Guidelines for Determining Direct and Indirect Costs


Office of Management and Budget (OMB) Circular A-21) "Cost Principles for Educational Institutions" provides guidance on defining and determining direct and indirect costs.

Direct Costs

Direct costs are those costs that can be identified specifically with a sponsored project, instructional activity, or other institutional activity, and thus directly assigned relatively easily with a high degree of accuracy. Examples of direct costs are salaries and wages, fringe benefits, equipment, supplies, travel, and publication expenses.

Indirect Costs

Indirect costs, referred to by the federal government as Facilities and Administrative (F&A) costs, are incurred for common or joint objectives and cannot be identified readily with a specific sponsored project, instructional activity, or other institutional activity. The two types of indirect costs are described below:

Category of Indirect Cost



Plant Operation and Maintenance Expenses

Utilities, janitorial services, routine maintenance and repairs, and facilities services.

Library Expenses

Books, materials, library staff, and library-related services.

Depreciation or Use Allowance

An allowance for the use of the buildings or equipment (excludes those costs paid for by the federal government).


General Administration and General Expenses

Accounting, payroll, administrative offices, and other general institutional services not related solely to any major function of the institution.

Sponsored Projects Administration Expenses

Services provided by the campus and central office in the administration of sponsored projects.

Departmental Administration Expenses

Institutional and departmental administrative costs in academic offices that benefit departmental activities or objectives.

Student Administration and Services Expenses

Services provided by deans of students, admissions, and registrar's office.

Determining if a Cost is Direct

For a cost to be directly charged it must be "reasonable," "allocable," "consistently treated," and "not specifically designated as unallowable." (These terms are further described in the blocks that follow.) A cost must meet all of these conditions before it may be directly charged to a federally sponsored project. These conditions apply to estimating (developing proposals), accumulating (spending), and reporting costs.

Note: The determining factor in distinguishing direct costs from indirect costs is identification of the costs with the sponsored project, not the nature of the good or service.


The cost must be reasonable and necessary for the performance of the project. This means that a prudent individual pursuing the proposed work would spend funds in this manner.


Costs must be allocable to the project. Costs of goods or services that are charged or assigned to a project must be based on the relative benefits received by the project. This is not an issue if the expense was incurred by a single project. However, if the item is of benefit to more than one project, then a sponsored project may only be charged for the portion of the expense that represents the benefit directly received by that project.

Example: A computer is purchased for two projects. Project A used the computer 40% of the time and Project B 60%. The cost of the computer would be charged to the projects based on the proportionate benefit to each project. The proportionate benefit is based on the actual use. Therefore, 40% of the cost is allocated and directly charged to Project A, and 60% is allocated and directly charged to Project B.

Example: A spectrophotometer is frequently used in a lab for six projects, making it difficult to accurately assign a direct benefit to each project. Since the benefit is spread over multiple projects to serve shared activities and it is difficult to identify a direct benefit to each activity or project, the cost must be considered an indirect cost.

Consistently Treated

When costs are charged to a federally sponsored project, they must be consistently treated. All costs incurred for the same purpose in like circumstances must be either direct costs only or indirect costs only. A cost item may not be charged as a direct cost on some projects and as an indirect cost on other projects in like circumstances.

Refer to "Guidelines for Implementing Federal Cost Accounting Standards" for more information on the treatment of costs.


A federally sponsored project may not be directly or indirectly charged for any item or service that is specifically designated as unallowable in A-21, section J, sponsor guidelines, or in the award.



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