Indirect costs are the shared costs of running an organization that cannot be traced to a single award: rent, utilities, accounting, executive time, general administration. Section 200.414 of the Uniform Guidance sets how a recipient recovers them from Federal awards. Most small and mid-size nonprofits and local entities use either a rate negotiated with a Federal cognizant agency or the de minimis rate, which the 2024 revision of 2 CFR part 200 raised from 10 percent to 15 percent of modified total direct costs.
Auditors meet this section in two places: the compliance audit of allowable costs for a major program and the review of how a pass-through entity treats a subrecipient's indirect costs. This page paraphrases the regulation as it reads on eCFR. Read 2 CFR 200.414, the definitions in 200.1 and Appendices III through VII for the full text.
What does 200.414 allow?
The de minimis rate (paragraph f). Recipients and subrecipients that do not have a current Federal negotiated indirect cost rate, including a provisional rate, may elect to charge a de minimis rate of up to 15 percent of modified total direct costs (MTDC). The recipient chooses the rate up to that limit. Other points in the paragraph:
- Federal agencies and pass-through entities may not require a rate lower than the negotiated rate or the rate elected under this paragraph unless a Federal statute or regulation requires it.
- The de minimis rate must not be applied to cost reimbursement contracts issued directly by the Federal Government under the FAR.
- Using the rate is optional.
- Costs must be consistently charged as either direct or indirect and may not be double charged or inconsistently charged as both.
- The rate needs no documentation to justify it and may be used indefinitely.
- Once elected, the recipient must use the de minimis rate for all Federal awards until it chooses to receive a negotiated rate.
Acceptance of negotiated rates (paragraphs c and d). Negotiated indirect cost rates must be accepted by all Federal agencies. An agency may use a different rate for a class of awards or a single award only when required by Federal statute or regulation, or when approved under the paragraph's deviation process, and must notify OMB of any approved deviation. Pass-through entities must accept all federally negotiated indirect cost rates for subrecipients.
One-time extension (paragraph g). A recipient or subrecipient with a current negotiated rate may apply for a one-time extension of that agreement for up to four years, subject to review and approval by the cognizant agency for indirect costs. It may not request a rate review until the extension ends, and it must re-apply when the extension ends. After a new rate is negotiated it may apply for another one-time extension.
Classification (paragraph a and b). Major institutions of higher education and major nonprofit organizations, defined as those receiving more than $10 million in direct Federal funding, classify indirect costs into Facilities and Administration. For other nonprofits, the association of a cost with a Federal award is the determining factor in distinguishing direct from indirect.
Appendices III through VII and IX to part 200 cover rate proposals and cost allocation plans for institutions of higher education, nonprofit organizations, state and local central services, public assistance, state, local and Tribal indirect cost proposals and hospitals.
What is MTDC?
Modified total direct costs is defined in 2 CFR 200.1. It includes direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $50,000 of each subaward, regardless of the subaward's period of performance. It excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward above $50,000. Other items may be excluded only when necessary to avoid a serious inequity in the distribution of indirect costs, with the cognizant agency's approval.
Equipment in the definitions means tangible personal property with a useful life over one year and a per-unit acquisition cost that equals or exceeds the lesser of the recipient's capitalization level for financial statements or $10,000.
Does the revision change existing rates?
Section 200.110(b) says existing negotiated indirect cost rates remain in place until they expire, and the effective date of changes to indirect cost rates is based on the date a newly renegotiated rate goes into effect for the recipient's fiscal year. The revisions to part 200 therefore take effect for rate proposals and negotiations when a rate is renegotiated.
A worked illustration
Illustrative numbers only. A nonprofit without a negotiated rate charges a grant these direct costs: salaries $400,000, fringe $100,000, supplies $50,000, travel $20,000, equipment $60,000, and one subaward of $120,000.
| Item | Amount | In MTDC? |
|---|---|---|
| Salaries | $400,000 | Yes |
| Fringe benefits | $100,000 | Yes |
| Supplies | $50,000 | Yes |
| Travel | $20,000 | Yes |
| Equipment | $60,000 | No |
| Subaward, first $50,000 | $50,000 | Yes |
| Subaward, excess $70,000 | $70,000 | No |
| MTDC | $620,000 |
MTDC is $400,000 + $100,000 + $50,000 + $20,000 + $50,000 = $620,000. At the maximum 15 percent the indirect cost charge is $620,000 x 15% = $93,000. At an elected 12 percent it would be $74,400. The same executive director time cannot sit in both the direct salaries and the indirect pool.
What do auditors test?
Practice observations built from the text, not requirements of the regulation:
- Rate authority. Obtain the negotiated rate agreement or the board or management election of the de minimis rate. Confirm the rate in effect during the award period.
- Base accuracy. Recompute MTDC from the general ledger. Equipment, capital expenditures, rent, scholarships, participant support and subaward amounts over $50,000 are the usual errors.
- No double charging. Compare direct charges with the indirect pool for the same type of cost, such as accounting staff or office rent. See allowable costs.
- Consistency. The same type of cost should be treated the same way across all awards and the organization's other activities.
- Pass-through handling. A pass-through entity cannot require the de minimis rate if the subrecipient has an approved negotiated rate. See subrecipient requirements.
- Federal award terms. Contracts under the FAR are outside the de minimis rate.
Frequently asked questions
What is the de minimis indirect cost rate?
Up to 15 percent of modified total direct costs, for recipients and subrecipients without a current Federal negotiated indirect cost rate.
Does the de minimis rate need supporting documentation?
The regulation says it does not require documentation to justify its use and may be used indefinitely. The base still has to be computed correctly and costs cannot be double charged.
Can a pass-through entity force a subrecipient to take a lower rate?
Not below the negotiated rate or the rate the subrecipient elected under the de minimis paragraph, unless required by Federal statute or regulation.
Can a negotiated rate be extended?
A recipient or subrecipient with a current negotiated rate may apply for a one-time extension of up to four years, which the cognizant agency must approve.
Sources
- eCFR, 2 CFR 200.414, 200.110, 200.331, 200.332 and the definitions in 200.1 (current text, retrieved November 2026): ecfr.gov
- OMB, Guidance for Federal Financial Assistance, 89 Fed. Reg. 30046 (April 22, 2024), discussion raising the de minimis rate from 10 to 15 percent
Related
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