Frequently Asked Questions

• Direct Cost vs. Indirect Cost

  Direct vs. Indirect Cost

  Understanding direct costs and indirect costs is important for properly tracking your organization’s expenses. Knowing the difference between the types of costs will help you to prepare a competitive budget proposal and you will have a better grasp on your accounting, thus better equipped to plan.

  In cases of government grants or other forms of external funding, identifying direct and indirect costs becomes extra important. Grant rules are often strict about what constitutes a direct or an indirect cost and may allocate a specific amount of funding to each classification.

  Often, funding for a specific project will largely support direct costs. Certain government agencies might allow you to explain why indirect costs should be funded, too, but the decision to grant funding is at their discretion.

  When a company accepts government funds, the funding agency may also have several strict mandates in place regarding the maximum indirect cost rate and which expenses qualify as indirect costs.

  Direct Costs	Indirect Costs
  If the cost can be identified specifically with a particular cost objective such as a grant, contract, project, function, or activity, then it is a direct cost	Costs of an organization that cannot readily be assigned to a particular project but are necessary to the operation of the organization and the performance of the project
  Examples: raw material, direct labor, fuel	Examples: operating and maintaining facilities, depreciation, and administrative salaries
  Highly variable mainly due to market factors	Relatively stable
  Direct costs affect the products/services prices, and are thus calculated per project or per item	Indirect costs affect the whole business and are thus calculated monthly or annually

   

  Contractual costs are those services carried out by an individual or organization, other than the applicant, in the form of a procurement relationship. The costs a contractor, including an individual consultant, incurs for travel are included in the contractual line item of the budget.

  The budget justification should address each of major cost categories (salaries, fringe benefits, equipment, travel, supplies, other direct costs, and indirect costs), as well as any additional categories required by the sponsor.

  Fringe benefits include but are not limited to the cost of leave, employee insurance, pensions, and unemployment benefit plans. The budget narrative should identify the applicant's fringe benefit rate. The applicant should not combine the fringe benefit costs with direct salaries and wages in the personnel category.