10a. Defining Direct and Indirect Costs (§200.412)
“There is no universal rule for classifying certain costs as either direct or indirect under every accounting system. A cost may be direct with respect to some specific service or function, but indirect with respect to the Federal award or other final cost objective. Therefore, it is essential that each item of cost incurred for the same purpose be treated consistently in like circumstances either as a direct or an indirect (F&A) cost in order to avoid possible double-charging of Federal awards.”
All costs can be classified as either ‘direct’ or ‘indirect,’ and the cost type governs how they are allocated. Some examples of direct and indirect costs follow:
- Direct costs are those that can be specifically identified with a particular award or activity relatively easily with a high degree of accuracy. Identification with the Federal award rather than the nature of the goods and services involved is the determining factor in distinguishing direct from indirect costs of Federal awards.
- Examples of direct costs are the salary and benefits paid to a case manager, a rental assistance check paid directly to a landlord and mileage reimbursement for staff making home visits.
- Indirect costs are those that have been incurred for ‘shared’ or ‘joint’ objectives and cannot be readily identified with any particular activity. Typical examples of these costs include:
- Rent, utility, insurance, maintenance and other expenditures related to shared space
- Administrative and executive team functions that support multiple program areas
- Purchases, transportation and staff expenses that benefit multiple program areas
Due to the diverse characteristics and accounting practices of non-profit organizations, it is not possible to specify the types of cost that may be classified as indirect cost in all situations. However, a cost may not be allocated as an indirect cost if any similar costs have been assigned as a direct cost.