“Overhead” has a branding problem. Decades of donor messaging equating low overhead with high efficiency left many funders, and many nonprofit staff themselves, treating indirect costs as something to minimize or apologize for in a grant budget. That instinct works against the organization. Rent, IT support, HR, accounting, and leadership time keep a program running just as much as direct program staff do, and a budget that hides or shrinks those costs usually ends up underfunding the very project it’s trying to fund.

Learning to name overhead plainly, explain why it belongs in the request, and back it up with a defensible rate changes how a budget reads to an experienced reviewer.

What are overhead and indirect costs in a nonprofit grant budget?

Quick answer: Overhead, also called indirect costs or administrative costs, covers expenses that support an organization’s operations broadly rather than a single program-rent, utilities, general accounting, IT infrastructure, and executive leadership time are common examples. These costs can’t be tied to one specific grant-funded activity the way a program coordinator’s salary or program supplies can, but they’re still required to deliver that activity.

Funders and accountants sometimes use “overhead” and “indirect costs” interchangeably, though some draw a narrower technical distinction between the two. For grant budgeting purposes, what matters most is that the organization can explain which costs are being requested, how they were calculated, and why they’re necessary to deliver the funded work.

Why do funders want to see overhead included?

Reviewers with real grants management experience increasingly expect indirect costs to appear in a budget, not to be hidden inside inflated program line items or left out entirely. An organization that omits overhead is often quietly cutting corners on financial management, evaluation, or oversight capacity to make the budget appear leaner and that gap tends to surface later, during implementation, when the organization can’t deliver what the proposal promised.

Major foundations have moved toward funding an organization’s true, full cost of doing business, including overhead, because underfunded overhead erodes the same organizational infrastructure a funder is counting on to deliver results—a pattern Candid’s research on the overhead myth has documented for years as a source of underinvestment across the sector. A program can’t run well if the accounting system tracking its grant funds is understaffed, or if the IT systems supporting staff go unmaintained because there was no budget line to fund them.

How should a nonprofit calculate its indirect cost rate?

Organizations have a few paths available, and the right one depends on the funder and the organization’s own grant history.

Negotiated indirect cost rate agreement (NICRA). Organizations that receive federal funding can negotiate a formal indirect cost rate with their cognizant federal agency. Once negotiated, federal agencies are required to honor that rate on future awards and can’t force the organization to accept a lower one. Building this rate requires documenting actual overhead expenses against direct program costs, typically through a cost allocation plan.

The 10 percent de minimis rate. Organizations without a negotiated rate can apply a standard 10 percent de minimis rate to modified total direct costs under federal Uniform Guidance, with no additional documentation required to justify that specific figure. This option gives smaller organizations a straightforward way to recover some overhead without building a full cost allocation system.

Funder-specific policies. Many foundations set their own overhead allowance, commonly in the 10 to 20 percent range, though this varies widely and some funders now allow considerably more. Always check a funder’s guidelines directly rather than assuming a standard percentage applies.

What language should a nonprofit use to describe overhead in a proposal?

Precision matters more than persuasion here. A short, matter-of-fact explanation works better than a defensive justification:

• Name the specific costs the indirect rate covers—general accounting, IT support, HR administration, facilities, and organizational leadership—rather than leaving “overhead” undefined.
• State the rate being applied and its source: a negotiated federal rate, the 10 percent de minimis rate, or the funder’s own stated allowance.
• Avoid apologetic framing. Phrases like “we’ve kept our overhead as low as possible” signal underinvestment in infrastructure, which is the opposite of what an experienced reviewer wants to see.
• Connect overhead directly to program delivery: note briefly how the organization’s administrative and financial systems support the specific project being proposed, not just the organization in general.

What mistakes do nonprofits make when addressing overhead in a budget?

A few patterns show up repeatedly in weaker budgets:

• Omitting indirect costs entirely, even when the funder explicitly allows them, out of a mistaken belief that a lower total request looks more favorable
• Inflating direct cost lines to quietly cover overhead expenses instead of naming them as indirect costs, which creates inconsistencies a careful reviewer can spot
• Applying an indirect cost rate inconsistently across different funders or grant years without documentation explaining the difference
• Failing to distinguish direct and indirect costs clearly enough in the budget narrative, leaving the reviewer to guess which category a given line item falls into

That last point matters beyond this specific section of the budget. How clearly a budget separates and explains its cost categories tends to reflect what funders look for in the budget narrative as a whole. Reviewers read overhead treatment as one signal among several about whether the organization’s financial planning can be trusted.

Frequently asked questions

Why do nonprofits need overhead funding?

Overhead covers the administrative, financial, and infrastructure costs, such as accounting, HR, IT, and facilities, that keep an organization running well enough to deliver any funded program. Underfunding these costs weakens the very systems a funder depends on for accountability and results.

What’s a reasonable overhead percentage for a nonprofit grant budget?

There’s no single universal figure. Federal grants allow a negotiated rate or a 10 percent de minimis rate under Uniform Guidance. Foundation allowances commonly fall between 10 and 20 percent, though this varies by funder, so checking specific guidelines is more reliable than assuming a standard number.

Should a nonprofit avoid mentioning overhead in a grant proposal?

No. Experienced reviewers expect to see indirect costs named clearly, with the rate and its source stated directly. Omitting overhead or burying it inside other budget lines raises more questions than including it plainly.

What’s the difference between overhead and indirect costs?

The terms are largely interchangeable in grant budgeting, though some accountants draw a narrower technical distinction. Both refer to costs supporting the organization broadly rather than one specific grant-funded activity.

Can a small nonprofit without a negotiated indirect cost rate still request overhead funding?

Yes. The 10 percent de minimis rate under federal Uniform Guidance is available to organizations without a negotiated rate, and many foundations accept a stated overhead percentage without requiring the formal negotiation process federal agencies use.