Legal Definitions - indirect cost

An indirect cost refers to an expense that is necessary for the overall operation of an organization but cannot be directly and exclusively tied to the production of a specific good, the delivery of a particular service, or a single project. Unlike direct costs, which are easily traceable to a specific output, indirect costs support multiple activities and are often shared across various departments or functions. These costs are essential for the organization to function but are not directly incorporated into the final product or service.

• A Software Development Company: Imagine a company that develops several different software applications for various clients. The salaries of the programmers working directly on a specific client's app and the cost of specialized software licenses purchased solely for that project are direct costs. However, the monthly rent for the company's entire office building, the utility bills for the whole facility, and the salary of the CEO who oversees all projects are indirect costs. These expenses are crucial for the company's existence and benefit all software projects, but they cannot be attributed to just one.
• A University Research Department: Consider a university department conducting multiple scientific research grants simultaneously. The wages of a research assistant hired specifically for a particular grant and the cost of unique chemicals used only in that grant's experiments are direct costs for that specific research project. Conversely, the salary of the department administrator who manages paperwork for all grants, the cost of general laboratory equipment shared by all researchers, and the electricity bill for the entire research wing are indirect costs. These costs support the department's overall research mission but are not exclusive to any single grant.