This guidance document does not supersede Federal laws and regulations. This OCED guidance document is for informational purposes only and is not a
requirements document. If there are inconsistencies between this OCED guidance document and any specic program or project document, the specic
OCED program or project document should be relied upon as it is the controlling document.
What are Indirect Costs and the Indirect Cost Rate?
Indirect costs are costs that are incurred for common or joint objectives and cannot be readily identied with a particular nal cost
objective. They are costs or expenses that cannot be identied or tracked to a single activity, project, job, or contract or costs that
apply to more than one project. To the extent that indirect costs are reasonable, allowable, and allocable, they are a legitimate
cost of doing business payable under a federal award. Examples of common indirect costs include oce space rental, utilities, and
clerical and managerial sta salaries.
The indirect cost rate results from dividing the allowable indirect cost pool dollars by the selected direct base dollars. When expressing an
indirect cost rate, it is always important to express both the percentage and the base to which it applies (e.g., 28.44% of Total Direct Costs).
What is a Negotiated Indirect Cost Rate Agreement?
Indirect costs are not charged directly to federal awards but are allocated equitably to the organization’s activities, typically
through the development and application of an Indirect Cost Rate Agreement. The organization will negotiate an Indirect Cost
Rate Agreement, commonly called a Negotiated Indirect Cost Rate Agreement (NICRA) with its cognizant federal agency. This
agreement describes what proportion of indirect cost each program should bear in a fair and convenient manner within the
boundaries of sound administrative principles. The indirect cost rate is designed to provide a method for cost recovery, and it is an
equitable, logical, and consistent process for allocating costs not directly associated with a single grant, project, or cost objective.
Who needs a Negotiated Indirect Cost Rate Agreement?
Any organization that requests indirect costs on cost reimbursable grants and cooperative agreements or has more than one
source of funding (including direct federal funding), may require a negotiated indirect cost rate agreement. If an organization
has only one federal award, the Department of Energy (DOE) Oce of Clean Energy Demonstrations (OCED) may decide NOT to
negotiate an Indirect Cost Rate Agreement but agree on an award specic rate.
Which federal agency issues a Negotiated Indirect Cost Rate Agreement?
A recipient’s cognizant federal agency is responsible for negotiating a NICRA with them. Unless specically assigned by the Oce
of Management and Budget, the federal agency which provides the most in direct funding is normally the organization’s cognizant
federal agency. If it appears that DOE will be the organization’s cognizant federal agency, please contact the cognizant OCED Grants
and Agreements Ocer for further information and guidance. Because indirect cost recovery can be limited on OCED awards and
could require post-award adjustments, applicants and award recipients should ensure they understand the limitations relating to
indirect cost recovery. These limitations will be specied in the award letter, other award document, or the NICRA.
Indirect Cost Rate Agreement
and Rate Proposal Guidance
DEPARTMENT OF ENERGY
OFFICE OF CLEAN ENERGY DEMONSTRATIONS
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What are the different types of Indirect Cost Rates?
Provisional: A provisional, or billing rate, is a temporary indirect cost rate applicable to a specied period and is used for interim
billings, pending the establishment of a nal rate for the period.
Final: A nal indirect cost rate is applicable to a specied past period based on the actual costs of the period. A nal indirect cost
rate is not subject to adjustment. Note that a nal indirect cost rate is established after an organization’s actual costs are known,
typically a scal year. Once established, a nal indirect cost rate is used to adjust the claimed indirect costs.
Predetermined: A predetermined indirect cost rate is applicable to a specied current or future period, usually the organization’s scal
year. The rate is based on an estimate of the costs to be incurred during the period. A predetermined rate is not subject to adjustment.
A predetermined rate may be negotiated for use on federal awards where there is reasonable assurance, based on past experience and
reliable projection of the organization’s costs, that the rate is not likely to exceed a rate based on the organization’s actual costs.
Fixed: A xed rate is an indirect cost rate with the same characteristics as a predetermined rate, except that the dierence
between the estimated and actual costs of the period covered by the rate is carried forward as an adjustment to the rate
computation of a subsequent period.
10% De minimis: 2 CFR § 200.414(f) species that any non-Federal entity that does not have a current negotiated (including
provisional) rate, typically may elect to indenitely charge a de minimis rate of 10% of modied total direct costs. No
documentation is required to justify the 10% de minimis indirect cost rate. Costs must be consistently charged as either indirect
or direct costs but may not be double charged or inconsistently charged as both. If chosen, this methodology must be used
consistently for all federal awards until such time as a non-Federal entity chooses to negotiate for a rate, which the non-
Federal entity may apply to do at any time. For this purpose, non-Federal entity is dened in 2 CFR § 200.1, and means “a State,
local government, Indian tribe, Institution of Higher Education, or nonprot organization that carries out a federal award as a
recipient or subrecipient.” The denition of non-Federal entity also includes for-prot organizations, per 2 CFR § 910.122(a).
What are the federal requirements for Indirect Cost Proposals?
Indirect cost proposals must follow the applicable cost principles appropriate to the organization type.
States, local governments, Indian tribes, Institutions of Higher Education, and nonprot organizations are subject to 2 CFR Part
200, including the indirect costs regulation at 2 CFR § 200.414. For entities other than for-prots, 2 CFR § 200.414(e) species the
requirements for the development and submission of indirect cost rate proposals. The relevant sections to OCED awards are:
Institutions of Higher Education must follow 2 CFR Part 200, Appendix III
Non-prot Organizations must follow 2 CFR Part 200, Appendix IV
States, local governments, and Indian Tribes must follow 2 CFR Part 200, Appendix VII, but states and local governments can
submit a Cost Allocation Plan with or in lieu of an Indirect Cost proposal consistent with 2 CFR Part 200, Appendix V.
For-Prot Organizations must follow the Federal Acquisition Regulation Part 31 Subpart 31.2 and prepare indirect cost rates
consistent with FAR 31.203.
Sample Indirect Cost Rate Proposals
The following is an example of Indirect Cost Rate Proposal methodologies using the Single Rate Method and Two Rate Method.
These examples are meant as a resource for OCED selectees and recipients when preparing Indirect Cost Rate Proposals.
Indirect Rate Proposal – Single Rate Method
The following is a sample Indirect Rate Proposal using the Single Rate Method, which is the simplied method for allocating
indirect costs. This method is typically applicable to a small business with less than $10 million or less than 25 employees. This
method groups all allowable indirect costs, including fringe, into a single pool. The following is a step-by-step process of how to
use the information from the organization’s General Ledger to develop an indirect rate.
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Step 1: Develop List of Accounts
Start the process by compiling a list of all accounts in the General Ledger, along with the Account Number, Account Name, and
the dollars that equate to the most recent scal year of incurred costs/expenses. If the business is new and no costs/expenses
have been incurred, use best judgment to estimate the cost of budgeted amounts for the accounts in the General Ledger.
Step 2: Segregate Direct Costs from Indirect Costs
The second step is to determine which accounts/costs in the General Ledger can be considered direct costs to a single project
or indirect costs to two or more projects. Evaluate each expense in the General Ledger to determine if the expense should be
divided into separate direct and indirect accounts.
For example, salaries and wages can be charged as a direct cost in some situations and as an indirect cost in other situations.
Therefore, salaries and wages would be separated into two distinct account numbers in the General Ledger to separate direct
salaries from indirect salaries. Other cost/expenses that may be identied as direct or indirect depending on the circumstance
are travel, supplies, equipment, and subcontracts.
Costs identied as direct in the General Ledger must track in corresponding subsidiary ledgers with unique account numbers
to each project or job. For example, direct salaries/labor can be accumulated into one direct account number in the General
Ledger, but in subsidiary ledgers, the direct salaries must be identied to individual projects using unique account numbers.
To be considered compliant, the government requires a job order cost accounting system.
Step 3: Segregate Unallowable Costs
Once the costs in the General Ledger are separated into direct and indirect accounts, costs that may be considered
unallowable for Federal awards must be identied and removed from the total indirect cost pool. Unallowable costs are
identied in the cost principles for each type of organization. It is essential to read the appropriate Cost Principles to identify
the types of costs that are considered unallowable. The sample General Ledger below identies some unallowable costs
(outlined in red). The sample is not a complete list.
Step 4: Consider Adjustments to Historical Expenses
Selectees must consider the impact the pending award will have on their nancial status. In some cases, the historical cost
accumulated as part of Step 1 above may need to be adjusted to better reect the nancial situation after receipt of the award.
As an example, if all expenses in the General Ledger will increase in the same proportion, there would be no impact on
the resulting indirect rate result calculation in Step 7 below. However, if direct labor goes up signicantly but other indirect
expenses do not increase in proportion, the result would be a decrease to the indirect rate calculated in Step 7 below.
Therefore, the selectee preparing the Indirect Rate Proposal should perform a cursory review of the nature and magnitude
of the accumulated historical expenses and make appropriate adjustments to ensure that the resulting indirect rate is the
best representation of your business during the period of performance of the award. If historical costs are adjusted, please
provide the original historical cost, the adjusted costs, and a written descriptive summary of the business assumptions used in
determining the adjusted costs when submitting the Indirect Rate Proposal.
Step 5: Sum the Total of the Indirect Cost Pool (numerator)
Add the total of all allowable indirect costs that are segregated in Step 3 above. This will be the “pool” or top number
(numerator) when dividing to compute the indirect rate. Please ensure that there are no unallowable costs included.
Step 6: Select the Base – federal and non-federal (denominator)
The base used to allocate the indirect costs is usually Total Direct Labor or Total Direct Costs of all projects/programs/
activities. In the example below, Total Direct Labor Costs is used as a base. The direct labor costs (both federal and non-
federal projects) segregated in Step 2 above will be the “base” of allocation or the bottom number (denominator) for
calculating the indirect rate. Normally there are no unallowable direct costs, but if there are, they need to be left in the base
so indirect costs are allocated equitably.
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Step 7: Calculate the Indirect Rate (Pool/Base)
Divide the pool amount in Step 5 above by the base amount in Step 6. This will be the indirect rate as a percentage of the
base selected.
SAMPLE GENERAL LEDGER: Please note that the General Ledger (below is only a sample). The selectee should use their own
account names and numbers when developing their indirect rate proposal.
Indirect Rate Proposal – Two Rate Method (Fringe Rate and Indirect Rate)
The following is a sample Indirect Rate Proposal using the two rate method. While the Single Rate Method discussed above is
more simplied, the Two Rate Method is the more common approach and includes separating out fringe costs from indirect costs.
Step 1: Develop List of Accounts
Start the process by compiling a list of all accounts in the General Ledger, along with the Account Number, Account Name, and the
dollars that equate to the most recent scal year of incurred costs/expenses. If the business is new and no costs/expenses have been
incurred, best judgment is needed in estimating the cost of budgeted amounts for the accounts in the General Ledger.
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Step 2: Segregate Direct Costs, Fringe Costs, and Indirect Costs
The second step is to separate accounts/costs in the General Ledger into three categories, direct costs, fringe costs, or indirect
costs. First, separate out employee benets or fringe costs. Next, determine which costs are direct or indirect after the fringe
is separated.
Step 3: Segregate Unallowable Costs
Once the costs in the General Ledger are separated into direct and indirect accounts, identify any cost that may be considered
unallowable for federal awards and remove them from the total indirect cost pool. Unallowable costs are identied in the cost
principles for each type of organization. It is essential to read the appropriate Cost Principles to identify the types of costs that
are considered unallowable. The sample General Ledger below identies some unallowable costs (outlined in red). The sample
is not a complete list.
Step 4: Consider Adjustments to Historical Expenses
Selectees must consider the impact the pending award will have on their nancial status. In some cases, the historical cost
accumulated as part of Step 1 above may need to be adjusted to better reect the nancial situation after receipt of the award.
As an example, if all expenses in the General Ledger will increase in the same proportion, there would be no impact on the
resulting Indirect Rate result calculation in Step 7 below. However, if direct labor goes up signicantly but other indirect
expenses do not increase in proportion, the result would be a decrease to the Indirect Rate calculated in Step 7 below.
Therefore, the selectee preparing the Indirect Rate Proposal should perform a cursory review of the nature and magnitude
of the accumulated historical expenses and make appropriate adjustments to ensure that the resulting indirect rate is the
best representation of your business during the period of performance of the award. If historical costs are adjusted, please
provide the original historical cost, the adjusted costs, and a written descriptive summary of the business assumptions used in
determining the adjusted costs when submitting the Indirect Rate Proposal.
Step 5: Identify the Fringe Pool (numerator)
As described in Step 2 above, the General Ledger cost elements must be separated into three cost groupings/pools. As seen
in the sample General Ledger below, the rst grouping of costs could be the fringe pool, which will include the expenses
incurred by the business for the employees (i.e., Federal Unemployment Insurance Tax (FUTA), State Unemployment Insurance
Tax (SUTA), employer share of social security taxes, health insurance/medical, etc.). Add up the total of these costs to
determine the Fringe Pool.
Step 6: Identify the Fringe Base (denominator)
The base for allocating fringe will be the total of direct and indirect salary and wages.
Step 7: Compute the Fringe Rate
Divide the total from Step 5 above by the total from Step 6. This will be the Fringe Rate, which will be applied to both direct
and indirect salaries and wages (total labor cost).
Step 8: Distribute the Fringe Expense to Direct and Indirect Columns
The Fringe Rate calculated in Step 7 above can now be used to distribute or allocate the fringe expense to the Direct and
Indirect Expense Columns. Use the calculated Fringe Rate from Step 7 and multiply the amount of total direct labor dollars.
Manually enter the amount in the Direct Expense column of the General Ledger. This fringe amount will now be considered
part of the Total Direct Costs. In preparing a Budget (SF-424A), the computed Fringe Rate will be multiplied by the amount of
direct labor in Block 6a and the amount entered in Block 6b.
Similarly, multiply the Fringe Rate computed in Step 7 above by the indirect labor dollars. Manually enter the amount in
the Indirect Expense column in the General Ledger. The Fringe in the Indirect Expense column will now become part of the
“indirect pool” described in Step 9 below.
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Step 9: Sum the Indirect Pool (numerator)
Add the total of all allowable indirect costs that are segregated in Step 3 above. This will be the “pool” or top number
(numerator) when dividing the indirect rate. Please ensure that there are no unallowable costs included or any costs in the
indirect cost pool that are also claimed in the base in Step 5 above. Also note that the Indirect Pool includes the fringe
computed on indirect labor in Step 8 above.
Step 10: Identify the indirect cost base (denominator)
The base (or denominator) for computing the indirect rate is commonly Direct Labor which was used in the example below.
Other bases such as Total Direct Costs can also be used if appropriate.
SAMPLE GENERAL LEDGER: Please note that the General Ledger below is only a sample. The selectee should use their own
account names and numbers when developing their indirect cost rate proposal.
SAMPLE GENERAL LEDGER
Please note that the General Ledger below is only a sample. The selectee should use their own account
names and numbers when developing their indirect cost rate proposal.
ACCOUNT # ACCOUNT NAME ANNUAL TOTAL DIRECT FRINGE INDIRECT UNALLOWABLE INDIRECT-CLAIMED
8210 Holiday 22,502$ 22502
8211 Vacation 31,252$ 31252
8212 Sick Leave 15,318$ 15318
8213 Severence Pay 32,419$ 32419
8214 FICA-Employer Portion 27,427$ 27427
8215 Federal Unemployement Insurance 1,393$ 1393
8216 State Unemployment Insurance 6,722$ 6722
8217 Workders' Cmpensation 3,826$ 3826
8217 Health I
nsurance 40,009$ 40009
8219 Life Insurance 7,920$ 7920
8220 Pension Plan 60,638$ 60638
TOTAL FRINGE POOL 249,426$
6110 Salaries & Wages 656,824$ 656,824$
8110 Salaries & Wages 123,067$ 123067 123,067$
FRING ALLOCATED TO DIRECT & INDIRECT LABOR 210,184$ 32% 39,381$ 39,381$
8221 Recruitment 285$ 285$ 285$
8222 Relocation 1,216$ 1,216$ 1,216$
8223 Personal Absence 1,082$ 1,082$ 1,082$
6310 Travel 35,173$ 35,173$
8310 Travel 12,987$ 12,987$ 2,500$ 10,4
87$
6320 Material 843,192$ 843,192$
6330 Other Direct Cost 187,493$ 187,493$
6340 Subcontracts-contractual 944,841$ 944,841$
6350 Supplies 25,000$ 25,000$
8350 Supplies 15,014$ 15,014$ 15,014$
6360 Equipment Rental 15,000$ 15,000$
8360 Equipment Rental 12,150$ 12,150$ 12,150$
8410 Legal Fees 1,744$ 1,744$ 1,744$
8420 Audit Fees 32,361$ 32,361$ 32,361$
8430 Miscellaneous 3,969$ 3,969$ 3,969$
8503 Entertainment 484$ 484$
484$ 0
8505 Advertising & Promotion 354$ 354$ 354$
8520 Periodicals 6,435$ 6,435$ 6,435$
8522 Bad Debts 3,018$ 3,018$ 3,018$ 0
8523 Business Meals 2,702$ 2,702$ 2,702$
8524 Depreciation/Amortization 2,824$ 2,824$ 2,824$
8525 Dues/Memberships 2,112$ 2,112$ 2,112$
8526 Conventions/Seminars 7,936$ 7,936$ 2,000$ 5,936$
8527 Interest Expense 1,001$ 1,001$ 1,001$
0
8531 Insurance 738$ 738$ 738$
8535 Reparis/Maintenance 1,681$ 1,681$ 1,681$
8537 Telecopier 2,434$ 2,434$ 2,434$
8538 Telphone 45,552$ 45,552$ 45,552$
8539 Temp Help/contract labor 1,816$
1,816$ 1,816$
8540 Small Equipment 878$ 878$ 878$
8542 Postage & Handling 6,235$ 6,235$ 6,235$
8553 Office Supplies 6,461$ 6,461$ 6,461$
8554 Other Outside Services 30,281$ 30,
281$ 30,281$
TOTAL INDIRECT COST POOL
TOTALS 2,917,707$ $366,198 $9,003 $357,195
(BASE) (POOL)
FRINGE COST POOL $249,426 INDIRECT COST POOL $357,195
BASE (DIRECT & INDIRECT LABOR) $779,891 BASE=(TOTAL DIRECT COSTS) 2,917,707$
FRINGE RATE 32.0% INDIRECT RATE 12.2%
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Denitions and References
Direct Costs
Direct Costs are those costs that can be identied and traced to a single project, activity, function, program, job, or
contract. Examples of costs that are easily traced to a specic project are labor, equipment, subcontracting, and supplies.
For accounting purposes, the General Ledger would accumulate all direct costs into summary accounts such as Direct
Labor, Direct Material, etc., but the subsidiary ledgers would have unique account identiers to track the costs to the specic
projects. See 2 CFR § 200.413 for more information about direct costs.
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Allocate
Allocate means to set apart or assign. Direct costs are assigned or allocated to individual projects based on an equitable
base such as direct labor. Indirect costs are set apart or allocated to two or more projects.
Base (denominator)
Indirect costs are assigned or allocated to individual projects by using an Indirect Rate. The indirect rate percentage is
the number which will be applied to the appropriate “base” when calculating indirect costs. If an indirect rate is going to
be applied to a project, then the “base” has to be directly identied to the project (such as direct labor hours, direct labor
dollars, material, supplies etc.). One concern becomes how to know what “base” to use when computing an indirect rate.
To make the determination, two things should be considered: who or what causes the indirect cost and secondly, and
who or what benets from the indirect cost? For example, the paying of salaries and wages causes a business to have to
incur fringe costs so the most logical base to use for computing a fringe rate is salary and wages. Other indirect costs
such as utilities are not caused by any single person or event but everything in the business benets from paying the
utilities so the base could be all direct labor costs or total direct costs since they all benet.
Indirect Cost Pool (numerator)
Indirect costs cannot be identied to specic projects, so, all the indirect costs are grouped or added together into an
indirect cost pool. By combining the costs into one pool, the costs can be allocated to projects by computing an indirect
rate after a base is selected. Examples of indirect cost that can be combined into one group are fringe costs that are
grouped into a “fringe pool”.
Unallowable Costs
Federal regulations prohibit the Federal Government from reimbursing certain types of costs that are called unallowable.
Allowable and unallowable costs are listed in the corresponding cost principles for each type of organization (see
references below for more information on cost principles).
Regulations
Financial assistance regulations are contained in 2 CFR Part 200 (Uniform Administrative Requirements, Cost Principles,
and Audit Requirements) and 2 CFR Part 910 (the DOE Financial Assistance Regulations).
2 CFR Part 200 Subpart D – Post-Federal Award Requirements and 2 CFR Part 910 Subpart D – Post Award Federal
Requirements for For-Prot Entities
For information associated with Cost Principles that, among other topics, dene allowable and unallowable costs for
dierent types of organizations, refer to the following:
For-prot Entities: Federal Acquisition Regulation Part 31.
All Other Entities: 2 CFR Part 200 Subpart E - Cost Principles
For audit requirements for states, local governments, and non-prot organizations including Institutions of Higher
Education, refer to 2 CFR Part 200 Subpart F - Audit Requirements. Audit requirements for for-prot entities, refer to
2 CFR Part 910 Subpart F - Audit Requirements for For-Prot Entities.
