Direct vs. Indirect Costs or Overhead

Direct or Shared Costs

• Direct costs relate to a specific project or program. Examples include scenery for Play #2, contracted faculty for the April-May workshops, supplies for the summer camp program or the food pantry, counselors for shelter clients, etc.

• Shared costs are direct costs that may apply to one or more projects or programs. These are shared, not allocated on a common cost basis across all organizational activities.

Indirect, Core Function Costs, Overhead, Common Costs

Overhead by any name is a vital budget component for all projects, whether specifically funded or not, and should certainly be taken into account along with direct costs as funding request budgets are composed.

• Indirect costs (sometimes called overhead or common costs) do not relate solely and specifically to a particular project or program. However, they are still necessary to its completion, so a proportion of these costs is allocated across all organizational activities. Examples of common costs include office rent, telephone, Internet, copier usage, or management staff time devoted to the project.

• A formal indirect cost rate can be calculated and negotiated for some grant proposal budgets when allowed by the funder.

• There has begun to be more awareness among funders that well-implemented programs must be supported by a solid, well-managed organization, and that that means that funders must do more than just project funding – they must also provide funding for the core functions such as accounting, evaluation, data collection, and administrative management costs that make programs possible.