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Indirect Costs: Tips for ODH Applicants and Grants Officers 

November 14, 2022
Photograph of a Davies Adding Machine, a rectangular metal contraption with five continuous metal bands that move in slots across a wooden frame.
Photo caption

Davies Adding Machine, 1867.

National Museum of American History. ID: MA.252690.

This summer, the NEH Office of Digital Humanities (ODH) reviewed the budgets of 109 awards made during the past three fiscal years.

We found that about one third of applicants incorrectly calculated their indirect costs (IDCs). In most cases, this led to recipients receiving less money than they requested in their application.

This post summarizes what we learned and offers tips to avoid common indirect cost mistakes on your application. If you plan to apply for an NEH grant, we encourage you to review this information carefully and share it with the appropriate program and financial offices within your organization. We hope this will make your job a little easier.

This post is not intended to replace information provided in our Notices of Funding Opportunity, specific terms on your award, NEH General Terms and Conditions for Awards, or 2 CFR Part 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.

About Indirect Costs

ODH applicants may request both direct and indirect costs in their budget.

Direct costs are easy to identify. These are expenses directly related to the proposed project, like equipment for the project or salaries of the individuals who will work on the project.

Indirect costs represent business expenses that do not readily fall within a project-specific functional activity. Indirect costs are frequently referred to as overhead expenses (e.g., rent and utilities) and general and administrative expenses (e.g., clerical and managerial staff salaries).

Indirect costs are calculated as a percentage of direct costs. Many organizations negotiate a federal indirect cost rate, known as a Negotiated Indirect Cost Rate Agreement, or NICRA. If your organization has a current or provisional NICRA, you can use this to claim indirect costs.

If your organization does not have a current or provisional NICRA, you may claim a standard 10 percent in indirect costs. This is known as the de minimis rate. (See 2 CFR § 200.414(f) for more information about de minimis rates.)

Indirect Costs by the Numbers

Awards

Number of awards that claimed indirect costs

103 (94%)

Number of awards that did not claim indirect costs

6 (6%)

Number of awards that claimed a de minimis rate

8 (7%)

 

Indirect Cost Errors

Number of awards that applied an incorrect rate

26 (24%)

Number of awards that calculated base costs incorrectly

17 (16%)

 

Indirect Cost Rates

Lowest Negotiated Indirect Cost Rate (NICRA)  (1 award)

22.9%

Highest NICRA (1 award)

55%

Average IDC rate

33%

Median IDC rate

34%

Analysis of 109 awards made by ODH through the Digital Humanities Advancement Grants, Institutes for Advanced Topics in the Digital Humanities, and NEH/AHRC New Directions programs during FY 2020, 2021, and 2022.

Advice for Applicants

Make sure you apply the correct indirect cost rate

Almost a quarter of ODH awards were reduced because they applied the incorrect indirect cost rate.

Review your institution’s NICRA to ensure that you use the most appropriate rate type for your project. For example, many higher education institutions negotiate multiple rates, such as “on-campus”, “off-campus”, “instruction,” “research”, or “other sponsored activities.”

An institution’s “research” rate is rarely the appropriate rate for inclusion in NEH-funded projects. The research rate is reserved for projects involving scientific research, not scholarly inquiry of the type most often supported by NEH.

Applying the incorrect indirect cost rate may result in a reduction of your award. In 2022, for example, one applicant requested 56 percent in indirect costs, which was their institution’s on-campus organized research rate. In this case, NEH determined that the use of the research rate was not appropriate. Instead, the “other sponsored activities” rate of 39 percent was applicable. As a result, NEH reduced the award amount by more than $10,000.

Be careful when you calculate your base

A common mistake applicants made was applying the indirect cost rate to project costs that should not have been included in the indirect cost base.

It is extremely important to review your NICRA to determine the correct cost categories and cost limitations that comprise the indirect cost base. Indirect costs are calculated by multiplying the direct project costs that are included in the indirect cost base by the indirect cost rate.

Incorrectly calculating your indirect cost base can lead to a reduction in your award. For example, in one case, an applicant incorrectly included gift cards for participants in their indirect cost base. NEH recalculated the indirect costs and reduced the award by $58. This was incorrect because the applicant’s indirect cost base specifically excluded participant support costs.

In another case, the applicant incorrectly included matching costs in their indirect cost base. NEH recalculated the indirect cost and reduced the award by $599.

Your institution may use the de minimis rate if it does not have an existing or provisional NICRA.

About seven percent of recipients used the de minimis rate.

While your institution does not have to request indirect costs in its application budget, you may apply the de minimis rate if it does not have an existing current or provisional NICRA (see 2 CFR § 200.414(f).)

The de minimis rate allows you to claim indirect costs of up to 10 percent of modified total direct costs (MTDC) (see 2 CFR § 200.1). If you apply the de minimis rate and receive an award, it will be in effect for the award’s period of performance.

You cannot change your indirect cost rate after you receive your award

NEH will not adjust your award amount as a result of changes to your negotiated rates. If an educational institution has a provisional rate at the time of award, NEH must use the provisional rate until a final cost is negotiated and approved by the cognizant agency.

NEH uses the indirect cost rate(s) in effect at the time it issues your award, except as provided in 2 CFR § 200.414(c)(1),.

Conclusion: Take Care with your IDC

Miscalculated indirect costs are a loss for institutions. If you do not calculate your indirect cost rate correctly, NEH will recalculate it for you. If the indirect costs are lower, NEH will reduce your award.

Make sure you have chosen the appropriate IDC rate, and that you have calculated your IDC base correctly to ensure that your budget is not reduced.

If you have questions about determining the indirect costs for your application, please contact NEH’s Office of Grant Management at @email or (202) 606-8494.