Understanding Indirect Costs (Overhead Funds)

Whether a grant or a contract, most awards will consist of two distinct funding elements – direct and indirect. Direct costs are those needed by the principal investigator to carry out the specific goals of the award and may include the costs of personnel, contractual services, supplies, and equipment. Indirect costs are those separate from the direct costs and are meant to reimburse an institution for the costs of hosting the award activity.

Because these indirect costs – heat, electricity, administrative support, space, infrastructure, etc. – are difficult to quantify and allocate to each individual project, indirect costs are usually calculated as a simple percentage of the direct costs and are added to whatever the allowable direct costs are.

In the case of indirect costs for federal government awards (known as Facilities and Administrative, or F&A costs), rates are a fixed percentage that is negotiated for each institution by the Research Foundation. These are renegotiated from time to time with the Department of Health and Human Services.  (Example: a federal agency makes an award of $500,000 in direct costs that the faculty member – or principal investigator – will use for the project. If the college has a negotiated F&A rate of 53%, an additional $265,000 will be added to the direct costs for a total of $765,000.)

There are two broad categories of F&A costs that go into determining the federal F&A rates:

  • Facilities Costs 
    • Depreciation of building
    • Depreciation of equipment
    • Operations & maintenance of physical plant
    • Interest on debt associated with capital assets
    • Library expenses
  • Administrative Costs
    • General & administrative expenses
    • Departmental administration
    • Sponsored project administration
    • Student administration and student services
    • Other indirect cost not listed under facilities

Proposals to federal agencies must always include the full negotiated F&A rate for the host institution so that costs can be fully recovered. Federal agencies are required to accept an institution’s negotiated F&A rate and apply it to its awards.  (There may be special circumstances where the rate requested or awarded may be lower.)

In the case of all other awards, whether from New York State, New York City, private foundations, or other sources, the indirect costs are specified by the sponsor in the award agreements. In some cases the non-federal sponsor will accept a college’s federally negotiated indirect cost rate, however, in many more instances they will not.  (For example, the maximum rate for New York State Department of Education awards is currently 8%.)

Generally, federal rates for grants involving the bench sciences will be far greater than the rates for a contract with a local governmental entity for a specific service that does not have the high associated indirect costs that scientific research requires.

Regardless of the source or size of an award, principal investigators oversee direct costs and colleges oversee indirect costs.