Approaching the Campus Budget - Appendix

[posted October 23, 2003]

Sponsored Research: Direct and Indirect Costs

All organized research has direct and indirect costs.

(NOTE: all quotations below taken from Paying for University Research Facilities and Administration, by Charles A. Goldman, T. Williams with David M. Adamson, Kathy Rosenblatt, Rand Corporation 2000 [www.rand.org/publications/MR/MR1135.1/index.html])

“Direct Costs: Costs closely tied to a specific project are termed ‘direct costs.’ These include salaries for scientists and wages for project team members. In addition to salaries and wages, direct costs also include materials and supplies used in the course of a project. Other direct costs include travel, project-specific equipment, and subcontracts to other organizations.”

However, nothing is simple, and for the calculation of indirect costs, the federal government requires that we exclude some of the direct costs from our calculations.

“Exclusions: When projects incur costs for equipment or for payments to subcontractors, these costs must be separated from direct costs. In computing F&A rates, costs for subcontracts over a certain threshold (currently $25,000) and equipment must be separated from direct costs … . There are a few other exclusions, but equipment and sub-contracts are the most important. The direct costs minus the exclusions are called ‘modified total direct costs (MTDC).’”

The federal government now calls indirect costs facilities and administration, or F&A.

“Facilities and Administrative (F&A) Costs: F&A costs include shared expenses related to facilities or administration of the university. Office of Management and Budget Circular A-21, provides definitions for which costs are to be included in facilities and administration.”

Every university establishes a rate with the federal government that expresses the indirect costs (or F&A) as a percentage of the direct costs (or MTDC). Although complicated in detail, this process is worth understanding in general terms.

For the purposes of this calculation, university activity falls into three functional categories: organized research, departmental research and teaching, and public service. The most important elements are departmental research and organized research. From the federal perspective the difference between the two kinds of research are as follows:

“… universities pursue several functions simultaneously and with shared resources. Universities must account for faculty effort and the use of shared facilities in order to allocate these shared costs to the appropriate functions. One function is instruction-the teaching of students. Another function is organized research, which includes sponsored projects as well as any separately budgeted research activity, even if paid for with the university's own funds.

Not all research activity is part of an organized research project, though. Small projects and general scholarly work without external funding are considered part of basic faculty workload. This work, termed "departmental research," is considered part of the instructional function. Effort on both instruction and departmental research is combined for purposes of allocating shared costs.

If faculty time is contributed to a general line of research but not shared on the budget of a funded project, then it may be considered departmental research. The university pays for the direct costs of departmental research as well as any associated facilities and administrative costs, just as it does for instruction (which is combined with departmental research for accounting).

If faculty time is formally shared on a project budget, that time must be accounted for as part of organized research, even though it is not sponsored by the government. The university must bear the costs not paid by the government-both direct costs and associated facilities and administrative costs. A university's cost share on a federal project is supposed to be counted as part of the MTDC base in calculating F&A rates, even though it is not reimbursed. “[emphasis added]

The total cost of organized research, then, includes both what a sponsor pays and what the university pays for both the direct costs of the research and the indirect costs of facilities and administration allocated to organized research. A few examples may help.

Example A

Imagine a project that will cost $100,000 in direct costs and the university has an indirect cost rate negotiated with the federal government of 55%. However, the federal government excludes some costs when it calculates its rates, so the MTDC for this particular project after we subtract out equipment and other excluded costs may only be $90,000. We can only try to collect the indirect cost rate as applied to the MTDC of $90,000, so our 55% rate will actually only entitle us to claim $49,500 (55% x 90,000). However, many agencies do not pay the full negotiated facilities and administration rate, and at times exemptions to the full rate are granted. On average the Amherst campus recovers about 28% instead of the full 55%. In this example then, we would actually recover only $25,200 with the campus covering the remainder. Therefore, in Example A, the total project cost is $149,500 with the sponsor paying $125,200 and the campus paying $24,300.

Example B

Additionally, the agencies want to see cost sharing, which the university can usually present as funding some of the direct costs of the project. Let us imagine that the university is eager to get the grant of Example A so it agrees to cost share or pay with university funds $30,000 of the project’s $100,000 direct costs. Now the total direct charge covered by the Federal government is $70,000 but the MTDC is only $60,000 and the government will only consider paying the indirect cost rate as 55% of $60,000 or $33,000. However, assuming the average actual recovery rate of 28%, then only $16,800 would be recovered. Our project will again cost the university $149,500 to deliver, but the Federal agency that sponsors the project will only pay $86,000 ($70,000 of direct costs and $16,800 of indirect costs), resulting in a university contribution of $63,500.

While the federal government recognizes the full negotiated rate, in these examples the 55%, many agencies do not pay the full negotiated Facilities and Administration cost negotiated with the federal government. Some, such as Agriculture or Education pay a fixed rate of 8 percent even when the audited rate is over 50%, requiring an additional university expense for performing this research. As used in the examples above, the campus recovery rate, averaged over all sources, is 28%.

Calculating the Indirect Cost Rate (or Facilities and Administration rate)

The university goes through the following process to calculate an indirect cost rate proposal for the federal government.

First, it calculates the MTDC for all of the campus’ organized research activity, whether paid for by an external sponsor or paid for by the university from its own funds.
Second, it allocates all allowable facilities and administrative costs between organized research and other activities including public service or departmental research and instruction.
Third, the university divides the allocated facilities and administrative costs by the MTDC of organized research on campus to arrive at the institution’s proposed indirect cost rate. The government has many rules about the allocation of these facilities and administrative cost, the most significant of which is a cap on the administrative costs portion of the rate.

After the audited process of calculating a proposed rate concludes, the institution and the federal government (through one of its granting agencies) negotiates the actual rate that the university can apply to its projects, and that rate, once negotiated, holds steady for two to four years until it is recalculated again.

Rates vary among universities depending on the mix of research type (health related, engineering, laboratory science, computer science) the presence of a medical school with its research component, and the age and quality of physical facilities on campus. The process of setting these rates is often controversial and the government and universities are in constant conversation about better or more effective ways of sharing the cost of high expense and nationally significant research work. Nationally, universities of our type have indirect cost rates in the 51% range. UMass Amherst’s current rate is 55%.

Approaching the Campus Budget

I. Approaching the Campus Budget

II. Approaching the Campus Budget: Research

Appendix: Sponsored Research: Direct and Indirect Costs

Projected FY04 Campus Budget (PDF)




FY07 Budget Update Amherst 250 Plan: Step One, An Interim Report Amherst 250 Plan Financial Master Plan Budget Document Archive Home	Approaching the Campus Budget - Appendix [posted October 23, 2003] Sponsored Research: Direct and Indirect Costs All organized research has direct and indirect costs. (NOTE: all quotations below taken from Paying for University Research Facilities and Administration, by Charles A. Goldman, T. Williams with David M. Adamson, Kathy Rosenblatt, Rand Corporation 2000 [www.rand.org/publications/MR/MR1135.1/index.html]) “Direct Costs: Costs closely tied to a specific project are termed ‘direct costs.’ These include salaries for scientists and wages for project team members. In addition to salaries and wages, direct costs also include materials and supplies used in the course of a project. Other direct costs include travel, project-specific equipment, and subcontracts to other organizations.” However, nothing is simple, and for the calculation of indirect costs, the federal government requires that we exclude some of the direct costs from our calculations. “Exclusions: When projects incur costs for equipment or for payments to subcontractors, these costs must be separated from direct costs. In computing F&A rates, costs for subcontracts over a certain threshold (currently $25,000) and equipment must be separated from direct costs … . There are a few other exclusions, but equipment and sub-contracts are the most important. The direct costs minus the exclusions are called ‘modified total direct costs (MTDC).’” The federal government now calls indirect costs facilities and administration, or F&A. “Facilities and Administrative (F&A) Costs: F&A costs include shared expenses related to facilities or administration of the university. Office of Management and Budget Circular A-21, provides definitions for which costs are to be included in facilities and administration.” Every university establishes a rate with the federal government that expresses the indirect costs (or F&A) as a percentage of the direct costs (or MTDC). Although complicated in detail, this process is worth understanding in general terms. For the purposes of this calculation, university activity falls into three functional categories: organized research, departmental research and teaching, and public service. The most important elements are departmental research and organized research. From the federal perspective the difference between the two kinds of research are as follows: “… universities pursue several functions simultaneously and with shared resources. Universities must account for faculty effort and the use of shared facilities in order to allocate these shared costs to the appropriate functions. One function is instruction-the teaching of students. Another function is organized research, which includes sponsored projects as well as any separately budgeted research activity, even if paid for with the university's own funds. Not all research activity is part of an organized research project, though. Small projects and general scholarly work without external funding are considered part of basic faculty workload. This work, termed "departmental research," is considered part of the instructional function. Effort on both instruction and departmental research is combined for purposes of allocating shared costs. If faculty time is contributed to a general line of research but not shared on the budget of a funded project, then it may be considered departmental research. The university pays for the direct costs of departmental research as well as any associated facilities and administrative costs, just as it does for instruction (which is combined with departmental research for accounting). If faculty time is formally shared on a project budget, that time must be accounted for as part of organized research, even though it is not sponsored by the government. The university must bear the costs not paid by the government-both direct costs and associated facilities and administrative costs. A university's cost share on a federal project is supposed to be counted as part of the MTDC base in calculating F&A rates, even though it is not reimbursed. “[emphasis added] The total cost of organized research, then, includes both what a sponsor pays and what the university pays for both the direct costs of the research and the indirect costs of facilities and administration allocated to organized research. A few examples may help. Example A Imagine a project that will cost $100,000 in direct costs and the university has an indirect cost rate negotiated with the federal government of 55%. However, the federal government excludes some costs when it calculates its rates, so the MTDC for this particular project after we subtract out equipment and other excluded costs may only be $90,000. We can only try to collect the indirect cost rate as applied to the MTDC of $90,000, so our 55% rate will actually only entitle us to claim $49,500 (55% x 90,000). However, many agencies do not pay the full negotiated facilities and administration rate, and at times exemptions to the full rate are granted. On average the Amherst campus recovers about 28% instead of the full 55%. In this example then, we would actually recover only $25,200 with the campus covering the remainder. Therefore, in Example A, the total project cost is $149,500 with the sponsor paying $125,200 and the campus paying $24,300. Example B Additionally, the agencies want to see cost sharing, which the university can usually present as funding some of the direct costs of the project. Let us imagine that the university is eager to get the grant of Example A so it agrees to cost share or pay with university funds $30,000 of the project’s $100,000 direct costs. Now the total direct charge covered by the Federal government is $70,000 but the MTDC is only $60,000 and the government will only consider paying the indirect cost rate as 55% of $60,000 or $33,000. However, assuming the average actual recovery rate of 28%, then only $16,800 would be recovered. Our project will again cost the university $149,500 to deliver, but the Federal agency that sponsors the project will only pay $86,000 ($70,000 of direct costs and $16,800 of indirect costs), resulting in a university contribution of $63,500. While the federal government recognizes the full negotiated rate, in these examples the 55%, many agencies do not pay the full negotiated Facilities and Administration cost negotiated with the federal government. Some, such as Agriculture or Education pay a fixed rate of 8 percent even when the audited rate is over 50%, requiring an additional university expense for performing this research. As used in the examples above, the campus recovery rate, averaged over all sources, is 28%. Calculating the Indirect Cost Rate (or Facilities and Administration rate) The university goes through the following process to calculate an indirect cost rate proposal for the federal government. First, it calculates the MTDC for all of the campus’ organized research activity, whether paid for by an external sponsor or paid for by the university from its own funds. Second, it allocates all allowable facilities and administrative costs between organized research and other activities including public service or departmental research and instruction. Third, the university divides the allocated facilities and administrative costs by the MTDC of organized research on campus to arrive at the institution’s proposed indirect cost rate. The government has many rules about the allocation of these facilities and administrative cost, the most significant of which is a cap on the administrative costs portion of the rate. After the audited process of calculating a proposed rate concludes, the institution and the federal government (through one of its granting agencies) negotiates the actual rate that the university can apply to its projects, and that rate, once negotiated, holds steady for two to four years until it is recalculated again. Rates vary among universities depending on the mix of research type (health related, engineering, laboratory science, computer science) the presence of a medical school with its research component, and the age and quality of physical facilities on campus. The process of setting these rates is often controversial and the government and universities are in constant conversation about better or more effective ways of sharing the cost of high expense and nationally significant research work. Nationally, universities of our type have indirect cost rates in the 51% range. UMass Amherst’s current rate is 55%.	Approaching the Campus Budget I. Approaching the Campus Budget II. Approaching the Campus Budget: Research Appendix: Sponsored Research: Direct and Indirect Costs Projected FY04 Campus Budget (PDF)


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