Direct vs. indirect costs in a nonprofit grant budget
Creating a strong grant budget is not about listing expenses. Your top priority is to show funders that your organization understands how money will be used, managed, and monitored.
One of the most common areas of confusion for nonprofits is how to properly classify direct versus indirect costs within a grant budget. Getting this distinction right can make the difference between a clear, competitive proposal and one that raises concerns for reviewers.
Why grant budgets can be challenging
The budget is often one of the most difficult parts of a grant application. While the narrative allows room for explanation and storytelling, the budget must be precise, logical, and easy to follow.
One common point of confusion surrounds direct versus indirect costs in a nonprofit’s budget for a particular project or program. Many organizations struggle with how to categorize expenses correctly or how much of their operating costs can reasonably be allocated to a single grant. Because funders often scrutinize budgets closely, mistakes in this area can weaken an otherwise strong proposal.
What are direct costs?
Direct costs are the activities or items associated entirely with the project or program. This may include project materials, program staff salaries, and other fees that pertain only to the program.
Direct costs should be easy for a reviewer to connect directly to the funded activity. If the expense would not exist without the project, it is generally considered a direct cost. Clearly identifying these costs helps funders understand exactly what their money will support and how it will advance the program’s goals.
What are indirect costs?
Indirect costs include items that are associated with running the organization as a whole, like administrative staff salaries, rent, utilities, office supplies, etc. Your entire organization uses these items both for administrative purposes and for other programs. You can calculate a percentage of these costs for your program, but you shouldn’t include 100% of the costs of these items in your budget.
Indirect costs support the infrastructure that allows programs to operate, but they are not tied exclusively to one project. This is why funders typically expect organizations to allocate only a reasonable portion of these expenses rather than charging the full amount to a single grant.
What funders expect in a direct and indirect cost breakdown
Some foundations are picky about the percentage of indirect costs they consider reasonable and will be open to financing. Others don’t pay much attention, as tends to be the case with smaller, less sophisticated funders. Larger foundations, as well as government entities, however, may specify their requirements, so pay close attention to those guidelines as you’re writing your budget.
Funders want to see that your organization understands their rules and respects their funding priorities. Reviewing each funder’s guidelines before drafting your budget helps ensure that your indirect cost allocation aligns with what is allowed and expected.
Quick tip: ensuring your budget and narrative align
You’ll also want to make sure your budget and your narrative tell the same story. If they don’t align, reviewers will note a red flag. And they may not fund your project.
The budget should clearly reflect the activities described in the proposal narrative. When reviewers see expenses that are not explained in the narrative or narrative activities that are missing from the budget, it creates confusion and raises concerns about planning and accuracy. Consistency between these two sections strengthens your overall proposal and builds reviewer confidence.
Final tip for nonprofits
Understanding the difference between direct and indirect costs and reviewing funder guidelines carefully can help prevent common budgeting mistakes. A clear, well-structured budget not only supports your narrative but also improves your chances of getting funded. We hope this has helped your understanding of direct versus indirect costs in a nonprofit budget.
Interested in learning more about our grant writing services? Contact us.
No Comments