Developing a Better Understanding of Indirect Costs

1

• Developing a Better Understanding of Indirect
  Costs
• Presented By 
• Charlie Tardivo, Principal, Research
  Administration Consulting Services LLC Also,
  Special Consultant with BearingPoint
• Mark Daniel, Director, Partners, Inc., Special
  Consultant BearingPoint

2
Indirect Costs

• Yeswe are going to discuss the dreaded subject
  of Indirect Costs
• No green eye shades allowed
• We will try to give you a basic understanding and
  appreciation of what Indirect Costs are and the
  fact that they are REAL COSTS
• Basics on cost allocation pools
• Unallowable Costs

3
Direct Costs

• 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.

4
Indirect Costs

• Costs 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 Are Real Costs

5
Types of Indirect Costs Rates

• Provisional
• Estimated rate used until actual rate is
  determined
• Predetermined
• Rate established for period. No carry forward
  provision.
• Fixed
• Rate established for period. Over/under recovery
  is adjustment made during next negotiation.

6
Indirect Costs Are a Formula

• Indirect Expenses
• _______________________ Pooled Cost
  Rate
•  
• MTDC Base
•  

7
Indirect Costs Are a Formula

• WHERE
•  
• Indirect Expenses Costs incurred which
  cannot be identified to a specific
  sponsored program
•  
• MTDC Base All sponsored research
  expenses less certain costs (e.g.,
  equipment)
•  
• Pooled Cost Rate Rate to be used during a
  given period

8
Modified Total Direct Costs (MTDC)

• Total direct costs excluding equipment, capital
  expenditures, charges for patient care and
  tuition remission, rental costs, scholarships and
  fellowships as well as the portion of each
  subgrant and subcontract in excess of 25,000
  (regardless of the period covered by the subgrant
  or subcontract).

9
Typical Grant Budget

• Salaries 40,000
• Employee Benefits 10,000
• Supplies and Services 13,000
• Travel 1,000
• Equipment 4,000
• TOTAL DIRECT COSTS 68,000
• INDIRECT COSTS (50 OF MTDC) 32,000
• TOTAL 100,000
• Indirect Cost Calculation 50 of MTDC or 50 of
  64,000 (68,000 less 4,000)
• MTDCMODIFIED TOTAL DIRECT COSTS
• (Direct Costs Excluding equipment in this Example)

10
What Is The Process for Computing Indirect Costs
Rates

• Use audited Financial statement amounts
• Establish cost groupings
• Distribute indirect costs to benefiting
  activities
• Compute indirect cost rate

11
Distribution of Indirect Costs to Benefiting
Activities

• Must distribute to all benefiting activities
• Must be a logical method
• Must provide a reasonable cost estimate

12
Components of the Indirect Cost Rate

• Facility-Related Components
• Building Use Charge
• Equipment Depreciation
• Operations and Maintenance Expense
• Library
• Administrative Components
• General Administration
• Departmental Administration
• Sponsored Project Administration
• Student Administration and Services

13
Building Use Charge

• Source of Pool Building Capital Accounts
• Allowance Depreciation on all buildings not
  constructed with Federal Funds
• Allocation Base Net Assignable Square Feet
  (by building) (base on space utilization
  survey conducted by property office)

14
Building Use Charge (continued)

• Allocated to
• Central Administration
• Central Utilities
• Operations Maintenance
• General Administration
• Student Services
• Departmental Administration
• Sponsored Project Administration
• Library
• Instruction
• Sponsored Research
• Other Activities

15
Building Depreciation

• Building cost from financials 500,000,000
• 40 year life 2.50
• Amount to be allocated 12,500,000
• Allocation of Square Footage
• Sq.ft.
• Instruction 1,000,000
• Plant 100,000
• Research 250,000 12.5
• Library 200,000
• General Administration 125,000
• Student Services 100,000
• Department Administration 25,000
• Other Activities 200,000
• Total Square Feet 2,000,000
• Amount to be allocated 12,500,000
• Research Percentage 12.5
• Building use allocated to Research 1,562,500

16
Equipment Depreciation

• Source of Pool Equipment Inventory
• Allowance Depreciation on all University owned
  equipment
• Allocation Base Net assignable square feet (by
  Department) (based on space utilization
  survey conducted by property office)

17
Equipment Depreciation (continued)

• Allocated to
• Central Administration
• Central Utilities
• Operations Maintenance
• General Administration
• Student Services
• Departmental Administration
• Sponsored Project Administration
• Library
• Instruction
• Sponsored Research
• Other Activities

18
Moveable Equipment

• Equipment cost from financials 50,000,000
•  
• 10 year life 10
•  
• Amount to be allocated 5,000,000
•  
• Research percentage (space) 12.5
•  
• Equipment allocated to research 625,000

19
Operations and Maintenance Expense

• Source of Pool Operations Maintenance
  Accounts
• Allocation Base Net Assignable Square Feet (by
  Building) (Based on space utilization
  survey conducted by property office)
• Allocated to Central Administration
• Department Administration
• Sponsored Project Administration
• Library
• Instruction
• Sponsored research
• Other activities

20
Operation and Maintenance of Plant

• OM Expenses from financials
  20,000,000
• Allocation of Square Footage
• Sq.ft.
• Instruction
  1,000,000
• Plant
  100,000
• Research
  250,000 12.5
• Library
  200,000
• General Administration
  125,000
• Student Services
  100,000
• Department Administration
  25,000
• Other Activities
  200,000
•  Total Square Feet
  2,000,00 00
•  Amount to be allocated 20,000,000
• Research Percentage 12.5
•  
• Building use allocated to Research 2,500,000

21
General Administration

• Source of Pool Central Administration (e.g.,
  Presidents Office, Purchasing, Payroll,
  Administrative Computing)
• General Administration (e.g.,
  Audiovisual, Bursars Office)
•  
• Allocation Base MTDC of Instruction, Sponsored
  Research Other Sponsored Programs
•  
• Allocated to Instruction
• Sponsored Research
• Other Sponsored Programs

22
General Administration

• General administration cost per
  financials 15,000,000
•  
• Function MTDC
•  
• Instruction 70,000,000
• Plant 20,000,000
• Library 9,000,000
• General Administration 15,000,000
• Research 20,000,000 10
• Student Services 5,000,000
• Other Activities 61,000,000
•   200,000,000
•  
• Amount to be allocated 15,000,000
• Research Percentage 10
•  
• Amount allocated to Research 1,500,000

23
Departmental Administration

• Source of Pool
• Department and Deans Offices
  Administrative salaries and benefits as
  indicated through time and effort reporting
• Other administrative costs including
  office supplies, telephones, service contracts,
  postage, etc.

24
Departmental Administration (continued)

• Allocation Base MTDC of instruction, research
  and other activities
•  
• Allocated to Instruction
• Research
• Other activities
•  

25
Sponsored Project Administration

• Source of Pool Expenses of Grant and
  Contract Accounting and Research
  Administration Office
•  
• Allocation Base MTDC of above expenditures
•  
• Allocated to Sponsored Research
• Other Sponsored Programs
•  

26
Sponsored Project Administration

• Sponsored Project Administration 1,000,000
• Expenses per Financials 
• Allocation Percentage
•  Sponsored Research Activity 20,000,000 75
• Training Other Sponsored Prog.
  6,600,000 25
• Total Sponsored Activity 26,600,000 100
•  Amount to be allocated 1,000,000
• Research percentage 75
•  Sponsored Project Administration
• Allocated to Research 750,000

27
Library

• Source of Pool Library Accounts
•  
• Allocation Base User population statistics
•  
• Allocated to Instruction
• Sponsored Research
• Other Activities
•  
•  

28
Library

• Library Cost per financials 7,000,000
•  
• Campus Research
• User Population Statistics Population Population
•  
• Faculty 500 100
• Undergraduate Students 7,000 125
• Graduate Students 1,500 135
• Employees 1,000 140
•  
• Total 10,000 500 5
•  
• Library Allocation 350,000

29
Indirect Cost Rate Components
30
How the Allocation Process Works
31
OMB Circular A-21

• COST PRINCIPLES FOR
• EDUCATIONAL INSTITUTIONS

32
The History and Evolution of Indirect Cost Rates

• 1947 ONR reimbursed universities for indirect
  costs incurred for Navy contracts.
• 1955 DHEW used this approach to set their rate
  at 8 of Total Direct Costs (still maximum for
  Training Grants)
• 1958 NIH Raised the rates to 15
• 1958 The Bureau of Budget introduced the famous
  Circular A-21
• 1963 NIH raised the Indirect Cost Rate to 20
• 1966 The Government made a commitment to fully
  reimburse universities for the cost of federally
  sponsored research
• 1979 A-21 revision introduced the MTDC concept
• 1986 A-21 revision capped faculty administration
  costs _at_ 3.6

33
The History and Evolution of Indirect Cost Rates
(continued)

• 1991 A-21 revision capped administrative
  components (GA, DA, SPA) _at_ 26
• 1993 A-21 revision retains the 26 cap, includes
  the student services component under the cap, and
  establishes consistency requirements
• 1996 A-21 revision introduces 1) Cost Accounting
  Standards (CAS) to all sponsored agreements and
  2) raises the equipment threshold from 500 to
  5,000. Other revisions were also included.
• 1997 A-21 proposed revision introduces 1)
  limitations on research facilities construction
  costs, 2) changes the utility cost formula, 3)
  defers the elimination of cost analysis studies
  to support allocation of library costs, and 4)
  provides additional guidance on depreciation and
  use allowance.
• 1997 to present

34
A-21 Revision, October 1991

• 26 Cap on administrative components (GA, DA,
  SPA)
• Certification about unallowable costs required in
  indirect cost proposal
• New unallowables, e.g. alcoholic beverages,
  alumni activities, lobbying, trustees travel,
  etc.
• Assurances from major institutions that indirect
  cost reimbursements for facilities and equipment
  will be expended for that purpose within 5 years.
• Cant shift under-recovery of research sponsored
  by foreign government, industry, or other
  sponsors to federally funded research

35
Four Tests of Allowability

• The cost must
• Be reasonable
• Be allocable
• Be consistently treated
• Conform to any limitations or exclusions in the
  sponsored agreement

36
What Does Allowable Mean?

• An allowable cost is one that is eligible for
  reimbursement by the Federal government
• Contrast with
• permissible by the institution
• allowable by sponsoring agency
• An unallowable cost is one that is not eligible
  for reimbursement by the Federal government

37
Allowable vs. Unallowable Costs

• Fundamental Rule of Allowability
• Cost must be related to the specific activities
  supported by the grant

38
The Cost Must Be Reasonable

• A cost may be considered reasonable if the
  nature of the goods or services acquired or
  applied, and the amount therefore, reflect the
  action that a prudent person would have taken
  under the circumstances prevailing at the time
  the decision to incur the cost was made.
•  
• (A-21)
•  

39
The Cost Must Be Allocable

• A cost is allocable if the goods or services
  involved are chargeable or assignable to such
  cost objective in accordance with the relative
  benefits received or other equitable
  relationship

40
The Cost Must Be Allocable (continued)

• Subject to the foregoing statement, a cost is
  allocable to a sponsored agreement if
• It is incurred solely to advance the work under
  the sponsored agreement
• It benefits the agreement and the institution in
  proportions that can be approximated through
  reasonable methods
• It is necessary to the overall operation of the
  institution

41
The Cost Must Be Consistently Treated

• A cost is consistently treated if the sponsored
  agreement is treated in the same manner as would
  costs charged to other institutional activities.
  This means that generally accepted accounting
  principles appropriate to the circumstances must
  be applied.

42
The Cost Must Conform to Limitations or Exclusions

• Conforming costs refer to special restrictions
  placed on the grant award. A cost may pass the
  first three tests but remain unallowable simply
  because the sponsored agreement says the cost is
  unallowable.

43
A-21 Revision, July 1993

• Direct costs are those costs that can be
  identified specifically with a particular
  sponsored project relatively easily with a high
  degree of accuracy.
• Consistent treatment of cost Costs incurred
  for the same purpose in like circumstances must
  be treated consistently as either direct or
  indirect costs.
• New rules on administrative and clerical staff
  costs normally treated as indirect costs.

44
A-21 Revision, July 1993 (continued)

• Two broad categories Facilities and
  Administration
• 26 cap on administrative components retained.
  Student Services now included within cap
• Consistent treatment of costs Costs incurred
  for the same purpose in like circumstances must
  be treated consistently as either direct or
  indirect costs.
• New rules on administrative and clerical staff
  costs normally treated as indirect costs
• Predetermined rates from two to four years is the
  norm

45
Highlights of OMB Circular A-21
SECTION B.1.b (2) UNIVERSITY RESEARCH SECTION
C.4.d. ALLOCATION AND DOCUMENTATION
STANDARD SECTION D.1. DIRECT COSTS
GENERAL SECTION F.1. DEFINITION OF FACILITIES
AND ADMINSTRATION SECTION F.1.b.4 ELIMINATION
OF PREDOMINANT USE SECTION F.2. DEPRECIATION
AND USE ALLOWANCES JOINT USE SPACE SECTION
F.4.a. OPERATION AND MAINTENANCE
EXPENSES SECTION F.3. INTEREST SECTION F.5.
GENERAL ADMINSTRATION AND GENERAL
EXPENSES SECTION F.6.b. DEPARTMENTAL
ADMINSTRATION EXPENSES SECTION G.2.
DISTRIBUTION BASIS (MODIFIED TOTAL DIRECT
COSTS) SECTION G.4. PREDETERMINED RATES FOR
INDIRECT COSTS (MULTI-YEAR) SECTION G.6.
PROVISIONAL AND FINAL RATES FOR INDIRECT
COSTS SECTION G.7.a. LIMITATION ON
REIMBURSEMENT OF ADMINISTRATIVE COST (CAP)
SECTION G.8. ALTERNATIVE
METHOD FOR ADMINISTRATIVE COSTS (FIXED
ALLOWANCE) SECTION H.1. SIMPLIFIED METHOD FOR
SMALL INSTITUTIONS SECTION J.8.f.4. FRINGE
BENEFITS SECTION J.21.g. INSURANCE AND
INDEMNIFICATION (MEDICAL MALPRACTICE INSURANCE)
46
Highlights of OMB Circular A-21

• SECTION B.1.b (2) UNIVERSITY RESEARCH
• SECTION C.4.d. ALLOCATION AND DOCUMENTATION
  STANDARD
• SECTION D.1. DIRECT COSTS GENERAL
• SECTION F.1. DEFINITION OF FACILITIES AND
  ADMINSTRATION
• SECTION F.1.b.4 ELIMINATION OF PREDOMINANT USE
• SECTION F.2. DEPRECIATION AND USE ALLOWANCES
  JOINT USE SPACE
• SECTION F.4.a. OPERATION AND MAINTENANCE
  EXPENSES
• SECTION F.3. INTEREST
• SECTION F.5. GENERAL ADMINSTRATION AND GENERAL
  EXPENSES
• SECTION F.6.b. DEPARTMENTAL ADMINSTRATION
  EXPENSES
• SECTION G.2. DISTRIBUTION BASIS (MODIFIED TOTAL
  DIRECT COSTS)
• SECTION G.4. PREDETERMINED RATES FOR INDIRECT
  COSTS (MULTI-YEAR)
• SECTION G.6. PROVISIONAL AND FINAL RATES FOR
  INDIRECT COSTS
• SECTION G.7.a. LIMITATION ON REIMBURSEMENT OF
  ADMINISTRATIVE COSTS (CAP)
• SECTION G.8. ALTERNATIVE METHOD FOR
  ADMINISTRATIVE COSTS (FIXED ALLOWANCE)
• SECTION H.1. SIMPLIFIED METHOD FOR SMALL
  INSTITUTIONS
• SECTION J.8.f.4. FRINGE BENEFITS
• SECTION J.21.g. INSURANCE AND INDEMNIFICATION
  (MEDICAL MALPRACTICE INSURANCE)
•  

47
A-21 Revision, July 1993

• The salaries of administrative and clerical
  staff should normally be treated as indirect
  costs.
• Direct charging of these costs may be appropriate
  where a major project or activity explicitly
  budgets for administrative or clerical services
  and individuals involved can be specifically
  identified with the project or activity.
• Items such as office supplies, postage, local
  telephone costs, and memberships shall normally
  be treated as indirect costs.

48
Main Objectives of Changes

• Tighten rules on allowability and allocation of
  costs
• Primary focus on IDC
•  Promote greater standardization in treatment of
  costs
• Also directed primarily at IDC

49
1996 Revisions and Changes to A-21

• Extend CAS and Disclosure Statement to grants
• Increase maximum equipment capitalization level
  to 5,000
• Change cognizant agency assignments
• Eliminate most special cost analysis studies
• Require same IDC rate for entire competitive
  segment of a project period

50
1996 Changes to A-21 (continued)

• Standardize treatment of unrecovered depreciation
  when institution converts from use allowances to
  depreciation
• Add new conditions for allowability of interest
  costs
• Disallow tuition benefits for employee family
  members 

51
Extend CAS to Grants and Cooperative Agreements

• Four standards and Disclosure Statement
• Standards apply to all grants, contracts and
  cooperative agreements
• Collectively called Sponsored Agreements
• No dollar threshold for application of standards
• Disclosure Statement applies to larger schools
• All institutions receiving 25M (regardless of
  amount of individual awards)

52
Equipment Capitalization

• Change capitalization threshold to 5,000 or
  amount used for financial statements, whichever
  is less
• Issues
• Treatment of unrecovered costs of equipment
  capitalized at lower levels in prior years
• Timing of change
• Impact of change on cost recovery

53
Changes to Cognizant Agency System

• Limits cognizant agencies to HHS or DOD/ONR
• Assignments based on which agency provides the
  most funds to an institution
• Shifts major DOD schools and Princeton to HHS
• Shifts between DOD and HHS would occur after 1997
• Alternative arrangements may be worked out
  between HHS and ONR, with OMB approval

54
Special Cost Studies

• Would not allow special studies for utilities,
  libraries, student services
• Substitute standard space weighting factors for
  utilities
• Reasons
• Special studies are a source of disagreement
• Cause disparity in indirect cost rates
• More expensive to conduct than standard
  allocation bases

55
Special Cost Studies

• Would not allow special studies for utilities,
  libraries, student services
• Substitute standard space weighting factors for
  utilities
• Reasons
• Special studies are a source of disagreement

56
Same Rate for Competitive Segment of Project

• Require IDC rate in effect at start of each
  competitive segment of a project to be used for
  entire period
• Award levels can not be adjusted for rate changes
  
• Reasons
• Peer reviewers and agencies would know total cost
  to government when decision to fund project is
  made
• Make agency practices consistent

57
Conversion from Use Allowances to Depreciation

• Requires depreciation after conversion to be
  computed as if the asset had been depreciated
  over its entire useful life
• Unrecovered depreciation of prior years can not
  be recovered in the future
• More recent revisions

58
IDC Return Policies/Issues

• Common misconceptions can IDCs be returned
  or are we actually talking about incentive
• Intent of the program
• Support research
• Admin support
• Resource support
• Available funds need to be spent
  and spent wisely
• Amounts and who gets what
• Spending levelsReduce Dormant Funds

59
Sponsor restrictions on IDC

•   When a sponsor states No Overhead do they
  really mean it?
• Read the fine print
• Can you substitute direct for indirect where
  allowed
• Admin costs and staffF.6.b. applies to Federal
  programs
• Space related costs square foot cost from IDC
  proposal
•  

60
Cost Sharing

•  
• What is it and why should we care?
• What is the affect on the IDC rate?
• Set up review and approval policy and process
• Develop policy prior to base year
• Reimbursement by department

61
Other Issues

• Time and Effort Issues
• Research Base Review
•   Identify and document non research funds
• Space Issues
• Update space survey
• Targets are rooms identified as 100 research
• Compare to Time and Effort Report

62
Other Issues Contd

• Base Year strategies and planning
•   Reviews are never too early
• Where possible, begin adjustments before the
• base year
•  
• Short to Long form and SW vs MTDC 
• How to enhance IDC rates
• What support systems needed

63

• Developing a Better Understanding of Indirect
  Costs
• Presented By 
• Charlie Tardivo, Principal, Research
  Administration Consulting Services LLC Also,
  Special Consultant with BearingPoint
• Mark Daniel, Director, Partners, Inc., Special
  Consultant BearingPoint