Uniform Guidance: De Minimis Indirect Cost Rate

The Office of Management and Budget’s (OMB) Uniform Guidance (UG) makes available the use of the de minimis indirect cost rate to allow not-for-profit (NFP) organizations that do not have a current Federal negotiated indirect cost rate to have at least some of the overhead costs they incur paid for by the Federal award. 

De Minimis Indirect Rate Calculation

As included at 2 CFR 200.414(f), the UG allows NFPs that do not have a current Federal negotiated indirect cost rate to utilize a de minimis rate of up to 15% of Modified Total Direct Costs (MTDC). The de minimis rate was updated from 10% to 15% with the revised 2024 OMB UG effective October 1, 2024, however Federal agencies can elect to apply the updated guidance to their federal awards issued prior to October 1, 2024.

When applying the de minimis rate, NFPs must charge costs consistently as either direct or indirect costs and may not double charge or inconsistently charge costs as both. NFPs may use the de minimis rate indefinitely or until the NFP elects to negotiate a rate. If elected, the de minimis rate must be used for all Federal awards, but no documentation is required to justify using the rate.

MTDC is defined at 2 CFR 200.1 as meaning:

“all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $50,000 of each subaward (regardless of the period of performance of the subawards under the award). MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs and the portion of each subaward in excess of $50,000. Other items may only be excluded when necessary to avoid a serious inequity in the distribution of indirect costs and with the approval of the cognizant agency for indirect costs.”

The first $50,000 of subawards can be taken when each subaward is initially issued, separately negotiated, or renegotiated over the Federal grant’s period of performance (i.e. not $50,000 for each entity’s fiscal year). Some NFPs have found it helpful to have two separate subaward general ledger accounts: one account that tracks the first $50,000 of subawards and another account that records costs in excess of the first $50,000.

The NFP will want to ensure that direct costs of the Federal award do not already include recovery of indirect costs (double charging) when using the de minimis rate. This type of issue is most prevalent when the NFP’s Federal award supports a large majority, if not all, of the activities of the NFP. It could also occur, however, if the NFP has historically recovered indirect costs from Federal awards by means of direct allocations. As noted previously, NFPs must be consistent in how direct and indirect costs are charged to Federal awards.

Internal Controls 

Should the NFP enter into federal awards that allow for use of the de minimis rate, it is important that the NFP establish a system of internal controls over the calculation of the de minimis rate. It is also important that the NFP monitor the calculation when invoicing the grant. Miscalculation will most often occur when those costs identified in the above definition (rental costs, subawards, etc.) are not properly deducted from total direct costs for purposes of calculating the de minimis recovery.

NFPs may be able to automate calculation of the de minimis recovery in their accounting systems to reduce the risk of error. Alternatively, the NFP could develop a form to document the calculation of the de minimis recovery. This form would ensure that the grant billing preparer takes all deductions that arrive at the MTDC into consideration. It would also allow for easy review of the de minimis calculation prior to grant billing submission.

Auditing the De Minimis Recovery

It is not surprising that indirect costs recovered from a federal award would be subject to audit as part of the Single Audit (if required). The OMB has outlined the following suggested audit procedures, as noted in OMB’s 2025 Compliance Supplement, be performed over the de minimis recovery:

1. Determine that the non-Federal entity does not have a current Federal negotiated indirect cost rate (including provisional rate).
2. Test a sample of transactions for conformance with 2 CFR 200.414(f).
   • Select a sample of claims for reimbursement of indirect costs and verify that the de minimis rate was used consistently, the rate was applied to the appropriate base, and the amounts claimed were the product of applying the rate to a modified total direct costs base.
   • Verify that the costs included in the base are consistent with the costs that were included in the base year, (i.e., verify that current year modified total direct costs do not include costs items that were treated as indirect costs in the base year).
3. For a non-Federal entity conducting a single function, which is predominately funded by federal awards, determine whether use of the de minimis indirect cost rate resulted in the non-federal entity double-charging or inconsistently charging costs as both direct and indirect.

Auditors perform these audit procedures, or a version of these procedures, with each Single Audit. A miscalculation could easily result in an over-recovery of indirect costs and questioned costs being reported as a Single Audit finding.

Other Options for Indirect Recovery

The de minimis rate is just one of several options for recovering indirect costs. Instead of using the de minimis option, NFPs may negotiate a Federal indirect cost rate or negotiate an indirect cost rate with the pass-through entity in accordance with Appendix IV to 2 CFR Part 200.

For a NFP to negotiate a Federal indirect cost rate, it typically takes a direct relationship (direct award) with a federal awarding agency, where that Federal awarding agency believes it to be worthwhile to negotiate a rate. Often times, a NFP has a federally negotiated indirect cost rate because it was required by a federal funding agency, either currently or in the past.

Pass-through entities have the option of negotiating indirect cost rates greater than the de minimis rate with subrecipients but are not required to do so. However, as noted at 2 CFR 200.414(f), Federal agencies and pass-through entities are not allowed to force or bribe a recipient or subrecipient into using an indirect cost recovery below the de minimis rate unless required by Federal statute or regulation.

Final Considerations

The de minimis rate is a good way for NFPs to get paid for at least a portion of indirect costs incurred on Federal awards, especially if it would be difficult to negotiate an indirect cost rate. In cases of limited Federal funding, NFPs may want to evaluate what is easier to fundraise and find other sources for — a shortfall in direct costs, or a shortfall in the recovery of indirect costs.

The de minimis rate is a critical aspect of the Uniform Guidance and deserves careful consideration by NFPs, though appropriate internal controls must be in place when the de minimis rate is being used.