Calculating Indirect costs

1. Determine the Ground Rules

Find out from the application guidelines or funding agency all the established budget regulations including:

Allowable Direct Costs - What items can be charged to the agency? Will the agency pay for salaries for principal investigators or project managers? Will it pay for outside consultants? Travel both inside and outside the United States? What are the rules about purchasing equipment?

Facilities & Administrative Costs (also called F&A, indirect costs, overhead) - Indirect costs pay for office and laboratory space, heat and lights, library services, administrative and other costs. Every institution is assigned a federal agency with whom it negotiates an indirect cost rate each year, based on an audit of the previous year's transactions. No institution arbitrarily sets its own indirect cost rate. The negotiating agency for the University of Alaska is the Office of Naval Research; UAF's current F&A rates are found at:

In preparing a proposal budget, the F&A costs are computed on Modified Total Direct Costs (MTDC) base. MTDC excludes permanent equipment costs in excess of $5,000, tuition, long term rental costs, scholarships, fellowships, and the portion of each subaward in excess of $25,000.
In instances where agencies will not pay F&A costs or pay at a rates lower than our negotiated rates (and so state in their guidelines), the university will accept the conditions. A statement from the agency or copy of the pertinent portion of the guidelines must be attached to the proposal when it is sent to the Office of Sponsored Programs.

Cost Sharing - Some sponsors require that some part of the cost of a project be borne by the applicant institution. This is usually provided by pledging some portion of personnel salaries with related fringe benefits, and in some cases, indirect costs.

Other sources of cost sharing can be used, but they must be carefully documented for auditing purposes. If the agency does not require cost sharing or a match, do not propose it. The University will be held accountable for the commitment. Contribute only what is required.

Minimum-Maximum Range - Before preparing a proposal and budget, determine what would be an appropriate amount to request. The guidelines usually will tell state the maximum amount allowed. Request the maximum if it's justifiable, but never request more money than the program allows.

2. Identify the Total Cost of the Project

Developing the budget is an excellent test of how clearly and completely the project has been described. The principal investigator should be able to work through the narrative of the proposal and identify the costs to be included in the budget.

Organize the budget according to the following commonly used categories. The OSP has created a budget spreadsheet template for all PIs and departments to use. The budget spreadsheet auto-calculates fringe benefits and indirect costs.

When preparing the proposal budget, do not directly charge costs that are normally indirect, and do not include costs that are unallowable to charge to sponsored programs.

Direct vs. Indirect Costs

Costs that are Normally Indirect

Unallowable Costs

3. Prepare the Final Budget and Budget Narrative

If the granting agency provides a budget form, you must use it. Please check the application guidelines for the most current forms.

The PI needs to provide rationale for various items in the budget. It is a good idea to prepare a budget narrative which outlines the basis on which each cost was developed. Desribe the project activity which substantiates the particular expense and include any information requested in the application guidelines.