Indirect Costs: The Basics

What are indirect costs?

Imagine your district has received a reading grant.  The grantor is providing funding for a teacher and instructional materials.  Indirect costs are all those additional costs associated with running the grant.  These will be hiring costs for the teacher, including recruitment, fingerprinting, and credential analysis.  When the teacher puts in an order for books, the purchasing department incurs costs in processing that order and dealing  with vendor problems such as wrong items shipped and back orders.  The business department incurs costs in accounting for the grant, filing expenditure reports, and making sure that the grantor actually sends us the money.  The teacher may be given a classroom to use that has heating and cooling costs, as well as cleaning and repair costs.  I think you get the idea.

It would be unreasonably time-consuming for each support department to calculate the cost of each service provided and directly charge every grant on a fee for use basis.  Thus a district overhead rate is calculated and is charged to grants as a percentage of grant expenditures. That is the indirect cost amount.

How is the rate determined?

School districts do not determine their own calculation method.  Because some grants are from federal sources, the US Department of Education has worked with the California Department of Education to come up with an acceptable calculation method.  Each year when a district submits its unaudited actuals report, the state software calculates the rate based on predetermined criteria.  Look for form ICR in the report.

How do I know what rate to use in what year?

The state department of education publishes approved rates on its web site.

Do all expenses generate an indirect cost?

No.  Capital outlay is excluded and the amount charged for subcontracted work is capped.  Some grants do not permit indirect costs and some have a cap on the rate itself.  Read the FAQ section on the CDE web site.

I thought the rate was calculated on revenue

If you know how much revenue you are receiving you will use that to determine how much of the grant to budget for indirect costs. When calculating the actual amount, it is actual expenditures that are used.  This is discussed further here.

How do I convince doubters?

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I have worked with several instructional people who have gone to extraordinary lengths to avoid indirect costs. They believe this charge is unreasonably reducing program spending. I explain it this way. If you bring in one small grant, the additional cost to district administration is probably negligible. But let’s imagine you bring in multiple grants totaling, say, $50 million.  Those grants allow us to hire significantly more instructional staff and buy many more supplies. The Human Resources and Purchasing departments would need to add positions. The business office would likely need to add a grant accountant. These are real costs. If we could not charge grants for these costs, we would have to cover them by reducing the amount of general funds going to the classroom. Most donors understand the concept of indirect costs and many are surprised the rate is low (4-6% generally).

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