Costs of federal research at universities

The historic partnership between the federal government and research universities has produced tremendous return on investment through improvements in human health, transformative technologies, and the development of the world’s best research workforce. The federal government has long sponsored research at universities because innovations and new technologies help our country prosper and enhance our national security. The internet, GPS technology, touchscreen phones, and treatments for cancer and heart disease are just a few examples of the countless innovations that have resulted from federally sponsored university research. University-based research is an investment that benefits all Americans: it serves the dual functions of 1) making the discoveries that are the foundation for technological and medical progress, and 2) training the next generation of scientists, engineers, and entrepreneurs.

Typically, universities are awarded federal research funds through a competitive grant process that helps ensure the best projects receive support. Federal research grants awarded to a university comprise two essential parts: 1) direct costs and 2) indirect costs.

Direct costs

These solely support research and include costs for:

• laboratory supplies, such as test tubes and beakers;
• research equipment, such as microscopes;
• salary support for the scientists and engineers conducting the research;
• stipends for graduate students working on the research; and
• travel that may be necessary for conducting research or for sharing research results.

The bulk of federal investment is spent on direct costs and the government provides funds at the start of the research project.

Indirect costs

Universities incur significant costs leading up to and while conducting federal research projects. IDCs cover a portion of the university’s infrastructure and operational costs necessary to conduct federally-funded research. These shared costs cover a portion of:

• construction and maintenance of sophisticated, high-tech labs;
• utilities such as lighting, water, air conditioning, and heat;
• telecommunications, internet, and data storage;
• radiation safety and hazardous waste disposal;
• security for sensitive and dangerous chemicals; and
• the personnel, paperwork, and other costs needed to comply with federal, state, and local regulations.

Universities pay these expenses as they conduct federally sponsored research, and the government then partially reimburses universities for a portion of these necessary research expenses.

How are IDCs calculated?

In theory, the federal government could seek to determine the exact share of IDCs required for each individual research grant. However, given that federal agencies issue tens of thousands of grants annually, such a system would be a costly and bureaucratic nightmare. Instead, the government has developed a system that eliminates the need for repeated complex calculations.

Whether it’s the cost to maintain a lab, connect to high-speed internet, or light laboratories, what a university pays for items that fall under IDCs tend to cover a variety of projects, not just one federal research project and not even solely federal research. For example, a university may pay a $5,000 quarterly fee for hazardous waste disposal. Since only a portion of that waste is the byproduct of federal research, the government only pays for the share of the waste produced in the conduct of federally sponsored research per strict rules and limits established by the Office of Management and Budget. It would be more costly, time-consuming, and inefficient to have two separate hazardous waste disposal contracts – one for all federal research and another for everything else.

To determine the level of IDCs reimbursement, a university and the government periodically assess these shared costs and determine the appropriate federal portion. The overall figure is ultimately calculated as a percentage of the amount the government awards for direct research costs (not a percentage of the overall funds, which is a common misperception). For example, after reviewing all the expected costs and looking at past research projects, both parties may determine that an amount equal to 50 percent of direct research costs is appropriate for the government to contribute toward IDCs. In that case, if the government awards a university $300,000 for the direct costs portion of a research grant, then it also awards $150,000 for IDCs, for a total of $450,000. (Note: In practice, the total IDC reimbursement would likely be slightly less since some elements of direct costs are excluded from the IDC calculation.)

How is accountability built into the IDC reimbursement system?

Universities are mindful of the need to appropriately use federal resources and contain costs while getting the most out of research projects. In fact, it is worth noting that the total IDCs for research performed by universities are, on average, comparable to if not slightly less than other research performers, such as federal laboratories and private contractors (RAND, 2000). Moreover, since 1991, the Office of Management and Budget has had in place a 26-percent cap on the percentage of government funds that can be provided to universities to cover administrative expenses (including costs incurred by the university to comply with federally mandated regulations).

The percentage resulting from the IDC calculation varies from university to university because costs vary based on factors such as: geographic location, the condition of the research facilities, and the amount of renovation and construction needed to house certain types of research. A university’s specific percentage rate is applied to all federal grants moving forward for a three or four-year period. During that time, the government requires a rigorous review and audit of a university’s IDC expenses to ensure that the school is using the funds appropriately. The rate is reexamined at the end of this period, and adjustments are made as warranted.

The partnership: Universities and the federal government share the total cost of research

Performing research to benefit humankind is a fundamental mission of U.S. research universities. The federal government sponsors university-based research because it seeks discoveries that lead to innovations and new technologies that will advance human health, fuel economic prosperity and enhance national security. Without the federal government’s reimbursement of IDCs, universities would scale back research that may help develop the next vaccine or cure, or the next technological innovation that will create new businesses or help secure our country. Groundbreaking science at universities simply could not happen if they could not recover the costs of electricity, laboratory space, and other IDCs necessary to do research.

Universities share a commitment to transparency, to careful stewardship of taxpayer dollars, and to conducting quality research and training. While the current system of IDCs is complex, it is integral to the successful university-government partnership. Universities continue to work with the federal government to identify ways to make this process even clearer and more effective.

— Association of Public and Land-grant Universities & Association of American Universities, March 2017