The award letter arrives. Your budget carried administrative costs at 8 percent, because that is what the last three applications used. Federal rules would have let you claim nearly twice that, without negotiating anything.
You Can Claim Up to 15 Percent Without Negotiating
Indirect costs keep the organization running but cannot be traced to one program: the person who closes the books, the audit, back-office rent, insurance. Direct costs are what you can assign to a project.
If you do not hold a current federally negotiated rate, including a provisional one, the de minimis rate rule lets you elect a rate of up to 15 percent of modified total direct costs. The regulation says it requires no documentation to justify its use and may be used indefinitely. Using it is optional, and any number up to the ceiling works.
What is waived is the rate justification, not the bookkeeping. Costs must still be charged consistently as either direct or indirect, never double counted. And one flat prohibition applies: the rate may not be used on cost-reimbursement contracts issued directly under the FAR.
The ceiling is newer than most budget templates. OMB raised it from 10 percent in the April 2024 final rule, effective government-wide on October 1, 2024. Agencies were not required to apply it to awards already issued, so an older award may still carry the 10 percent ceiling in its own terms. Do not rebill one.
The Base Matters as Much as the Rate
15 percent of what. Not the award total. It applies to modified total direct costs, and the MTDC definition is narrower than people expect.
MTDC includes direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $50,000 of each subaward, regardless of how long that subaward runs. It excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward above $50,000. Anything else comes out only with your cognizant agency's approval.
On a Subaward, the Number Is Agreed, Not Declared
On a direct award you elect the rate and put it in the budget. On a subaward you do not. Without a negotiated rate of your own, the subaward rate rule requires the pass-through entity to set your rate in collaboration with you, choosing between a negotiated rate and the de minimis rate.
Two protections survive. Neither an agency nor a pass-through may push you below your negotiated rate or the de minimis rate you elected, unless a federal statute or regulation requires it. And a pass-through must accept a federally negotiated rate if you hold one.
Elect the de minimis rate and it applies to all federal awards until you actually receive a negotiated rate. Starting a negotiation does not end the election. The cost principles do not reach every federal dollar, though: fixed amount awards, loans, food commodities, and awards to hospitals sit outside Subpart E.
When a Negotiated Rate Beats the Default
If actual overhead runs well above 15 percent, common once you carry an audit, compliance staff, and facilities, a negotiated rate is worth the work. Negotiated rates must be accepted by all federal agencies, with departures allowed only where a statute or regulation requires one or the awarding agency approves it under published criteria.
Your cognizant agency negotiates the rate on behalf of all the others. By default it is the one with the largest dollar value of awards funded directly to you. Receive nothing directly from any agency and you have no cognizant agency: the pass-through entity negotiates with you instead.
Appendix IV sets the mechanics. A first proposal is due immediately after you are told an award will be made, and no later than three months after its effective date, unless you elect the de minimis rate. After that you resubmit within six months of each fiscal year close, unless your agency grants the one-time four-year extension. During an extension you cannot request a rate review, so do not lock in a rate you expect to outgrow.
No proposal is acceptable without a signed Certificate of Indirect (F&A) Costs in the prescribed form, signed at no lower a level than vice president or chief financial officer. The signer attests personally that the pool excludes unallowable costs, among them lobbying, public relations, entertainment, donations, fines, and fraud-defense costs. Read all four attestations before anyone signs.
Whether it pays off turns on your cost structure, and none of this is legal or accounting advice for your situation.
Caps exist too, and one can come from an agency's regulation rather than a statute: HHS limits indirect costs on training grants to a fixed 8 percent of a reduced base under 2 CFR 300.414. Disclosing rate policy is not optional: the agency must state its indirect cost policies in the funding notice and publish the criteria behind any deviation. If a notice is silent, ask. If an agency refuses to honor a negotiated rate, notify OMB. One more reason to read the opportunity closely before adding to your federal pipeline.
A Pending Rule Cuts the Other Way
OMB's May 2026 proposed rewrite does not amend the de minimis rate or the MTDC definition; neither appears in its amendatory instructions. OMB said it is "not proposing updates to the indirect cost rate negotiation system through this document," citing fiscal 2026 appropriations language on negotiated rates.
The same proposal adds a pre-issuance review principle at proposed section 200.205(b)(3): "All else being equal, preference for discretionary awards should be given to institutions with lower indirect cost rates." If that survives into a final rule, claiming your full rate could carry a competitive cost on discretionary awards.
None of it is in effect. Section 157 of the Continuing Appropriations and Extensions Act, 2027 bars a rule arising out of that proposal, or a substantially similar one, from being issued or finalized through December 11, 2026. We have covered what the rewrite would change and the effective date it never got.
The Takeaway
Pull the indirect line from your last three federal budgets. If it reads 10 percent on an award issued since October 2024, you have been leaving money behind. Elect a de minimis rate of up to 15 percent, apply it to modified total direct costs rather than the award total, and charge it consistently. On subawards, agree the number with the pass-through instead of assuming it. If real overhead runs higher, start the cognizant agency conversation now, not three months after the next award lands. Unrecovered indirect comes out of your operating reserves.