Indirect Costs Explained: Getting Funders to Pay the Full Cost of the Work

The grant pays for the tutor. It does not pay for the room she teaches in, the bookkeeper who tracks her hours, the insurance that lets children into the building, or the director who wrote the grant. Those costs are as real as the tutor's salary. They are just harder to see, which is why funders have spent decades not paying them.

Indirect costs are the shared expenses of running an organization that cannot be tied to a single program, and recovering them is the difference between a grant that strengthens an organization and a grant that quietly drains it. Here is what they are, what rules and norms apply in 2026, how to calculate your own rate, and how to ask funders to pay the full cost of the work.

Direct, indirect, and why the line matters

Direct costs are traceable to one program: the tutor, the curriculum, the bus. Indirect costs support every program at once: rent, utilities, accounting, insurance, technology, leadership, the audit. The line between them is partly a matter of accounting choice, and organizations that draw it carefully, assigning to programs every cost that honestly belongs there, find their indirect rate is lower and their direct budgets are fuller. Every organization reports the split on its Form 990 as program, management and general, and fundraising expenses; our article on the Form 990 and who is reading it explains what funders see there.

The overhead myth, and where funders stand now

For years, the share of spending on management and fundraising was treated as a measure of waste, and organizations starved their own infrastructure to keep the number low. In 2013 the three largest sources of nonprofit information in the United States published a joint letter calling that measure a myth, and the sector has been slowly changing since. Many funders now accept indirect costs at stated rates, some have moved to general operating support that covers the full cost of the work, and a movement toward trust-based philanthropy argues for it outright. Others still cap indirect costs at rates far below what running an organization actually costs. Our article on the overhead myth makes the case; this one is about the mechanics.

A grant that pays the tutor and not the building does not fund the program. It funds part of the program and asks the organization to donate the rest.

The federal rules, in plain terms

Federal awards follow the Uniform Guidance, which allows an organization to recover indirect costs in one of two ways. An organization can negotiate an indirect cost rate agreement with its primary federal agency, based on its actual costs, and that rate must then be honored by every federal agency and by any pass-through funder using federal money. Or an organization without a negotiated rate can charge the de minimis rate, which the 2024 revision of the guidance raised from 10 percent to 15 percent of modified total direct costs, with no negotiation and no documentation beyond the calculation. Many small recipients have never claimed it. Our article on government grants for small nonprofits covers the rest of that rulebook.

Calculate your own rate

• Total the indirect costs for the last full year: rent, utilities, insurance, accounting and audit, technology, administrative salaries and the share of leadership time not spent on programs, and similar shared costs.
• Total the direct costs for the same year, across all programs.
• Divide indirect by direct. The result is your indirect rate as a share of direct costs.

Most small organizations that do this honestly find a rate well above the 10 or 15 percent that many foundations cap at, and often above 25 percent. That number is not a problem to hide. It is the true cost of the work, and it is the starting point for every budget and every conversation with a funder. Our article on nonprofit bookkeeping without a finance department covers the records that make the calculation possible.

How to ask funders to pay the full cost

• Put indirect costs in every grant budget, as a line at your rate or the funder's maximum, with one sentence explaining what it covers. Budgets that omit it teach funders the work is cheaper than it is. Our article on the grant budget that gets approved shows the format.
• Where a funder caps the rate, move honest costs to direct lines. The program's share of rent, the program manager's time, the data system the program uses, and the accounting the grant itself requires are direct costs of that program when allocated properly.
• Ask for general operating support wherever it is offered. Unrestricted funding covers the full cost by definition. Our article on restricted and unrestricted funds explains why it matters.
• Show the funder the gap. A one-page true-cost statement, with the rate calculation, tells a program officer what their cap actually asks the organization to absorb. Many will find a way when they see it.
• Use the de minimis rate on every federal dollar, including federal money passed through state agencies and intermediaries, which must honor it.
• Fund the rest deliberately. Individual giving, earned income, and reserves are what cover the indirect costs funders will not, so budget for them rather than hoping. Our article on operating reserves shows where the margin goes.

Calculating the rate, allocating costs correctly across programs, and building grant budgets that recover the full cost is work our Ops and Finance department does alongside the Grants department for organizations without a finance lead. See how our staff keep the true cost visible.

Where organizations go wrong

Leaving indirect costs out of a budget to look lean. Accepting a funder's cap without moving allocable costs to direct lines. Treating a low indirect rate as a virtue in the annual report. Never claiming the federal de minimis rate. And running programs at a loss, year after year, funded by the reserve and the executive director's unpaid hours, until one of them runs out. Our article on capacity-building grants covers the funders who invest in the infrastructure that indirect costs pay for.

Questions nonprofits ask about indirect costs

Is a high indirect rate a sign of a badly run organization?

No. It is a sign of an honestly calculated one, and often of a small one, since shared costs are spread over fewer programs. The number to watch is whether the work gets done and the books balance.

Can we charge indirect costs to a foundation grant?

Most foundations allow a rate, and many cap it. Include it every time, at the cap where one exists, and allocate honest program costs to direct lines.

Do we need a negotiated rate to charge indirect costs on federal grants?

No. The de minimis rate of 15 percent of modified total direct costs is available without negotiation to organizations that have never had a negotiated rate.

Should fundraising costs be in the indirect rate?

Fundraising is reported separately from management and general on the Form 990, and most funders exclude it from allowable indirect costs. Recover it through unrestricted revenue instead.

Your mission is bigger than the tutor's salary

The building, the books, and the leadership are the mission too, and an organization that never asks funders to pay for them pays for them out of its own future. You do not need to become a cost accountant on top of everything else. You need a staff that is already calculating the rate, already allocating the costs, and already building budgets that recover the full cost while you lead the mission only you can lead. Find out what our staff can do for you.

Zoya Syal is Content and Production Manager at Nonprofits Engine, where she leads the content and testimonial work for a team that helps small nonprofits get set up and funded.