NICRA: Getting your grants to cover indirect costs
Does your nonprofit get fully reimbursed for the indirect costs associated with your grants or just a fraction?
If you receive grants from agencies like the Health and Human Services Commission (HHSC), you can potentially triple or quadruple your indirect cost rate reimbursement by putting a Negotiated Indirect Cost Rate Agreement (NICRA) into place.
What are indirect costs?
You can think of nonprofit expenses falling into one of three categories:
Direct project costs – The expenses that are directed exclusively to running a project. If you run a shelter, for example, this includes shelter staff compensation, rent and electricity for the shelter, food for feed the people you serve, and the like.
Unallowable costs – These are mostly fundraising costs. Like that coffee you had with Oprah Winfrey asking her for a million-dollar donation. These expenses would go away if you no longer had to worry about money coming in the door.
Indirect costs – These expenses are critical to the organization as a whole but aren’t directly involved in the project. This includes such things as payroll processing, the bookkeeper, and rent for your administrative space. The project and organization couldn’t function without them, but because they’re not directly involved in project delivery you most grants will treat them separately.
When nonprofits can fully cover their indirect costs, the whole organization can flourish. When they have to make do without, it can hurt the whole organization by starving it of the cash it needs to maintain a healthy infrastructure.
Without NICRA, you only recover a fraction of your indirect costs
Nonprofits receiving federal grants can receive a 10% indirect cost reimbursement, the de minimus rate, without any special paperwork or application. While better than nothing, it falls far short of the average of 40% that most nonprofits would need to cover their true indirect costs.
Unfortunately, too many organizations doing good work lack the time and/or expertise to apply for a NICRA. This can quickly add up to hundreds of thousands of dollars or more that they leave on the table.
For example
Let’s say your nonprofit has one program with two government grants worth a total of $1.7 million per year and you have indirect costs of $300 thousand. If you only collect the de minimus rate of 10%, that means you still need to raise $130 thousand to cover all of your indirect costs. And that would be on top of fundraising to cover your unallowable costs.
If you had a NICRA in place, you could use the grants to cover your full indirect costs.
How do you get a NICRA and make it work?
Whether it’s someone at your agency, or a trusted advisor, getting the NICRA takes a few steps, including:
Calculating your indirect cost rate. All the indirect costs go into this. You can calculate these using methods such as Salary Base or Direct Allocation. Some costs, like your bookkeeper, are straightforward while others, like a building shared by everyone at the organization, can get more complicated. You’ll negotiate the NICRA with your main government funder (AKA “cognizant agency”), and each has their own checklist with required schedules, charts, and calculations.
Negotiations. Prepare to have multiple conversations with your cognizant agency to make sure everyone agrees that the final rate is accurate and aligns with government regulations.
Implementing NICRA in your accounting. Once you have the NICRA, you may need to update expense tracking in your accounting system so that you can accurately report on indirect costs. (Note: some accounting systems cannot handle the complexity.)
Implementing NICRA in your billing and reporting within the parameters of federal regulations (2 CFR Part 200) pertaining to direct and indirect costs.
Reviews during the initial rate period may happen line by line to help you track properly.
Rate Renegotiation. Your preliminary rate, usually good for 2 years, gets renegotiated annually or based on the cognizant agencies policies. And you can anticipate a full renewal every 4 years.
That’s a lot of work!
Yes. Whether you do the work completely in-house or engage a specialist, a NICRA requires a meaningful time investment to apply for. Maintaining the level of detail needed will require dedicated staff time.
But a NICRA typically pays for itself
A NICRA can pay for itself quickly. In the example above, the agency using the de minimus rate had to raise about $12,500 from other sources each month just to cover its indirect costs.
What could your nonprofit do if it didn’t have to fundraise to cover indirect costs any more?
Contact us for assistance calculating and implementing your indirect cost rate.
Or for more information on how we handle NICRA engagements, check out our dedicated Nonprofit NICRA website!