As you can see from this example, using direct costs as a basis for your indirect cost rate will result in larger programs being charged with more of the indirect costs than smaller programs. The Office of Management and Budget Circular A-122, Cost Principles for Nonprofit Organizations , describes the method of developing a federal indirect cost rate, using these same principles. However, even within these guidelines, indirect cost rates for the same organization may vary from federal agency to federal agency. Organizations may allocate indirect costs based on how many people are served in each of their programs, how large each of their sites is, or other logical methods. There is little agreement in the nonprofit or funding community about how to calculate the rate, what to include, and how much is fair.
Some foundations have informal, unwritten guidelines for a maximum level.
Under federal guidelines, allowable indirect costs range from 3 percent to 70 percent, varying from agency to agency. Contrary to popular belief, indirect costs are not an easy measure of an organization s efficiency or stewardship. For example, imagine a multi-service agency where each program has its own bookkeeper, purchases its own supplies, and has all its own equipment. Such an organization would have no indirect costs at all, but would be clearly less efficient than if the programs shared bookkeeping costs, supplies and equipment. Final Comments Because the presentation of financial information influences the way we assess an agency's finances, the selection of indirect costing methods and accounting procedures has an important impact on decision-making.