Direct costs are those which can be identified specifically with a particular sponsored project and which can be directly assigned to such activities, relatively easily and with a high degree of accuracy. For example, the supplies needed for a research project are easy to identify, as are the salaries of the individuals who will work on the project and travel expenses for those individuals.
Indirect Costs (Facilities and Administrative Costs, F&A)
The OMB defines Indirect costs as “costs incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives.” Such costs are not directly allocable to one specific project because the indirect costs support multiple projects. For instance maintenance on a HVAC system may improve the air quality in many laboratories and offices in one building. Conversely, direct costs can be allocated to a specific cost objective with a high degree of accuracy. Employees who are working on the project or activity clearly meet the direct cost definition.
How are Indirect Rates Determined?
Every five years or so Duke submits and Indirect Cost Rate Proposal (ICRP) to the Department of Health and Human Services (DHHS) and then negotiates with DHHS the final rates. Though the government caps the Administrative costs at 26%, Duke’s calculation of its administrative costs is always a couple of points higher. The Facilities cost is not capped, but that also gets negotiated.
In general, a cost can either be direct or indirect but not both. If the cost is used as part of the ICRP, then it should not be charged directly to any grants. However, several types of costs live in both worlds and these deserve special consideration when building the proposal budget or charging expenses to an award.