Indirect Costs in Subcontracts

Gear up everyone, this is going to be an exciting post where we get into the weeds of the CFR! (Yep, the Code of Federal Regulations, our government’s “codification of the general and permanent rules published in the Federal Register.” Look no further if you need some light reading to help you fall asleep at night.)

But first, let’s hit some quick definitions.

Costs in a grant budget are divided into direct costs – those that can be attributed to a specific grant program or service – and indirect costs – items that are difficult to link directly to a specific service, but nevertheless are vital to the operation of your agency. 

Direct costs can include items like salaries for staff who provide direct services, such as a case manager or tutor, or items linked specifically to a program, like a tutoring assessment or tutoring supplies like paper and pencils. All of these costs are clearly used for programming. 

Indirect costs can include things like overhead (such as rent) and salaries for administrative staff such as your finance or HR people. They might include items such as an agency’s annual audit or legal fees. These are crucial expenses, but not ones that are necessarily easy to link directly to program services. Hence, the federal government (as well as other funders) allows you to set aside a portion of your funding to meet these expenses.

We’ll go into what indirect costs are, how to calculate them, and how to negotiate an indirect cost agreement with a federal department (such as the U.S. Department of Labor) in a later post.

But today we’re talking about something even more specific and very important. If you have subcontractors in your federal proposal and budget, can they charge an indirect rate on their subcontract? Or can they just charge direct program expenses?

Let’s look at 2 CFR §200.331, which covers requirements for pass-through entities.

Yes, to answer the first question. Subcontractors definitely can include an indirect cost rate in their subcontract if the Request for Proposal (RFP) allows indirect cost rates for the Prime Applicant seeking funding.

So then, what percentage should subcontractors charge for their indirect rate? Are they limited to your agency’s indirect cost rate (as the Prime Applicant) for a particular grant? And what about restricted rate programs that limit the amount of indirect costs that can be charged, regardless of whether you have a negotiated indirect cost rate?

Whew. We know this is more than one question, but let’s tackle all of them, since they all raise important issues.

Agencies that receive federal grants (the Prime Applicant) can apply for a Negotiated Indirect Cost Rate Agreement (NICRA) with a federal agency. If you don’t have a NICRA, you can use the federal government’s de minimis rate of 10% for indirect costs (the unrestricted rate) or 8% (on restricted rate programs).  


When it comes to subcontracts, I’ve never seen an RFP specify anything about how much a subcontractor can charge for indirect. So that means it’s time to open up the CFR and find the answer. 

It turns out the answer to what indirect cost rate a subcontractor can use is, it depends. 

According to 2 CFR §200.331, a subcontractor who has a NICRA is required to use that rate for the subcontract. This applies whether or not it is a restricted rate program, and the subcontractor should use whichever rate (unrestricted or restricted) is applicable to that grant competition. 

For subcontractors without a negotiated indirect cost rate agreement, there are two options for charging indirect costs. The lead agency for the grant proposal may negotiate a rate with the subcontractor, or the subcontractor may use the de minimis rate for that grant. 

So even if the subcontractor doesn’t have a negotiated rate in place, they have the option of negotiating this rate with the Prime Applicant, rather than just falling back on the de minimis rate, which is what the Prime Applicant has to do if they don’t have a NICRA.

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