Many Nonprofits earn federal funds via grant funding directly through the federal government or indirectly through state and local governments. Whether your nonprofit already receives grant funds or is planning to receive grants, you may want to consider a Federally Negotiated Indirect Cost Rate (“FNICR”) to save and maximize your organization’s resources.

Before we discuss whether your organization should consider let’s unpack the relationship between your organization’s grants and indirect costs.

Indirect costs are essential for the sustainability of nonprofits but often go unrecognized in grant budgets. They encompass the necessary expenditures that support an organization’s overall operations, rather than being directly attributed to a specific project or program. This includes administrative support, facility maintenance, utilities, equipment, and other foundational expenses. For nonprofits operating on grants, covering these costs is crucial to maintaining the infrastructure that underpins their grant-related and mission-driven work. An indirect cost rate, once established, allows nonprofits to allocate a portion of their grant funding to cover these overhead expenses, thereby ensuring they can continue to operate effectively without diminishing the resources dedicated to their core initiatives. This harmonious balance of funding direct program activities and vital operational costs is what enables nonprofits to thrive and effect enduring impact through their grant-funded projects.

What is a Federally Negotiated Indirect Cost Rate?

A FNICR is a pivotal tool for nonprofits who receive grant funds. A FNICR determines the percentage of indirect costs (such as rent, utilities, support services, non-program staff salaries, etc.) that can be expensed to your grant(s). This rate is established through negotiation with a federal agency (the agency that administers your grants), allowing consistent overhead recovery across all grants. When an indirect cost rate is negotiated, it is tailored to the specific needs and cost structure of the organization. These rates typically range from 10% to upwards of 30% or more but they can be higher or lower depending on your nonprofit’s administrative and infrastructure costs, as well as the nature of the programs delivered. An FNICR ensures that nonprofits are equitably compensated for their operational expenses, improving their financial health, and enhancing their capacity to sustain and grow their mission-critical programs.

What if I do not have a Federally Negotiated Indirect Cost Rate?

If a nonprofit has not negotiated a rate, the U.S. government offers a default rate of 10% of modified total direct costs (MTDC) for organizations that have never received a negotiated rate. Let’s explore an example of the power of FNIDR by using the hypothetical Nonprofit “Community Health Initiatives”:

Scenario:

CHI has been operating for several years and has received various federal grants to support its programs. However, they’ve always struggled with covering their operational costs—things like rent for their office space, utilities, and administrative staff salaries—using just the direct funding from these grants.

The Challenge:

CHI’s programs are well-funded through grants that pay for direct costs like educational materials and health workers’ salaries. Yet, at the end of each grant period, the organization has to dip into its fundraising dollars to keep the lights on and pay their admin staff, which is not sustainable.

The Solution:

CHI learns about the Federally Negotiated Indirect Cost Rate (FNICR) and begins the process to negotiate this rate with the federal government. They compile data on their indirect costs and submit this information to their cognizant federal agency—the agency they receive the most funding from.

Negotiation and Outcome:

After reviewing CHI’s financials, the cognizant agency agrees to an indirect cost rate of 20%. This means that $.20 of every grant dollar is now allowed to be spent on indirect costs. Prior to the CHI negotiating a FNICR, they could only expense $.10 of every grant dollar to their indirect costs.

Application:

CHI receives a federal grant of $500,000 for direct program costs. With the newly negotiated FNICR of 20%, they can now claim $100,000 for indirect costs ($500,000 x 20% = $100,000), as opposed to $50,000 of indirect costs.

This additional funding helps CHI to sustain its operations without compromising the quality of its programs or relying solely on fundraising for operational costs. Now, CHI can better plan for the future, knowing they have a consistent and government-approved method to support their indirect costs through their federal grants.

This case study might make you wonder, how do I get a Federally Negotiated Indirect Cost Rate?

To get an indirect cost you will have to do the following:

  1. Identify the federal agency who is funding your grant (i.e. DDA, HHS, DOE, etc.)
  2. Identify the indirect cost proposal requirements pertaining to your funder (please note, these requirements differ by funder).
  3. Ensure you have audited financial statements for your most recent fiscal year.
  4. Follow the calculation process detailed in your funding agencies proposal.

For those eager to unlock the full potential of FNICR, seeking access to vital financial information for grant applications, aiming to stay abreast of our existing grant conditions, or curious about the benefits of outsourcing, we invite you to get in touch with us! Let us help you harness the opportunities ahead!