1. Facilities and Administrative Rates- What does this really mean? Louis Guin, Manager, Bearing Point Anne Feuerborn, Manager, Arizona State University April 27, 2008

2. © 2007 BearingPoint, Inc. Education and Healthcare Services 2 Overview A-21 as guidance What is F&A and why is it important? What are direct costs and total costs? Total Cost vs. Modified Total Cost F&A rate example Application of the F&A rate

3. © 2007 BearingPoint, Inc. Education and Healthcare Services 3 OMB Circular A-21 Guide to help universities properly cost projects and calculate F&A costs Circular issued by the Office of Management and Budget that contains federal cost principles. Sets basis for cost allowability Defines Direct and F&A costs Defines methodologies for allocating F&A to direct functions

4. © 2007 BearingPoint, Inc. Education and Healthcare Services 4 What is F&A? Per A-21: Costs which benefit common or joint objectives Costs which cannot be identified to a specific activity such as instruction or research project Facilities and Administrative are also called: F&A Indirect Cost Overhead expenses

5. © 2007 BearingPoint, Inc. Education and Healthcare Services 5 Examples of F&A Costs Facilities Lights, water, gas Annual cost of a building (depreciation), and its maintenance Annual cost of equipment (depreciation) Administrative Departmental support staff Office of Sponsored Projects Payroll department, Human Resources

6. © 2007 BearingPoint, Inc. Education and Healthcare Services 6 Why do we calculate F&A rates? To identify the portion of F&A costs applicable to major functions of the university Instruction Organized Research Other Sponsored Activities Other Institutional Activities To recover F&A expenditures allocable to sponsored activities

7. © 2007 BearingPoint, Inc. Education and Healthcare Services 7 Why is F&A important to you? A-21 establishes that the federal government will pay its fair share of total costs Reimbursement of the university’s investment in sponsored work is what allows the university to keep investing in its resources! If sponsors do not pay their fair share of F&A, who will?

8. © 2007 BearingPoint, Inc. Education and Healthcare Services 8 What is an F&A Rate? A percentage Ratio between indirect and direct costs Simply stated if the F&A rate is 50%: For every $1.00 spent on research 50 cents of cost is incurred by the university Why don’t we charge the sponsor 50 cents directly? F&A, because it is not directly associated with a project, is difficult to estimate project-by-project

9. © 2007 BearingPoint, Inc. Education and Healthcare Services 9 Who needs an F&A rate? Institutions that wish to be reimbursed for Facilities and Administrative costs Two methods of calculating an F&A rate Long Form- Required for institutions expending more than $10 million on Federal grants and contracts annually. Calculated rate will be higher using this method Short Form- Simpler allocation methodologies used by institutions that have smaller research expenditures

10. © 2007 BearingPoint, Inc. Education and Healthcare Services 10 Where there is indirect… there is direct Direct costs, per A-21 are: Costs that can be identified specifically to a particular sponsored project, or activity, with a high degree of accuracy Examples Salaries of a Principal Investigator and GRA’s Lab Supplies Project related travel Equipment directly purchased by the project

11. © 2007 BearingPoint, Inc. Education and Healthcare Services 11 Total Costs vs. Modified Total Cost Total costs are: Direct + Indirect Modified Total Costs: Direct + Indirect – Items not charged with F&A Modified Total DIRECT costs Direct – Items not charged with F&A Most common basis for application of F&A rate

12. © 2007 BearingPoint, Inc. Education and Healthcare Services 12 Items not charged with F&A – Section J of A-21 Common Examples: Capital Equipment purchase Participant Support Costs Scholarship/Fellowship Subcontracts >$25,000 Facilities Rental Why? Distorts the F&A rate, causes over-recovery of F&A

13. © 2007 BearingPoint, Inc. Education and Healthcare Services 13 MTDC Example Simple example of one project’s MTDC: Total Direct Costs in our budget: $130,000 Salaries/benefits: $95,000 Supplies: $5,000 Scholarships: $20,000 Capital Equipment: $10,000 Modified Total Direct Costs: = $130,000 - $10,000 - $20,000 = $100,000 MTDC

14. © 2007 BearingPoint, Inc. Education and Healthcare Services 14 Elements of the rate Base - “Directs” Main activities of the university- the business which is conducted Ex. Organized Research, Instruction, Other Sponsored (grant- funded Public Service) Rate components - “Indirects” Facilities components Administrative components These are items from which the Direct costs benefit!

15. © 2007 BearingPoint, Inc. Education and Healthcare Services 15 What does the rate itself mean? The rate is applied to the cost of a sponsored project, and is the amount of “overhead” which is recovered Example: $100,000 of salaries and supplies for research 55% Research F&A rate University recovers $55,000 for F&A costs

16. © 2007 BearingPoint, Inc. Education and Healthcare Services 16 Rate Development Steps Step 1: Create cost pools Split costs in indirect and direct Determine specific type of pool Step 2: Determine allocation basis Associating indirects with each base Step 3: Calculate the rate Add indirects associated with base Divide indirects by the base

17. © 2007 BearingPoint, Inc. Education and Healthcare Services 17 Rate development step 1: Cost Pools Costs need to be “pooled” into: Direct bases Facilities and Administrative pools

18. © 2007 BearingPoint, Inc. Education and Healthcare Services 18 Types of Direct Bases Instruction Includes Departmental (non-sponsored) research Organized Research Sponsored, or University funded initiatives Other Sponsored Projects Public Service Anything that does not fit instruction or research definition Other Institutional Activities- Auxiliaries

19. © 2007 BearingPoint, Inc. Education and Healthcare Services 19 F&A components- Facilities Building (Shell, HVAC, Walls, Floors, Cabinets etc) Depreciation Equipment (Moveable equipment) Dept. Interest (Cost of financing a structure) Operations and Maintenance (Utilities, Custodial, Environmental Safety) Library

20. © 2007 BearingPoint, Inc. Education and Healthcare Services 20 Building and Equipment depreciation Expenses 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 J.12.

21. © 2007 BearingPoint, Inc. Education and Healthcare Services 21 Interest Interest is allowable on similar newly acquired assets, but is subject to a number of conditions involving cost, federal occupancy, equity contribution, relocation of federal programs etc.

22. © 2007 BearingPoint, Inc. Education and Healthcare Services 22 Operations and Maintenance Expenses incurred for administration, supervision, operation, maintenance, preservation and protection of the institution’s physical plant The Utility Cost Adjustment is part of O&M. UCA is a 1.3 point allowance for institutions who once employed a utility cost study

23. © 2007 BearingPoint, Inc. Education and Healthcare Services 23 Library Expenses incurred for the operation of the library including the costs of books and library materials purchased for the library less applicable credits

24. © 2007 BearingPoint, Inc. Education and Healthcare Services 24 F&A Components- Administration General Administration (President, payroll, HR, Provost) Departmental Admin (College Admin, Department support staff and supplies) Sponsored Projects (Pre and post award) Student Services (usually only benefits instruction base)

25. © 2007 BearingPoint, Inc. Education and Healthcare Services 25 General Administration 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

26. © 2007 BearingPoint, Inc. Education and Healthcare Services 26 Departmental Administration Expenses incurred for administrative and supporting services that benefit common or joint departmental activities or objectives

27. © 2007 BearingPoint, Inc. Education and Healthcare Services 27 Sponsored Projects Administration Expenses are limited to those incurred by a separate organization established primarily to administer sponsored projects. Includes grant and contract administration, special security, purchasing, personnel, etc.

28. © 2007 BearingPoint, Inc. Education and Healthcare Services 28 Student Services Administration Expenses incurred for the administration of student affairs and for services to students including dean’s of students, admissions, registrar, counseling and placement, student advisors, student health and infirmary services, catalogs and commencements and convocations.

29. © 2007 BearingPoint, Inc. Education and Healthcare Services 29 Rate Development Step 2: Allocation What does it mean to allocate a cost? Choose a basis (prescribed by A-21) to distribute the F&A costs to the cost objectives they benefit In other words, the indirect costs will be matched to the direct costs that they benefit

30. © 2007 BearingPoint, Inc. Education and Healthcare Services 30 Rate Development Step 2: Allocation F&A Pools are allocated to Direct Bases in the following order: Depreciation Interest O&M G&A DA SPA Library

31. © 2007 BearingPoint, Inc. Education and Healthcare Services 31 Allocation of Facilities Components Facilities components allocate either by: Full Time Equivalent (FTE) Assignable Square Footage (ASF) Most Facilities costs allocate on the basis of ASF Library and Land Improvement (Building component) allocate based on FTE

32. © 2007 BearingPoint, Inc. Education and Healthcare Services 32 A simple F&A- Facilities component Facilities expense per year: $1,000,000 University space profile of 10,000 asf is: 5,000 ASF Instruction, or 50% Instruction 3,000 ASF Research or 30% Research 2,000 ASF Administration, or 20% Admin 1,000 ASF Operations and Maintenance 10% O&M Facilities cost for Research: $1,000,000 x.30= $300,000

33. © 2007 BearingPoint, Inc. Education and Healthcare Services 33 Allocation of Admin Components Administration components allocate on the basis of Modified Total Costs Student Services is the exception: most universities allocate only to instruction

34. © 2007 BearingPoint, Inc. Education and Healthcare Services 34 A simple F&A- Admin component Administrative expense per year: $500,000 University MTDC is: $2,000,000 Instruction is $1,000,000 or 50% MTDC Research is $1,000,000 or 50% MTDC Administrative cost for Research: $500,000 x.50= $250,000

35. © 2007 BearingPoint, Inc. Education and Healthcare Services 35 Rate Development Step 3: The Rate Take facilities and administrative costs allocated to Organized Research, divided by the Organized Research direct cost base.

36. © 2007 BearingPoint, Inc. Education and Healthcare Services 36 A simple F&A- Research Rate totals Facilities Cost: $300,000 Admin Cost: $250,000 Base Amount for Research: $1,000,000 Research Rate= $550,000/$1,000,000 = 55% F&A rate for Research

37. © 2007 BearingPoint, Inc. Education and Healthcare Services 37 Basis for various rate calculations Functions: Instruction Research Public Service Location of the function: On Campus Off Campus (usually only administrative costs, capped at 26%)

38. © 2007 BearingPoint, Inc. Education and Healthcare Services 38 F&A Rates Example Organized Research On Campus: 50% Organized Research Off Campus: 26% Instruction On Campus55% Instruction Off Campus26% Other Sponsored Activities On Campus36% Other Sponsored Activities Off Campus 26%

39. © 2007 BearingPoint, Inc. Education and Healthcare Services 39 Rate Application Shortfalls Barriers to charging the full F&A rate F&A Waivers Institution grants privileged exceptions Institution wants to foment a relationship with a new sponsor Sponsor limitations Ex. USDA 8% Ex. Department of Education 8% Ex. Foundations (common with humanities programs)

40. © 2007 BearingPoint, Inc. Education and Healthcare Services 40 Rate Application- TDC vs. MTDC TDC vs. MTDC TDC base contains more costs, thus potential for more recovery MTDC F&A rate approved by cognizant agency is based on MTDC Most Federal sponsors specifically require use of MTDC TDC Used when a sponsor has a rate limitation Usually only Non-Federal Sponsors Unless otherwise stated in a rate agreement, your institution may choose to charge the reduced rate on a TDC basis.

41. © 2007 BearingPoint, Inc. Education and Healthcare Services 41 Risks in the Rate Application Indirect vs. Direct: Cost Accounting Standards (CAS) CAS states that costs be treated consistently A-21 mentions notable exceptions where indirects can be charged directly Many universities have a mechanism to allow for the direct charging of administrators, supplies, memberships, and postage. Risk of “double charging”

42. © 2007 BearingPoint, Inc. Education and Healthcare Services 42 Questions? Thanks for attending! Contact info: Anne Feuerborn anne.feuerborn@asu.eduanne.feuerborn@asu.edu Louis Guin louis.guin@bearingpoint.comlouis.guin@bearingpoint.com