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What is Indirect Cost? Reading Material for Nepal's NGO / Not for Profit Organization

When we talk about the Indirect Cost Rate for the project, flat 10% on the overall cost comes to our mind. Most of us believe that it is the profit for the organization for implementing the project and do not have to show how the amount is expended or utilized. We take it for granted. But it is the misconception that we have.

By definition, Indirect Cost is incurred for common or joint objectives and cannot be readily identified with a particular grant, contract or any other activity of the organization. A question arises, how these costs are determined? Normally, the organization establishes the provisional indirect cost rate at the beginning of the Fiscal Year, with due consideration to the organization's overall cost structure and expenditure projection. An Indirect Cost Rate is:

  • a device for determining fairly and conveniently, within the boundaries of sound administrative cost principles, what proportion of indirect cost each one of the entity programs or funding sources should be bear.
  • the ratio between the total indirect expenses and some direct cost base.

However, it must be supported by the organization's indirect policy. Organization normally prefer to have the fixed indirect cost calculation policy yet, they should have the cushion to have slight variation. These variations will help organizations to negotiate with the different donor organizations.

While saying so, we must also be careful that all the donor organizations do not have similar indirect cost policy. Some donors ask us to have the flat rate (negotiable), some ask to have the audited rate (to be revised per year) and some others do not fund indirect cost at all. Generally, when it comes to the indirect cost rate, we find the policy of US Federal agency more stringent. US Federal Agency has three basic methods for calculating the indirect cost rate (refer OMB Circular A122) :
  • Simplified
  • Multiple
  • Direct Allocation Methods
A Guideline for calculation along with examples can be read through on the link below:
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