Indirect costs are often misunderstood and underclaimed in federal grants. This post explains how to approach them more strategically and recover what your organization is entitled to.
Indirect costs play a critical role in the financial health of organizations managing federal awards. These costs support the infrastructure that makes programs possible, yet they are often misunderstood or underutilized. In recent years, indirect cost rates have also been part of broader federal discussions, particularly around universities and research institutions, which has added to the confusion. At the same time, many of the challenges and misconceptions around indirect costs extend far beyond those sectors and affect a wide range of organizations navigating federal funding.
Because of that, it becomes even more important to understand what indirect costs actually represent, how they are calculated, and how to apply them correctly within your own organization. Many organizations focus their attention on direct costs, ensuring that every expense tied to program delivery is tracked and documented. At the same time, indirect costs are applied inconsistently or overlooked entirely. This can lead to missed opportunities for cost recovery over the life of an award.
Even when a rate is established, indirect costs are not always fully recovered. This is often the result of small inconsistencies in how the rate is applied or a lack of clarity around which costs should be included. In some cases, teams may hesitate to apply indirect costs consistently across awards. In others, certain expenses may be excluded due to uncertainty about how they should be classified.
These challenges are not always visible in day-to-day operations, but they can have a significant impact over time. Underclaiming indirect costs means that organizations are not fully recovering the resources needed to support their programs.
Recovering indirect costs is not just about applying a percentage. It requires a clear and well-supported methodology. Documentation should demonstrate how the rate was developed or selected, how it is applied across awards, and how it aligns with federal requirements. It should also provide support for the underlying costs that make up the rate.
When this documentation is incomplete or inconsistent, it can raise questions during a review, even if the rate itself is appropriate.
A more intentional approach to indirect costs helps ensure that organizations are not only compliant, but also positioned to recover the full amount they are entitled to.
