Indirect Cost Policy
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Revised IDC Policy February 2017 For external use IDC Policy and Guidance February 2017
Effective 2/1/2017
Indirect Cost Guidance
Philosophy
T
he Bill & Melinda Gates Foundation tackles critical problems primarily affecting the world’s poor and
disadvantaged, and supports strong and effective partner organizations to do the same. We believe that
good stewardship means maximizing our resources, including grant funding and staff time, while
building strong partnerships based on trust.
W
e aim to structure grants in a way that makes sense from a financial perspective while also funding
partners for the cost of delivering results efficiently, supported by open and honest dialogue about the
resources required. As grant proposals are developed, we try to gain a complete and accurate
understanding of the total cost to execute the project efficiently and effectively. However, there may be
circumstances when our views of direct and indirect costs may not align with those of our partners,
including other funders.
O
ur expectation is that grantees’ executive and board leadership are continually evaluating how to
“right size” their organizations’ overhead cost to operate efficiently and effectively.
W
e welcome partners to contact the foundation if they have questions about this policy. Our finance
team can help clarify appropriate treatment of costs under the foundation’s policy.
Definitions
The spirit of this policy is to pay for expenses that are directly attributable to project outcomes and
outputs as direct costs and expenses associated with general running of the business as indirect costs.
Greater specificity on each category is described below.
D
irect Costs
Direct costs are the expenses required to execute a grant that are directly attributable and can be
reasonably allocated to the project. Program staff salaries, travel expenses, materials, and consultants
required to execute the grant are examples. Costs that would not be incurred if the grant did not exist
are often indicative of direct costs.
Indirect Costs
Indirect costs are general overhead and administration expenses that support the entire operations of a
grantee and that may be shared across projects. Examples include facilities expenses, e.g. rent, utilities,
equipment for the grantee’s headquarters, and associated information systems and support and
administrative staff such as HR, general finance, accounting, IT, and legal. Additional examples and detail
are included in Annex A. Expenses that would be incurred regardless of whether the grant is funded are
often indicative of indirect costs. While these costs may not be directly attributable to a project, they
are real and necessary to operate as an organization.
I
ndirect Cost Rate
Indirect Cost Rate = Budgeted Indirect costs/ Budgeted Total Direct Costs (e.g. personnel, sub‐awards,
supplies, equipment, etc.)
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The indirect cost rate proposed in the budget should not exceed the grantee’s organizational rate (when
defined by the same terms.)
While the definitions above are general guidance for all grants, the requirements and activities of each
project should be considered when determining direct and indirect costs. We review budget
assumptions and cost categorizations on a grant by grant basis, and treatment of specific costs in one
grant should not be considered precedent‐setting for other grants.
Maximum Indirect Cost Rates
Indirect cost rates for grants are subject to the following limitations:
•
The rates provided above are the maximum rates allowed under the foundation’s policy. A
grantee or
contractor with an actual indirect cost rate lower than the maximum rate provided
above should not increase
the funding request to the maximum allowed. The intent is to
sufficiently fund actual costs, not to generate financial surpluses for grantees.
•
The indirect cost rate awarded in a grant budget may vary up to the maximum percentages
depending on factors including, but not limited to, the type of project, level of administrative effort
required, cost structure of the grantee, overall grant size, and extent of sub‐awards or commodity
purchases.
o
Example 1: A primary grantee will receive grant funds that will be largely sub‐granted to
other organizations. The foundation may limit indirect costs the primary grantee receives
on the sub‐granted funds depending on the level of effort required to manage the sub‐
awards. The overall effective indirect cost rate awarded to the primary grantee may
therefore be less than the maximum allowable rate.
o
Example 2: A material portion of a project budget is allocated for commodity purchases. A
lower overall effective indirect cost rate may be negotiated to remove commodity cost
from the indirect cost calculation.
o
Example 3: A NGO grantee has an organizational actual indirect cost rate of 8%, i.e., for
every $1,000 in direct costs, it has $80 in indirect costs. Rather than defaulting to the
maximum rate of 15% in the grant proposal, 8% should be proposed in the grant budget.
•
Maximum Indirect Cost Rates and limitations apply to both the primary applicant
organization and any sub‐grantees. Each respective organization may receive indirect costs
UP TO the rate applicable to their
organization type.
o
Example: If a U.S. university is the primary grantee and has an international nonprofit
organization sub‐grantee, the U.S. university is eligible to receive up to a 10% indirect cost
rate, while the international organization is eligible to receive up to a 15% rate.
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Revised IDC Policy February 2017 For external use IDC Policy and Guidance February 2017
•
We seek consistency across funding mechanisms and thus we reserve the right to apply
this philosophy and principles to contracts.
•
For profit entities may propose indirect costs as a percentage from 0% up to 15% to the
extent that adequate explanation of the cost is provided.
•
We reserve the right to request substantiation of any grantee’s indirect cost rate.
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Revised IDC Policy February 2017 For external use IDC Policy and Guidance February 2017
APPENDIX A:
The following is a list of common direct and indirect costs. We recognize that there are categories
of cost that can be considered either direct or indirect depending on grantee accounting practices
and the nature of the cost relative to the project purpose.
It is the responsibility of grantees to submit proposal materials that allow us to understand the link
between project outcomes and direct costs. We also expect that grant proposals speak to what is
covered by the requested indirect cost rate.
EXAMPLES OF COMMON DIRECT AND INDIRECT COSTS
DIRECT COSTS:
The following may be included as direct
costs if DIRECTLY ATTRIBUTABLE and
REASONABLY ALLOCABLE to and
specifically required to execute the
project
INDIRECT COSTS:
The following may be included as
indirect costs if REASONABLY
ALLOCABLE the project and not
included as a direct cost
Personnel
• Salaries and wages of employees
working directly on the project.
• Fringe benefits of employees
These costs should be substantiated by time
keeping and/or an allocation methodology, and
can include directly attributable and allocable
project management and support, project legal
or accounting functions (substantiated by
timekeeping)
• Personnel cost of general
management and administrative
support personnel, such as executive
management (CEO, COO, CFO, etc.)
or central operational functions
(Accounting, HR, IT, Legal, etc.)
Travel
• Travel expenses for trips directly
needed to deliver the project
• Travel not directly related to the
project
Consultants
• Contracted staff working directly on
the project
• Contracted staff for general
administrative functions, such as
accounting or audits
Equipment
• Costs for equipment directly used by
the project (can include
purchase/replacement, operation,
maintenance; to be pro‐rated in case
of partial use)
• Costs for equipment or depreciation
on equipment
1
incurred by central
operational functions
Other Direct Costs
• Allocable facilities, utilities and
communications expenses that are
required to execute the project, such
as field clinics, laboratories, project
office costs
•
Project‐specific supplies
• Costs for facilities, utilities and
communications associated with
central operational functions such as
university headquarters, U.S. office of
an international NGO, back office of a
biotech firm
Sub-awards
• Grants or contracts with other
organizations that directly contribute
to the project outcomes
• Outsourced general operating
activities, such as accounting, audits,
IT support
1
If depreciation is included in the indirect cost pool, the acquisition cost used for computing depreciation must exclude any
portion of the cost donated by the foundation or another funder.
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APPENDIX B: Frequently Asked Questions (FAQs)
•
Question: What has changed in the 2017 policy update? The rates still look the same.
Answer: While the maximum indirect cost rate percentages have not changed, we have adjusted
the costs that can be considered direct to better reflect the cost of achieving project outcomes,
specifically in the areas of facilities and project support.
•
Question: When will these changes take effect?
Answer: The IDC policy will take effect on February 1, 2017 and all new grants made from
that date forward will be affected by the new policy.
•
Question: Why doesn’t the foundation match my institution’s Negotiated Indirect
Cost Rate Agreement
(NICRA) rate with the U.S. government or other funding
organizations?
Answer: The foundation’s position is that whenever possible,
specifically allocable costs should be
identified as direct costs, including those for dedicated ongoing project
management and support.
Please see Appendix A for examples of direct and indirect costs. Please note that
our
categorization differs from the U.S. government’s instructions to treat project management and
support
expenses as indirect costs. The foundation funds these costs as direct costs onto which is
added up to 15% for indirect costs which are not directly attributable to the project.
•
Question: Why are headquarters facilities typically not classified as direct costs?
Answer: Headquarters rent and other centralized facilities costs are part of doing business for an
organization and therefore are not
specifically attributable to a project or activity. These facility
expenses of the organization should be
categorized as indirect costs. In some cases, we are
willing to cover the facility expenses associated with directly attributable personnel that sit in
the same headquarters facility but directly support the project funded by the foundation’s grant.
Facility expenses more than this allocation are considered indirect and are subject to the indirect
rate limitations of the primary grantee noted in the Indirect Cost Policy
•
Question: How does the calculation of indirect costs work for the primary grantee and
the sub‐grantee?
Answer: The primary grantee receives indirect cost allowances on the total budget which
includes its direct internal costs and sub‐granted or sub‐contracted costs. The ‘sub‐granted’ or
‘sub‐contracted’ funds would also include direct
costs and indirect costs to that respective
institution. The calculation may look as follows:
Grant to University ABC:
ABC direct internal costs (personnel, supplies, travel, etc.) ‐> 5.85M
Sub‐granted costs to non‐profit organization XYZ ‐> $1.15M
•
Includes direct sub‐grantee costs ‐ $1.0M
•
Includes indirect cost allowance to sub‐grantee (15%) ‐ $150k
Total direct costs to non‐profit organization ABC ‐> $7.0M
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Indirect cost allowance to primary grantee (10%) ‐> $700k
Total grant award -> $7.7M
•
Question: Why are indirect costs not provided to other foundations and government
agencies?
Answer: As a foundation based in the U.S., we generally must ensure that our funds are used for
charitable
purposes. When the foundation makes a grant or enters into a contract with a U.S.
public charity, the
organization’s status as a charity by the U.S. government is based on an
assessment of the organization’s
mission and activities to confirm the funds will be used for
charitable purposes.
Government entities are typically funded
by the citizens of the country for various agencies (e.g.
Ministry of Health, Finance, Agriculture, etc.) Government entities are benefiting the
communities of which the citizens are a part. Therefore, our policy is to fund the program‐specific
costs related to our project or activity, but the
administrative and general operations costs of the
government agency should be funded by the respective
country’s budgetary funding. Similar
logic applies to private foundations.
•
Question: Why do U.S. universities receive a lower rate than international universities?
Answer: The foundation has an important relationship with university grantees to perform
valuable work
projects, including but not limited to discovery research, vaccine development,
and clinical trials. The
foundation’s policy considers that U.S. universities should request a
limited amount of indirect costs from
private funders. In the U.S., indirect costs recoveries are
negotiated with federal funding agencies because most U.S. funded research is performed on
university campuses. Therefore, the foundation’s policy
is to provide a rate of up to 10% to U.S.
universities to allow for additional administrative and overhead costs of the
institution to be
funded by other sources.
•
Question: How do I determine if a cost is direct or indirect if it is not clear?
Answer: The key differentiating factor should be whether the cost is required and allocable to
the project to meet its objectives. Here are several examples to help illustrate the distinction:
o
An audit function could be considered indirect if it is organizational internal audit
performing routine activities. However, if extra due diligence is required for new sub‐
awards on a particular project, the audit function to carry that out may be considered
direct.
o
An organization can have accountants that manage the central organizational costs and
some that are assigned exclusively or on a percentage basis to specific projects. In this
case, the former would be considered indirect and the latter direct.
o
A local NGO has a headquarters in the capital city which also houses project‐specific staff
for work done in that region. In this case, the portion of the office that houses the
headquarters functions would be considered indirect and the space dedicated to specific
projects could be considered direct if incrementally needed to achieve project objectives.
