1. Facilities and Administrative (F&A) Pools and Bases Leading Excellence in Research Costing Practices Conference October 13 - 15, 2015

2. 2 Session Presenters:  Darryl James, Director, Financial Analysis Office, UC San Diego, dljames@ucsd.edu, 858.822.5077dljames@ucsd.edu  Greg Sheahan, President, HCA Asset Management, gsheahan@hcamgt.com, 941.544.2369gsheahan@hcamgt.com  Kevin Nguyen, Manager, Financial Analysis Office, UC San Diego, hqn011@ucsd.edu, 858.822.2830hqn011@ucsd.edu

3. 3 Overview  Cost Principles, OMB Circular A-21, 2 CFR 220  2 CFR Chapter I, Chapter II, Part 200, et al. Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards - Applicable to nonfederal entities December 2014  Cost Principles found in Subpart E, Sections 200.4xx and Appendix III for Institutes of Higher Education (IHE)  Bases and Pools – Direct vs. Indirect (Facilities and Administrative) Costs  Modified Total Direct Cost Basis (MTDC)  Facilities and Administrative Cost Rate Calculation

4. 4 Federal Cost Principles, OMB Circular A-21, 2 CFR 220  Federal cost principles for determining costs applicable to grants, contracts and other agreements with educational institutions.  Provides for the federal government to bear their fair share of costs (both direct and indirect F&A costs).  Recognizes the cognizant agency concept whereby all federal agencies will accept cognizant’s negotiated rate agreements.  Except where prohibited by law or appropriation limitations.

5. 5 Federal Cost Principles OMB Circular A-21, 2 CFR 220 (cont’d)  Principles were NOT intended to impose on an institution with specific accounting practices if compliant with generally accepted accounting practices.  Not intended to restrict organizational structure or management techniques  Not intended to restrict how F&A cost revenue should be used.  New Uniform Guidance (2CFR Chapter I, Chapter II, Part 200, et al., Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards)  Combines 8 circulars into one document  Applicable to nonfederal entities December 26, 2014  Replaces OMB Circular A-21, 2 CFR 220

6. 6 The A-21 Rules Important Definitions Direct Costs = Bases = Denominator  Those costs specific to a particular sponsored project, an instructional activity, any other institutional activity  Can be directly assigned to activities relatively easily with a high degree of accuracy  Ensures that no benefiting activities (functions) are excluded when distributing F&A costs  Examples: Salaries of Researcher or Teaching faculty or Coach, Lab supplies purchases specifically for a project Facilities and Administrative Costs = Pools = Numerator  Costs incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored program or institutional activity  Examples: Electricity, Buildings, Interest, General office supplies

7. 7 The Direct Cost Bases (the denominator) Bases represent an institution’s direct cost activities:  Instruction and Departmental Research (IDR)  Teaching and training  Departmental research  Organized Research (OR)  Sponsored research  University research separately scoped and accounted for  Other Sponsored Activities (OSA)  Public/ Community service (sponsored only)  Extension Activities  Other Institutional Activities (OIA)  Auxiliary enterprises  Unallowable activities for F&A purposes

8. 8 The Direct Cost Bases (cont’d.) Issues to consider:  Unallowable costs as OIA  Activities that are ALWAYS unallowable (fundraising, commencement, entertainment, lobbying, etc.)  Expenses that are ALWAYS unallowable (alcohol, bad debt, etc.)  Unallowable scrub – the process  Cost Share as part of Organized Research Base  Verifiable cost shared expenditures  Faculty effort variations  Hard match funds  Project cost overruns or salaries over NIH cap  Imputed Cost Share

9. 9 Unallowable Scrub – The Process

10. 10 The Indirect Cost Pools (The “F” and the “A” numerator) Facility Costs – “F”  Building Depreciation  Equipment Depreciation  Interest Expense on Buildings  Operation and Maintenance  Utilities  Various O&M pools  Library Administrative Costs – “A”  General Administration  Departmental Administration  Sponsored programs Administration  Student Administration and Services 26% Cap OR 24% Alternate Fixed Allowance (OR Off-campus rate

11. 11 The Indirect Cost Pools (The “F” and the “A” numerator) Biggest changes in the UG that impact depreciation? There is an emphasis being placed on stewardship and accountability of Federally titled and funded equipment and construction. The institutions will need to make sure that their internal controls are effective and are monitoring and accounting for these costs per Federal guidelines. All references to Use Allowances, including the 2% use allowance for Buildings and the 6.67% use allowance for equipment, have been eliminated. Building Depreciation/Building Componentization Maintaining the physical facilities in the most efficient manner possible to meet the goals and mission of the institution is imperative to providing an effective environment for teaching, research and public service. The depreciation generated from the cost distribution to building shell and building service component(s) is allocated to the entire building on an assignable square foot basis. Fixed equipment depreciation may be allocated to the room where inventoried.

12. 12 The Indirect Cost Pools (The “F” and the “A” numerator) Equipment Depreciation/Food for Thought Because most institutions have moved to a higher threshold ($5,000 >) in recent years we are finding that the accounting classifications for assignment of equipment are very voluminous. A review of current accounting classifications should be reviewed and condensed for more accurate accounting and to remove too many accounting classification choices. It is my belief in most cases the lives of scientific and medical equipment continue to get shorter as research becomes more detailed and specific the lives associated with the instrumentation is limited. When institution-funded equipment is identified accurately to a room (i.e. a research laboratory), there is no disagreement that the corresponding depreciation is allocable to the function of the room (i.e. research). Acceptance of the room-by-room equipment depreciation methodology is predicated on the institution demonstrating that the location of the equipment identified to particular rooms is accurate.

13. 13 The “F” Indirect Cost Pools Building and Equipment Depreciation + Interest  Expenses are for the portion of costs related to the institution’s buildings, capital improvements to land and buildings, and equipment which are computed in accordance with section J.14 and F.2 for A-21. [Section 200.436 and Appendix III (IHE), B.2. for Depreciation; Section 200.449 and Appendix III (IHE), B.3. for Interest in Uniform Guidance]  Reconciled to Financial System Fixed Asset Detail  Interest Expense for Buildings follows building cost.

14. 14 The “F” Indirect Cost Pools (cont’d.) Operations and Maintenance (O&M) Utility cost adjustment (UCA) of 1.3 points only for Exhibit B schools [New Uniform Guidance utilizes weighted research laboratory space for ALL schools with a cap of 1.3 points (For IHE, Appendix III, B.4.c.] Interpretation?  All schools (not just the 65 on OMB-A21 Exhibit B) can add a UCA to the proposed F&A rate calculations. REUI=ratio of a laboratory energy use index (lab EUI) to corresponding index for overall average college or university space (college EUI). Values for these two indices were taken respectively from the Lawrence Berkeley Laboratory “Labs for the 21st Century” benchmarking tool.  According to the proposed language justification, the current Lab EUI is 310 kBTU/sq.ft./yr., and the current College EUI is 155 kBTU/sq.ft./yr., resulting in a ratio of 2 for research space.

15. 15 The “F” Indirect Cost Pools (cont’d.) Operations and Maintenance (O&M) Interpretation?  Sub building metering is allowed ONLY for justification of the UCA.  The allocation of the Utility Cost is to be calculated using the same methodology as building depreciation – entire building on an assignable SF methodology.  The UCA must be justified by calculations provided by the UG with a cap of 1.3 points.  Schools on OMB-A21 Exhibit B must justify the UCA that has been allowed without such justification since 1998.  Each utility (electricity, steam, chilled water) should be considered separately and determined at the building level.  Allocation of the utility cost(s) is made first at the building level before weighted to research laboratory space.  Special studies for utility cost allocations are unallowable. Single function research lab space metered separately not considered.

16. 16 The “F” Indirect Cost Pools (cont’d.) Operations and Maintenance (O&M)  Expenses incurred for administration, supervision, operation, maintenance, preservation and protection of the institution’s physical plant Normally includes:  Utilities  Repair and Renovation  Janitorial/housekeeping  Grounds maintenance  Safety and Security  Environmental safety  Hazardous waste disposal  Facility planning  Space and capital leasing

17. 17 The “F” Indirect Cost Pools (cont’d.) Library  Expenses incurred for the operation of the library including the costs of books and library materials purchased for the library less applicable credits  Standard allocation based on FTE’s  Special Library Studies

18. 18 The “A” Indirect Cost Pools General Administration Expenses (GA)  Expenses incurred for the general executive and administrative offices and other expense of a general nature which do not relate solely to any major function of the institution Normally includes:  Allocations from administrative offices that serve an entire university system  Institutional administrative executive offices  Financial Planning, budgeting, payroll, accounting  General counsel

19. 19 The “A” Indirect Cost Pools (cont’d) Departmental Administration (DA)  Expenses incurred for administrative and supporting services that benefit common or joint departmental activities or objectives. Normally includes:  Academic deans’ offices (limited to costs associated with administrative activities)  Academic departments and divisions salaries and fringe benefits attributable to administrative work  Includes department business office and administrative officers  Faculty Administrative Allowance (3.6% MTDC) for administrative work (including bid and proposal preparation) of faculty and professional personnel conducting research and/or instruction

20. 20 The “A” Indirect Cost Pools (cont’d) Sponsored Projects Administration (SPA)  Expenses are limited to those incurred by a separate organization established primarily to administer sponsored projects. Includes grant & contract administration.  Examples  VC / VP for Research  Pre-Award, Post-Award, Sponsored Projects Offices (Central and Departmental), Institutional Review Board (IRB), Institutional Animal Care and Use Committee (IACUC)  SPA is allocated to the functions performing sponsored projects based on MTDC of the sponsored projects. Usually includes:  Organized research  Sponsored instruction  Other sponsored activity

21. 21 The “A” Indirect Cost Pools (cont’d) Student Administration and Services (SAS)  Expenses are limited to those incurred for administration of student affairs and services to students  Examples  Dean of Students  Admissions, Registrar, Counseling and Placement  SAS is allocated to Instruction (by default)

22. 22 Putting the Pieces Together F&A Mechanics  Reconciliation to Financial Statements  Expenditure Detail  Fixed Asset and Depreciation Detail  Payroll Detail  Utility Detail  And many others  Record for University  Space – supplemented with use data  FTE  Statewide Cost Allocation Plans (SWCAP)  Paid on behalf of university cost by the University of California Office of the President (UCOP) at UC San Diego

23. 23 Modified Total Direct Costs (MTDC) Basis for F&A Rate Calculation and Assessment A-21 discusses the distribution basis for F&A costs and defines it as modified total direct costs (MTDC). MTDC includes:  Salaries and wages along with associated fringe benefits  Materials and supplies  Services  Travel  Subawards up to the first $25,000 MTDC excludes:  Equipment (capitalized at $5,000 and above)  Capital expenditures (buildings and assets $5,000 or greater)  Subawards in excess of $25,000  Stipends, tuition, patient care [Participant Support Costs are now a standard exclusion in UG]

24. 24 The F&A Rate Calculation Facilities “F” Administrative “A” BLDGS EQUIPINTERO&M LIBR GA DASPA SSA Indirect Cost Pools (Numerator) Space FTE MTDC MTDC MTDC MTDC Direct Cost Bases (Denominator) ORGANIZEDRESEARCH INSTRUCTION/DEPTRESEARCH OTHER SPONSORED ACTIVITY OTHER INST. ACTIVITY “F” Rate = Facilities Cost / OR Base * Include Cross Allocations + “A” Rate = Adm. Cost / OR Base ≤ 26% * Include Cross Allocations + Utility Cost Adj. (UCA) = Total F&A Rate

25. 25 Stepdown Overview

26. 26 Questions

27. 27 THANK YOU!