Indirect Costs (Overhead)

There has been some movement toward supporting the full indirect costs of supported research as demonstrated by the creation of the Federal Indirect Costs Program.  Universities continue to lobby in this regard and it is the expectation at the University of Toronto that, unless the sponsoring agency has a standing policy against it, researchers will include a provision for indirect costs in their research proposals.

In view of the prevailing policy on support of the indirect costs of research, it is also critical that researchers correctly identify, and include in research proposals, all direct research costs.

This section covers the following:

An Overview

Direct Versus Indirect

Indirect Cost Recoveries: Accounting, Distribution and Reporting

Guidelines for Use of Departmental Overhead

An Overview

  • The indirect costs of research approximate 100% of the direct labour costs and the majority of these indirect costs are currently funded by the University's Operating Fund. The University would prefer to see more support for these costs from research sponsors.
  • Indirect research costs are incurred at all levels of the organization.
  • Where not specifically disallowed, requests for research funding should include indirect costs.
  • University practice is to require an indirect provision on research contracts of
    • 40% of total direct costs on research contracts, unless the contracting agency requires, and the Dean endorses, an alternative method of calculation
    • 20% of total direct costs on research grants, and
    • 10% of total direct costs on research grants from foundations unless the sponsoring agency has a prescribed rate(s)
    • Refer to the Research Administration Policy for specific details relating to overhead rates on research contracts and grants.
  • Accounting for indirect costs, i.e. overhead recoveries, is done by the Research Oversight and Compliance Office.
  • Indirect cost recoveries are distributed to the units which incur the indirect costs on a “slip year” basis as a one-time-only budget in the unit's operating Fund Centers. For example, overhead recoveries from customers in calendar year 2011 are appropriated and available for spending in fiscal year 2012-13.

Direct Versus Indirect

Indirect Cost Defined
Indirect costs are those which cannot be traced, i.e. to a particular department or project. The corollary is that any costs which can be traced are direct costs.

In order to trace a cost, it must first be possible, i.e. practical, to measure the service or supply and then determine the related cost.

It is important to note that it is not the nature of the cost but its traceability that determines whether the cost is direct or indirect.

Indirect Research Costs
From this it follows that the indirect costs of a research project are those which cannot be traced directly to the project. Those costs which can be traced, including the cost of departmental administrative services, are direct costs of the research project.

Research overhead - The term research overhead is generally used to refer to the provision, in a research grant or contract, for the indirect costs of a research project.

Consider a research project in the Department of Physics. As research progresses, services will be provided by:

  • the institution, i.e. central services
  • the faculty
  • the department

At each level there may be direct and indirect costs. Here are some examples of each:


Direct Costs Indirect Costs
Central or Institutional Services
Cost of renovating a site for equipment for the project Cost of regular cleaning of the area occupied by the research activity
Cost of any special insurance policy needed for the research project Project's share of the cost of general insurance
Faculty Services
Cost of specific technical services provided to the research project Cost of standard advisory services
Department Services
Cost of measurable secretarial or administrative assistance. e.g. % of time, provided to the research project General level of administrative service for which it is not reasonable to measure the portion absorbed by the project

Indirect Cost Recoveries: Accounting, Distribution and Reporting

Accounting for Indirect Costs

  • Where a research award has a provision for indirect costs, as indicated on the Funded Research Digest, a separate budget (commitment) item within the award is established to charge the indirect costs (overhead) to the award.  The accounting for this overhead is done by Research Accounting staff who calculate the overhead for the reporting period by applying the overhead rate to the actual direct costs incurred and prepare a journal entry to record the indirect cost to the award and the corresponding recovery to the Operating Fund. This recovery is recorded as General University income.

Distribution of Indirect Costs - How
As indicated above, indirect costs of research are incurred at three levels of the organization - the institutional, faculty and departmental levels.

It is the University’s policy that the distribution of indirect costs which have been recovered from research awards appropriately reflect the distribution of indirect costs.  Accordingly, the indirect costs recovery is distributed to the administering Division.  The Division will then determine the distribution.

Collaborating Departments and the Departmental Share
The departmental share is distributed to the department identified as the administering department referred to on the Funded Research Digest.

Frequently, however the research will be shared by two or more departments who, as a result, are incurring indirect costs in respect to the research. In these cases, following distribution of the overhead to the administering department, the department may effect the appropriate sharing by reallocating the overhead budget using a Budget Transfer / Revision form.  Refer to GTFM section: Changing the Original Budget: Authorizations and Procedures for more information on how this is accomplished.

Distribution of Indirect Costs – When
The timing of the distribution of the indirect cost recovery is done on a slip-year basis. The indirect cost recoveries from a research award in a calendar year are made available as a one-time-only budget entry in the following fiscal year.  For example, overhead recoveries from customers in calendar year 2011 are appropriated and made available for spending in fiscal year 2012-13. This allows departments to operate with a level of certainty as to the amount of the distribution for the fiscal year.

An annual report on the distribution of the indirect cost recoveries for the upcoming fiscal year is produced by Research Accounting each year following completion in January of the recording of all recoveries applicable to the research expenditures in the immediately preceding calendar year.

The report details the total overhead by award, the distribution of that overhead and the total overhead for the recipient unit, i.e. department, faculty or Accommodation and Facilities Directorate.

The report is distributed to faculty financial officers in late February or early March by the Research, Oversight and Compliance office.

Guidelines for Use of Departmental Overhead


  • Central, Faculty and Departmental administration
  • Utilities
  • Library collections and services; central services provided by the Division of the Vice-President, Research and Innovation, and Divisions and Departments such as Personnel, Purchasing, Physical Plant and Accounting, Biohazard Disposal, Radio Isotope Disposal and Waste


  • Equipment acquisition, installation, maintenance, replacement
  • Laboratory climate control
  • Technical and secretarial support not included as a direct cost
  • Telephone charges
  • Hiring and employment costs
  • Research employee skill enhancement/professional development courses
  • Bridging research group salaries and benefits between contracts
  • Space and facilities renovation

Current Awareness

  • Attendance at conferences, symposia
  • Publication
  • Publicity
  • Memberships in professional and learned societies
  • Purchase of journals, proceedings and books specific to research area


  • Identification and cultivation of potential sponsors
  • Identification, preparation and submission of new research proposals (both successful and unsuccessful)
  • Negotiation of research programs, and terms and conditions with sponsors

Project/program feasibility
Researchers engaged in contract research require idea development funds so that promising concepts can be explored to the point that they are sufficiently well-defined for new grant or contract proposals to be formulated.

Last revision November 2013

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