The U.S. System for Paying Facilities and Administrative Costs of Research

1. The U.S. System for Paying Facilities and Administrative Costs of Research The Basics - What are F&A Costs and How are Rates Calculated and Negotiated? The History of Federal F&A Cost Policy Trends in F&A Rates Sources of Funds for University Research Lessons Learned (The Hard Way)

2. The U.S. F&A System • The Accounting Definition • Direct Costs: Costs Specifically Identified to Individual Research Projects, Instructional Programs or Other Major Functions • Indirect Costs: Costs Incurred for Common or Joint Purposes

3. Typical Direct Costs • Salaries & Fringe Benefits – Work of Faculty, Technicians, Postdocs, Grad Students, etc. to Carry Out Project Objectives • Travel Related to Performance of Project • Lab Supplies • Consulting and Other Specialized Services • Subcontracts for Project Activities at Other Institutions

4. F&A or Indirect Costs • Costs of Facilities – Operation of Research Labs • Buildings and Equipment • Utilities • Custodial Services • Maintenance and Repairs • Security • Radiation Safety • Hazardous Waste Disposal • Library Services

5. F&A Costs cont’d • Administrative Services • Sponsored Project Services • Protection of Human Subjects • Controls Over Care and Use of Animals • Scientific and Financial Regulatory Compliance • Review and Processing of Grant Applications • Grant Accounting and Reporting • General Administrative Services • Purchasing • General Accounting • Information Systems • Human Resources • Departmental Support Services

6. F&A Cost Pools • Building Depreciation • Equipment Depreciation • Interest Expense Related To Facility Construction • Operations and Maintenance Expenses • General Administration and General Expenses • Departmental Administration • Sponsored Projects Administration • Library • Student Services

7. F&A Rates • F&A Costs are Recovered Based on F&A Cost Rates • Rates are Developed by Institutions in Periodic Indirect Cost Proposals • Proposals are Submitted to Cognizant Federal Agency for Review/Audit, Negotiation, Approval • After the Rates are Approved, they are Applied to Each Grant and Contract to Determine the Amount of Indirect Costs to be Charged to the Grant or Contract

8. Calculation of F&A Rate • Calculation of Indirect Cost Rates • Rate Calculation Process • Each Indirect Cost Pool is Allocated to Major University Functions (e.g., Research, Instruction) Based on Cost Allocation Measures • Amount Allocated to Each Major Function is Divided by a “Base” which Represents Direct Operations of the Function • The Resulting Percentage is the Indirect Cost Rate for that Function

9. Calculation of F&A Cost Rates (Cont’d) • The Base Specified in Circular A-21 is “Modified Total Direct Costs” Rates are Commonly Developed for Three Major University Functions: • Organized Research • Instruction • Other Sponsored Programs

10. Example of F&A Cost Rate • Indirect Costs Allocated to Research: $50 Million • Direct Cost Base of Research: $100 Million • Indirect Cost Rate: 50%

11. Negotiation of Rates • Proposed Rates are Reviewed/Audited, and Negotiated by Cognizant Federal Agency • Acts for All Federal Agencies • Only Two Agencies Do IDC Rate Negotiations – HHS and ONR • One Rate Negotiated for All On-Campus Research • Separate Rate for Off-Campus Research • Sometimes Separate Rate Negotiated for Medical School • Single Rate Concept Mainly to Avoid Complications • Collaborative, Interdisciplinary Research • Process Governed by Federal Guidelines - OMB Circular A-21

12. History – Federal Policy • Movement from Flat Rates/Capped Rates to Cost Reimbursement • Movement from General Cost Guidelines (Principles) to Extensive, Detailed Rules • First Cost Principles: 1947 Navy “Blue Book” – 13 Pages • Circular A-21 First Issued 1958 • Revised Numerous Times – Last Revision 2004 • Current Version – 58 Pages (Much Smaller Print)

13. History - 50s and 60s • Most Federal Grants (Particularly NIH) Capped Indirect Cost Reimbursement Through the Mid Sixties • Originally Capped at 8%, Raised to 15%, then to 20% • Caps Initially Established by Agency Policy, Later Imposed by Congress in Agency Appropriations • NIH Cap Removed in FY 1966 Appropriations • Recognized Importance of Indirect Costs to Research • Marked Beginning of Serious Indirect Cost Rate Negotiations • HHS Established Capability to Review and Negotiate IDC Rates

14. History – 70s and 80s • Indirect Costs Became Controversial • Full Impact of Removing Indirect Cost Cap on NIH Research Grants • Larger Share of Research Appropriations Paying for Indirect Costs • Congressional and Faculty Concerns About “Spiraling” Indirect Cost Rates • Federal Guidance (Circular A-21) Considered Too General • Comprehensive Overhaul of Circular A-21 in 1979, Additional Changes in 1982, 1986 – Tighter Rules

15. History – 90s • Major National Controversy Over Indirect Costs • Whistleblower Allegations • Universities Accused of Including Unallowable Costs in Indirect Costs, Questionable Practices • Congressional Investigations and Hearings • “Scrub” Audits • Numerous Press Accounts -- Newspaper Articles, Cartoons, TV, Reader’s Digest

16. History – 90s (Continued) • Controversy Sparked Four Major Revision of A-21—1991, 1993, 1996, 1998 • Changes Were Extensive and Far Reaching • Cap on Administrative Costs – 26% MTDC • Cost Accounting Standards and Disclosure Statement • Tighter Rules on Allocation of Indirect Costs Pools • Restricted Direct Charges for Admin. & Clerical Salaries, Other Administrative Costs • Numerous Other Changes

17. History – 2000s • Was Fairly Quiet, But Some Recent Agitation • DOD 2008 Appropriations – Cap on Basic Research F&A Costs • 35% of Total Costs • Equates to Approx. 53.8% Cap on Indirect Costs as a Percentage of Direct Costs • New HHS Negotiator’s Manual • Tougher Positions in Certain Areas

18. Importance to Research • F&A Costs Represent Services Essential to Research Programs • Impossible to Do Modern Research Without Them • If Sponsors Don’t Pay, Someone Else Must pay

19. Trends in F&A Rates • F&A Rate surveys by COGR show that university F&A rates have held relatively constant at approximately 51 percent for at least the past six years. • F&A payments as a percentage of total funds awarded by NIH was stable at 28.5% for fiscal years 2003 - 2005, according to a recent study by the Government Accountability Office.

20. Comparative F&A Costs • Although no recent studies directly compare the costs of research conducted at universities with private industry, a 1996 study by Arthur Andersen & Co. showed that universities spend less on F&A costs than industry (31 percent of total costs versus 36 percent of total costs).

21. University Contribution to the Cost of Research • A RAND study in 2000 estimated that universities were subsidizing between $700 million and $1.5 billion of F&A costs associated with federal projects as a result of various agency limitations, cost sharing requirements, and other related factors. • Universities are the second leading source of funds for university-based research. The FY06 NSF Survey shows that universities contribute more than $9 billion of their own funds to support their R&D activities, or nearly 20 percent of their total research and development expenditures.

22. Lessons Learned • Principles are Great - if: All Parties Agree They are Consistent They are Consistently Applied