Calculating Indirect Costs – The “Magic” Formula

Question:

Your district has received a grant for $100,000.  The indirect cost rate is 5%.  What is the indirect cost amount for this grant?

Answer:

a) $5,000

b) Something else

And, the answer is ….. b) Something else

Explanation:

The real question here is, how much of this grant can you spend on items other than indirect costs?  Let’s call that amount “x”.  Once x is calculated, that amount multiplied by the indirect cost rate will generate an indirect cost amount of “y”.  When you add x and y together, they will equal $100,000.

You can see immediately that the spendable amount (x) is less than $100,000 so therefore x times 5% is less than $5,000.  Makes sense?

The calculation:

*The spendable amount (x) = the grant amount divided by (1 + the indirect cost rate).

In this example x = 100,000/1.05 = $95,238

The amount of indirect cost to charge to the grant (y) is $95,238 x 5% = $4,762

Double Check:

$95,238 + $4,762 = $100,000

*Someone once came to me for “the magic formula for calculating indirect costs.” Let me just say for the record that this is math, not magic.  Unfortunately the sobriquet stuck and I too have since been known to refer to this as the “magic” formula.

There is more to know about indirect costs and I can see where confusion can arise.  The formula above is for fixed grant amounts and is used for budgetary purposes. I’ll post more on this topic.

 

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