What Is the Average Indirect Cost Rate for Nonprofits?

Nonprofit organizations manage both the direct costs of their programs and the underlying expenses that keep the entire organization functioning. These underlying expenses are known as indirect costs. The indirect cost rate assesses how these support costs relate to direct program spending, offering transparency to stakeholders and ensuring sustainable delivery of mission-driven services. This rate is a key element in financial planning and reporting for nonprofits, influencing their ability to secure and manage funding effectively.

Defining Indirect Costs

Indirect costs are expenses incurred for common or joint purposes that benefit multiple programs or activities but cannot be directly attributed to a single project or service. They are sometimes referred to as overhead or administrative costs because they relate to the general infrastructure and management of the organization.

Common examples of indirect costs include administrative salaries for staff managing finances, human resources, or executive leadership. General office expenses like rent, utilities, internet services, and supplies also fall into this category. Accounting and auditing services, information technology (IT) support, and insurance premiums benefit the entire organization rather than a single program.

The distinction between direct and indirect costs lies in their traceability to a specific cost objective. Direct costs can be specifically identified with a particular program, project, or activity, such as a program manager’s salary for one initiative or materials purchased for a specific workshop. Indirect costs, by contrast, are shared across multiple activities, making direct assignment impractical or complex.

Calculating the Indirect Cost Rate

The indirect cost rate is calculated using a formula that expresses indirect costs as a percentage of direct costs. The basic formula is: (Total Indirect Costs / Total Direct Costs) \ 100. This provides a clear ratio of an organization’s support expenses to its program-specific expenditures.

In this formula, “Total Indirect Costs” represents the aggregate of expenses that benefit multiple programs and cannot be directly assigned. This pool includes administrative salaries, rent for shared office space, utilities, general office supplies, and professional services like accounting or legal fees. These costs must be allocated across the organization’s various activities.

“Total Direct Costs” refers to the sum of all expenses directly attributable to specific programs or activities. This can include program staff salaries, specific project materials, and travel expenses for a particular initiative. The denominator often uses “Modified Total Direct Costs” (MTDC), a specific definition for federal awards. MTDC generally includes all direct salaries and wages, applicable fringe benefits, materials and supplies, services, and travel, along with the first $50,000 of each subaward, while excluding equipment and capital expenditures.

Nonprofits can establish their indirect cost rates through various methods. One common approach for organizations receiving federal funding is to negotiate a rate with their cognizant federal agency, resulting in a Negotiated Indirect Cost Rate Agreement (NICRA). This agreement formally establishes the rate at which indirect costs can be reimbursed for federal grants. Organizations without a NICRA may elect to use a de minimis rate, which, as of October 1, 2024, can be up to 15% of modified total direct costs, as per 2 CFR Part 200.

Factors Influencing the Indirect Cost Rate

Indirect cost rates among nonprofits vary significantly due to organizational characteristics and operational models. Organization size often plays a role; smaller nonprofits may have proportionally higher indirect costs because they lack the scale to spread administrative expenses across many direct programs. Larger organizations might achieve economies of scale, potentially leading to a lower indirect cost rate.

A nonprofit’s mission and operational model also influence its rate. Organizations focused on direct service delivery, such as those providing meals or educational support, might have a different cost structure compared to advocacy groups or research-oriented nonprofits. The nature of services dictates the proportion of resources allocated to direct program activities versus administrative and support functions. For example, a nonprofit with extensive physical infrastructure, like a community center, will likely have higher facilities-related indirect costs.

Funding sources also shape the indirect cost rate. Nonprofits heavily reliant on government grants may need to adhere to specific indirect cost recovery policies and caps set by federal or state agencies. These policies can limit the percentage of indirect costs charged to a grant, sometimes requiring organizations to subsidize indirect costs from other funding streams. Private foundations may have different approaches, with some offering more flexibility or higher rates for indirect cost recovery.

Geographic location is another contributing factor. Organizations operating in areas with high costs of living or expensive commercial real estate will incur higher expenses for rent, utilities, and staff salaries. These increased operational costs directly affect the numerator in the indirect cost rate calculation, potentially leading to a higher rate compared to organizations in lower-cost regions. Each nonprofit’s indirect cost rate reflects its specific operational environment and strategic choices.

Understanding Typical Indirect Cost Rates

There is no single “average” indirect cost rate that universally applies to all nonprofits, as rates are highly individualized. Instead, it is more useful to consider typical ranges and benchmarks observed across the sector. For many nonprofits, particularly those receiving federal grants, the de minimis rate of up to 15% of modified total direct costs serves as a common baseline if a negotiated rate is not in place.

However, actual negotiated rates and those supported by private funders can vary more widely. Many nonprofits experience indirect cost rates ranging from 10% to 30% or higher, depending on their operational structure and funding mix. Some foundations have adopted policies supporting higher indirect cost recovery, recognizing the full costs of operating a nonprofit. For example, some foundations have increased their allowable indirect cost rates on project grants to 29% or higher, acknowledging that a lower rate may not cover an organization’s true operational expenses.

Funders, particularly government agencies and private foundations, have specific guidelines for how indirect costs are viewed and applied in grant agreements. Federal agencies generally adhere to Uniform Guidance, which outlines principles for cost allowability and indirect cost rates, including the de minimis option and the process for negotiating a NICRA. Private foundations often set their own policies, ranging from providing full indirect cost recovery to imposing strict caps or funding only direct project costs.

A higher indirect cost rate does not automatically indicate inefficiency, nor does a lower rate always signify superior efficiency. A higher rate might reflect investments in robust financial management systems, comprehensive human resources support, or a strong organizational infrastructure, all contributing to effective program delivery. Conversely, a very low indirect cost rate might suggest an organization is under-recovering its true operational costs, potentially jeopardizing its long-term sustainability.