Don’t Forget to budget indirect costs

“When you’re developing the budget for a grant proposal, be sure to consider indirect costs,” said Holly Thompson, contributing editor at The Grantsmanship Center in Los Angeles, Calif. “Because each grant-funded program is dependent upon your organization’s infrastructure, indirect expenses are an important part of the proposal budget.”

Indirect expenses, also called “overhead,” “administrative,” or “general operating” expenses, are essential to all your organization’s programs yet difficult to attribute directly to individual programs. The annual audit, the salaries of the bookkeeper and receptionist, general liability insurance, and general technology updates are examples of common indirect expenses. Each of your organization’s programs has to carry an appropriate portion of these costs.

“Study the application guidelines,” said Thompson. “Funders vary widely in how they handle indirect costs.” Generally, indirect costs are calculated as a percentage of each program’s direct expenses. In federal proposals, unless you limit indirect costs to 10 percent of direct expenses, you will need to negotiate an indirect cost rate. Some private funders cap indirect expenses at 10 percent or less, and some won’t pay them at all.

If a funder will not support indirect expenses or sets an unrealistic cap, your organization must make up the difference. It’s important to understand the full cost to your organization of operating a grant-funded program. If a grant will not support indirect expenses, can your organization afford to operate the program?

“Become familiar with how your organization categorizes and handles indirect costs,” advised Thompson. “Be sure your financial manager and other appropriate administrators are engaged in developing the budget and understand the degree to which each requested grant will support indirect expenses.”