In managing indirect costs on federal grants, which statement best describes the proper practice?

• A. Apply indirect cost rates inconsistently to budgets.
• B. Allocate overhead with no documentation.
• C. Only charge direct costs and ignore indirect costs.
• D. Apply approved indirect cost rates consistently, maintain documentation, and allocate overhead appropriately per grant terms.

Answer: (D)

Indirect costs are the overhead that supports multiple activities and aren’t tied to a single project. For federal grants, you recover these costs by using an approved indirect cost rate and applying it consistently to allowable direct costs. The best practice is to apply that rate as approved, keep thorough documentation showing how the rate was calculated and how charges were allocated, and ensure overhead is allocated in accordance with the grant terms. This creates an auditable trail, helps ensure costs are allowable, allocable, and reasonable, and reduces the risk of disallowances or repayments. Charging only direct costs or skipping documentation would hide or misallocate these shared costs, while applying rates inconsistently undermines compliance and audit readiness.