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: %

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 , 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