Indirect Cost Accounting: Principles and Policies The California Institute for Climate Solutions Public Workshop on UC’s Proposal December 12, 2007 Arthur Bienenstock Stanford University

Indirect (F&A) Costs – Definitions OMB Circular A-21 “Direct costs are those costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy.” “F&A costs are those that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity.”

Indirect Costs – Some Examples Utility costs – electricity, heat, water Environment, Health and Safety Depreciation of shared research equipment Research share of accounting, procurement, human resources Interest on loans for construction or renovation of research facilities

Indirect Costs are Important for Research Cannot do modern research without these services Costs are real and carefully audited by the federal government –Federal reimbursement rate is typically less than needed to cover indirect costs of research Formally acknowledged by White House Office of Science and Technology 2000 report, Analysis of Facilities and Administrative Costs at Universities Formally acknowledged by auditors of Stanford

How Should Indirect Costs Be Funded? Divert funds from education, financial aid, etc.? Increase tuition? State pays parts of them directly for public universities –Reduced federal indirect cost reimbursement rate Research sponsor reimburses at federal indirect cost rate as part of research funding –Most fair and appropriate –Advocated by universities –Precedent – California’s Breast Cancer Research Program –Reduces administrative costs compared to separate rate

Confusion on Rates Federal IDC rate is NOT a percentage of total costs 50% rate is not 50% of total cost Total cost = Direct cost + (rate x Dir. Cost) $150 total = $100 Dir + $50 IDC 50% IDC rate is 33.3% of total costs Stanford 58% rate is 36.7% of total costs

Consequences of Arbitrarily Low Indirect Cost Reimbursement Rates NATIONAL INSTITUTE FOR FOOD AND AGRICULTURE –REPORT OF THE RESEARCH, EDUCATION AND ECONOMICS TASK FORCE OF THE UNITED STATE DEPARTMENT OF AGRICULTURE - July 2004 “…overhead reimbursement to institutions that receive NRI grants is so low that many institutional leaders discourage their scientists from applying for them. As a result, many scientists interested in agriculture prefer projects that receive funding from NIH or NSF.” (NRI is USDA’s National Research Initiative, the flagship of its research programs)

Conclusion Reimburse indirect research costs at the federally negotiated indirect cost rate