Negotiated Indirect Cost Rate Agreements (NICRA) Benefits and Considerations

Introduction
Indirect costs, sometimes referred to as "overhead," include expenses that support overall operations but cannot be readily assignable to just one program or activity. Typical examples include facility costs and administrative costs such as the salaries and benefits of administrative staff (e.g. human resources, finance staff, and executive leadership), and office supplies and insurance.
A Negotiated Indirect Cost Rate Agreement (NICRA) is a formal arrangement between an organization and a federal agency that establishes the indirect cost rate allowable for reimbursement on all federal grants and cooperative agreements. The resulting agreement specifies the maximum rate for indirect cost reimbursement, providing a structured framework for cost recovery on federally funded projects.
The rules that govern application and use of a NICRA for federal awards received by nonprofit organizations can be found within the Uniform Guidance (2 CFR Part 200), specifically in Subpart E - Cost Principles (§§ 200.412 and 200.414) and Appendix IV. Note that the rules governing indirect costs for federal contracts are governed by the Federal Acquisition Regulation (FAR). While the FAR generally doesn't apply to grants, some agencies may incorporate certain FAR provisions by reference or use them as guidance in their grant-making processes.

NICRA Basics
A NICRA is negotiated with a recipient organization’s cognizant federal agency, following submission of a detailed proposal and supporting documentation in the agency’s preferred format. The cognizant agency for reviewing and approving indirect costs is the federal agency that provides the largest dollar amount of funding directly to the recipient organization. Thus, when negotiating a cost allocation plan or proposal, it’s important to identify the appropriate cognizant agency as some federal agencies contract with other agencies to negotiate rate agreements. For example, NASA currently pays the Department of Interior’s Business Center (IBC) to negotiate indirect cost rate agreements for NASA’s award recipients.
If an organization receives all its federal funding as a subrecipient (i.e., receives a subaward from a pass-through entity), it is not eligible to negotiate for a NICRA with a federal agency. However, a subrecipient may elect to use the de minimis rate (currently 15% of Modified Total Direct Costs) or it can negotiate an indirect cost rate with the pass-through entities from which it receives its federally-sourced funding.
When applying for a NICRA, an entity should expect to provide a variety of documentation, such as a cost policy statement, audited financial statements, a schedule of federal awards received, and of course indirect cost rate calculations. Always check the cognizant agency’s website to view current documentation requirements.

The Math
A NICRA (Negotiated Indirect Cost Rate Agreement) is essentially a percentage of total allowable indirect costs (the numerator) divided by a direct cost base (the denominator). Allowable direct cost bases include: a) direct salaries and wages, b) direct salaries and wages, plus fringe benefits, and c) modified total direct costs (MTDC). MTDC is a subset of direct costs that excludes certain costs (such as capital expenditures).
As an example, if your entity’s NICRA is 25% of direct salaries and wages, and those wages total $100,000 then up to $25,000 in allowable indirect costs can be charged. Note that this doesn’t increase the amount of the federal award; it simply represents the maximum amount of grant funds that can be assigned as indirect costs.

Good Reasons to Apply for a NICRA
• Full Cost Recovery: A NICRA enables nonprofit organizations to allocate indirect costs so that federal awards pay their fair share of indirect costs, ensuring that federally-funded programs do not drain resources from core operations.
• Budget Predictability: An established indirect cost rate helps organizations better budget grant funds and plan finances more reliably. However, rates can change, so regular monitoring is essential. Organizations receiving $35 million or more in federal funds annually must apply for and renew a NICRA each year. They are not eligible to use the 15% de minimis indirect cost rate option and must negotiate their rate with their cognizant federal agency annually.
• Credibility and Transparency: The negotiation process lends legitimacy to the cost structure, demonstrating to federal agencies and other funders that the organization has the capacity to effectively manage indirect cost rates. Non-federal funders do not have to accept a federal NICRA but knowing that an organization has one can boost an entity’s credibility.
• Consistency Across Awards: Once negotiated, the NICRA applies to all eligible federal funding, minimizing the need for separate indirect cost negotiations with each new award. Negotiated indirect cost rates must be accepted by all federal agencies, as well as by pass-through entities.
• Competitive Advantage: For organizations with significant administrative and operational costs, a NICRA may provide a competitive edge in securing and managing larger or more complex federal awards. Some federal (and even state) awards require that the award recipient have a NICRA or apply for one as soon as the award is received.

Bad Reason to Apply for a NICRA
• Sometimes, a member of an entity’s board of directors thinks the organization should have a NICRA because they think it will make the organization eligible to collect more money on its federal awards. This is a misconception because the total amount of the federal award stays the same—only the distribution between direct and indirect costs changes.
Reasons Why You Might Wait to Apply for a NICRA
• Resource-Intensive Process: Preparing a NICRA proposal requires extensive documentation, cost allocation plans, and financial analysis, which may overwhelm smaller organizations with limited administrative capacity. Note that YPTC can help an organization do the analysis and assemble the materials required to submit an application.
• Ongoing Compliance Burden: Maintaining a NICRA entails strict adherence to federal cost principles, routine monitoring, and periodic renegotiation—adding complexity to financial operations. It should be noted, however, that federal award recipients must meet these compliance requirements whether they have a NICRA or use the de minimis indirect cost rate.
• Potential for Lower-Than-Expected Rates: The negotiated rate may be lower than an organization’s actual indirect cost needs, especially if the base year has unusually low indirect expenses or the negotiating agency is conservative.
• Public Scrutiny: Having a formal indirect cost rate may invite greater scrutiny from auditors, federal agencies, and the public, especially if rates are perceived to be high. Good to Know: YPTC can help develop strategies to keep an organization’s indirect cost rate as low as possible while remaining realistic.
• Alternative Recovery Options: Organizations with mostly non-federal funding or those eligible for the de minimis 15% indirect rate may find the NICRA process unnecessary or less beneficial.

Conclusion
Applying for a NICRA can be a strategic asset for organizations with substantial federal funding and significant indirect costs, offering structure, legitimacy, and the possibility of more complete cost recovery. However, the rigorous application and compliance demands may deter smaller or less administratively resourced organizations. A thoughtful assessment of current and potential federal funding, internal capacity, and long-term organizational goals is crucial before pursuing a NICRA. YPTC helps clients assess the best strategy including preparing a NICRA application and supporting the negotiation process.