Differentiating Between Direct and Indirect Costs

Last revision: February 5, 2007

Federal regulations as described in OMB Circular A-21 provide definitions of the types of costs that are normally defined as direct costs vs. indirect (F&A) costs. As stated in A-21, In general, direct costs are those costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or F&A costs. Identification with the sponsored work rather than the nature of the goods and services involved is the determining factor in distinguishing direct from F&A costs of sponsored agreements.

Conversely, F&A costs are those that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity.

At the budget preparation stage of proposal development, costs that can be identified as normally F&A costs are discussed with the PI or his/her designee to determine extraordinary circumstances requiring an exception to the standard. An explicit budget justification must be included in the proposal describing the extraordinary costs and specific review by the signatory authority or designee is required.

A link to OMB Circular, Section J, helps the researchers understand the types of costs that are normally considered F&A costs or are considered unallowable.

When a sponsored award is received, there are various levels of review to determine the appropriateness of expenditures and obligations in light of the definitions outlined above. These reviews occur at the PI/departmental level, in Post Award Services , and in the accounting services section of Financial Services. Research administration training sessions consistently stress the reasonable, allocable, and allowable provisions of A-21 and these provisions are the basis for proper expenditures on sponsored agreements.

OMB Circular A-21