The 10% de minimis indirect cost rate is a simplified method for allocating indirect costs to federal grants, contracts, and other agreements, primarily used by non-federal entities such as universities, non-profits, and local governments. This method is outlined in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (commonly referred to as the Uniform Guidance), specifically in 2 CFR Part 200.

Understanding Indirect Costs

Indirect costs, also known as overhead or facilities and administrative (F&A) costs, are expenses that are not directly tied to a specific project or activity but are necessary for the overall operation of an organization. Examples include utilities, rent, administrative salaries, and general office supplies. Unlike direct costs, which can be easily traced to a specific project, indirect costs benefit multiple projects or activities and must be allocated in a fair and reasonable manner.

The De Minimis Rate Explained

The 10% de minimis rate allows non-federal entities that have never negotiated an indirect cost rate with a federal agency to apply a flat 10% rate to their modified total direct costs (MTDC) as a way to recover indirect costs. This rate is intended to simplify the process for smaller organizations or those with limited experience in managing federal awards.

Key Features of the 10% De Minimis Rate:

1. Eligibility: The rate is available to non-federal entities that do not have a negotiated indirect cost rate agreement (NICRA) in place with a federal agency.
2. Application: The 10% rate is applied to the MTDC, which includes most direct costs but excludes certain items such as equipment, capital expenditures, and subawards over $25,000.
3. Simplification: The de minimis rate eliminates the need for complex cost allocation plans or negotiations with federal agencies, making it easier for smaller organizations to participate in federal programs.
4. Flexibility: Organizations can choose to use the de minimis rate or negotiate a higher rate if they believe their actual indirect costs exceed 10%.

Benefits of the 10% De Minimis Rate

1. Reduced Administrative Burden: By allowing organizations to apply a flat 10% rate, the de minimis rule reduces the administrative burden associated with calculating and negotiating indirect cost rates.
2. Increased Access to Federal Funding: Smaller organizations, which may lack the resources to navigate complex federal requirements, can more easily access federal funding opportunities.
3. Predictability: The flat rate provides predictability for both the organization and the federal agency, simplifying budgeting and financial planning.

Limitations and Considerations

While the 10% de minimis rate offers significant advantages, there are some limitations and considerations to keep in mind:

1. Potential Underrecovery: If an organization's actual indirect costs exceed 10%, using the de minimis rate may result in underrecovery of costs. In such cases, negotiating a higher rate may be more beneficial.
2. Exclusions from MTDC: Certain costs, such as equipment and subawards over $25,000, are excluded from the MTDC base. Organizations must carefully review the Uniform Guidance to ensure compliance.
3. Transition to Negotiated Rates: If an organization grows or its indirect costs increase significantly, it may need to transition from the de minimis rate to a negotiated rate, which can be a complex process.

How to Apply the 10% De Minimis Rate

To apply the 10% de minimis rate, organizations must:

1. Determine Eligibility: Ensure that the organization does not have a negotiated indirect cost rate agreement in place.
2. Calculate MTDC: Identify the modified total direct costs for the project, excluding items such as equipment and subawards over $25,000.
3. Apply the 10% Rate: Multiply the MTDC by 10% to determine the allowable indirect costs.
4. Document the Calculation: Maintain documentation to support the use of the de minimis rate in case of an audit or review.

Example Calculation

Suppose a non-profit organization receives a federal grant with the following direct costs:

• Salaries and wages: $200,000
• Supplies: $50,000
• Equipment: $30,000
• Subaward over $25,000: $40,000

The MTDC would be calculated as follows:

• Salaries and wages: $200,000
• Supplies: $50,000
• Equipment: $0 (excluded)
• Subaward over $25,000: $0 (excluded)
• Total MTDC: $250,000

Applying the 10% de minimis rate:

• Indirect costs = $250,000 x 10% = $25,000

Transitioning from De Minimis to Negotiated Rates

If an organization's indirect costs exceed 10% or if it becomes more experienced in managing federal awards, it may choose to negotiate a higher indirect cost rate. This process involves:

1. Preparing a Cost Proposal: The organization must prepare a detailed cost proposal, including a breakdown of indirect costs and supporting documentation.
2. Negotiating with a Federal Agency: The proposal is submitted to a cognizant federal agency for review and negotiation.
3. Implementing the Negotiated Rate: Once approved, the negotiated rate is used for future federal awards.

Conclusion

The 10% de minimis indirect cost rate is a valuable tool for non-federal entities, particularly smaller organizations, to recover indirect costs associated with federal awards. By simplifying the process and reducing administrative burdens, the de minimis rate promotes greater access to federal funding while ensuring compliance with federal regulations. However, organizations must carefully consider their actual indirect costs and the potential benefits of negotiating a higher rate as they grow and evolve.

For more detailed guidance, organizations should refer to the Uniform Guidance (2 CFR Part 200) and consult with their federal awarding agency or a financial expert familiar with federal grant management.