Faculty researchers when preparing a proposal for the support of a research project, or for another sponsored activity, include an amount for indirect costs in the total cost of the project's budget. For many, the concept of indirect costs associated with their proposals is somewhat abstract because there seems to be no direct relationship between these costs and the activities for which support is requested. Others believe the necessity for a sponsor to provide funding for these "indirect" costs reduces the amount available to them to pay salaries and buy the necessary supplies and equipment to carry out their proposed project. While there is an acknowledgment that such costs are necessary, how these costs are determined and reimbursed through individual sponsored agreements is not always readily understood.
It is important to note the term "Facilities and Administrative" costs or "F&A" costs has recently been adopted by the Federal Government to replace the term "indirect" cots. The reason the government renamed this term was to help clarify the nature of these costs in terms that more appropriately described their purpose in support of research and other sponsored activities at colleges and universities.
We address here the more common questions that are posed often by faculty PIs about why F&A cost rates vary between universities, how our F&A cost rates compare with those of other universities, and how our F&A cost recoveries are utilized.
Fringe Rate for FY 2016 and Beyond
A rate is calculated for each of these components based on methods prescribed in OMB Circular A-21, and the total of these individual rate components results in a rate that is subject to negotiation with and approval by federal officials. There is also a rate calculated for off-campus projects and there may be separate rates calculated for research, instruction and other sponsored activities. The off-campus rate includes only the administrative components capped at 26% and is applied to those projects that are conducted predominantly in facilities not owned, leased or rented by a university. Each rate is applied to sponsored program costs on a Modified Total Direct Cost (MTDC), which includes all direct costs except equipment, capital expenditures, patient care, tuition and fees, facilities rental and the portion of subcontracts in excess of $25,000.
The F&A components mentioned previously are also referred to as F&A "cost pools". Each university must identify its F&A costs (i.e., expenditures already incurred) with the various F&A cost pools. Once all F&A costs have been accumulated in the various F&A cost pools, they must be allocated to the functions of the university (research, instruction, other university activities) according to methods prescribed in OMB Circular A-21, or by using alternative methods approved by federal negotiators.
Each university must submit a formal F&A cost rate proposal to its cognizant federal agency, which for Old Dominion University (ODU) and its fiscal agent the ODU Research Foundation (ODURF) is the Office of Naval Research (ONR). The proposal, which is based on the most recent year for which complete cost data is available, is evaluated by ONR (or other cognizant federal agency) negotiators who represent all federal agencies in negotiations with the university submitting the proposal. The negotiators' role is to determine if a university has accurately identified its F&A costs and allocated these costs in accordance with the prescribed methods. There are usually some differences in the interpretation of the rate proposal processes that lead to compromises between federal negotiators and ODURF officials in arriving at a final rate agreement. Once this negotiation is concluded, the F&A rate agreement is signed by both the cognizant agency negotiators and ODURF for a specified duration.
There is no single answer to this question. Instead, the principal differences result from the following factors:
- The size and intensity of use of a university's research facilities and buildings is the primary cause for variability of F&A costs. For example, if two universities have the same direct cost research base and one has twice as many net square feet of space assigned to research, the facilities rate component for the university with twice the net square footage will be approximately twice that of the other university.
- A university's ability to secure funds to construct, upgrade and maintain research facilities. Universities that are able to spend money to renovate existing research facilities and construct new research facilities experience a higher level of costs than universities that are unable to do so. These higher costs are reflected in their recovery rates for building use.
- The location of a university has a significant effect on the costs of facility operations. The universities that have the best combination of climactic conditions and utility rates will generally have a lower rate for facility operations.
- The "mix" of research among universities contributes to the variances in facilities rates. The cost per square foot of constructing or renovating biomedical research space is more costly than the cost per square foot of space for mathematicians, for example.
- Differences in cost recovery strategies also contribute significantly to rate variations. Many public universities are not permitted to retain recovered F&A funds within the university to further support research programs. Where these universities recover F&A costs as a budget offset, they have less incentive to fully recover their costs from sponsors and thereby less capability to fund special initiatives that support or enhance research.
- Some universities may elect to recover a given cost directly rather than as a F&A cost or vice versa. A common example of this would be employee fringe benefits.
Administrative costs are the most difficult to quantify and, consequently, they are the most criticized and questioned F&A costs. In the case of ODU, it is much easier to estimate since most of grant administration, procurement, hiring, inventory control, and federal compliance is performed by a single organization (ODURF in this case). In universities that do not have a research foundation, the administrative cost is often distributed and more difficult to quantify. They are not, however, a major contributing factor to differences in F&A rates between universities. The Federal Government has capped the amount of administrative cost recovery by revising OMB Circular A-21 language several times in recent years, even though the regulatory burden on universities continues to increase.