When a grant applicant includes a sub-awardee in a proposal, the budget must account for the direct costs of the sub-awarded work, the indirect costs each party is entitled to recover, and the amount of each subaward that the grant applicant is entitled to count toward their federally negotiated indirect cost rate (NICRA) or de minimis rate. Confusing these issues or applying the wrong rate is one of the most common budgeting errors we see in the proposals we review. This can significantly affect your proposal scoring by reviewers and the allowable funds in your awarded budget, if funded.
Direct Costs vs. Indirect Costs: The Basics
Direct costs are those that can be specifically identified with a single project: the sub-awardee’s personnel, travel, materials, and equipment. Indirect costs (facilities, administration, overhead) are recovered through a NICRA or de minimis rate that the federal government allows you to use in federal budgets if you do not have a NICRA. Both grant applicants and their sub-awardees can apply their NICRA-approved rate to their direct costs.
A prime or sub-awardee without a NICRA typically can use a de minimis rate of up to 15% of Modified Total Direct Costs (MTDC) under 2 CFR 200.414(f), effective for awards issued on or after October 1, 2024, unless the Request for Proposals (RFP) specifies otherwise.
Two Common Mistakes That Cost Applicants Points
Mistake 1: Applying the prime’s rate to the sub-awardee’s budget. Each entity recovers indirect costs under its own approved rate. A frequent mistake is applying the prime applicant’s indirect rate to the sub-awardee’s budget instead of requiring the sub-awardee to use their own rate.
Mistake 2: Miscalculating MTDC for subawards. Only the first $50,000 of each subaward is included in the prime applicant’s NICRA or de minimis rate calculation when determining MTDC. Any amount over this $50,000 threshold is automatically excluded from the indirect/de minimis calculation. These details matter because reviewers check the math, and an incorrectly calculated budget signals weak fiscal management — it can lose points in the review as well as result in disallowed funds even if the proposal is awarded.
How MTDC Works in Practice
Modified Total Direct Costs are not simply the sum of all direct costs. Certain items are excluded from the MTDC base, including equipment, capital expenditures, patient care charges, rental costs, tuition remission, and the portion of each subaward over $50,000. Getting these exclusions right is essential before you apply your indirect rate.
Use our free Indirect Cost and MTDC Calculator to walk through the calculation step by step. It shows which budget categories are included in MTDC and applies either your NICRA rate or the de minimis rate so you can see exactly what your indirect cost recovery should be — and catch errors before they reach reviewers.
Why This Matters for Competitive Proposals
Reviewers check the math on budgets. An indirect cost calculation that doesn’t add up — or that charges a rate that isn’t allowable for one of the parties — is a red flag that suggests the applicant may not have the fiscal management capacity to administer a federal award. In competitive grants where every point counts, a clean, well-documented budget narrative is as important as a compelling program design.
For broader budgeting support, see our grant writing services or download our free Federal Grant Checklist to make sure your proposal covers all the required elements before submission.