively huge chunk of change on an indirect cost negotiation was just wrong.

Let’s start with some definitions.

Federally Negotiated Indirect Cost Rate

A federally negotiated indirect cost rate is a rate determined through negotiation between a federal agency and a recipient organization (such as a university, nonprofit, or state government). The rate is based on the actual historical costs of an organization's operations and is specific to the organization and reflects its unique indirect costs. The process involves a detailed review of the organization's financial records and cost allocation practices.

Once negotiated, this rate is used to charge indirect costs to state and federal grants and contracts. This rate can vary widely between different organizations and even between different departments within a single organization.

The rate is typically negotiated for a specific period (e.g., 3-5 years) and must be re-negotiated once it expires. Organizations are required to maintain accurate documentation of their costs and adhere to federal regulations, such as those outlined in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 CFR 200).

De Minimis Rate

The de minimis rate is a flat rate provided by the federal government or other grant-makers that can be used by organizations that do not have a negotiated indirect cost rate. The de minimis rate is a flat rate, usually 10% of modified total direct costs (MTDC), which include all salaries and wages, fringe benefits, materials and supplies, services, travel, and subawards up to $25,000 per subaward.

This rate is designed to be a simplified method for recovering indirect costs without detailed negotiations. 

It is available to organizations that have never received a negotiated indirect cost rate, typically small organizations, or those with less experience in grant management. The de minimis rate can be applied without the need for detailed documentation of indirect costs and is standard for all eligible organizations, providing a consistent and straightforward approach to indirect cost recovery.

The key difference is that a federally negotiated indirect cost rate costs a small fortune to establish and is specific to an organization and based on its actual indirect costs, requiring detailed accounting and negotiation, while the de minimis rate is a flat, easy-to-use rate available to organizations without a negotiated rate. Organizations should choose the method that best fits their administrative capabilities and the nature of their funding. If your organization is still having financial reviews, rather than audits, or considers an annual audit a major expense, you absolutely do not need to go out and negotiate a federal indirect cost rate. Instead, save up your indirect cost recovery at the de minimus rate until you can afford it. By then, you might be ready.

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