Indirect cost rates (IDC)

In order to perform research on behalf of federal agencies, universities incur a variety of costs they would not otherwise have, both leading up to and while conducting a specific research project. Indirect costs, often referred to as indirect costs, cover a portion of the university’s infrastructure and operational costs related to federally-funded research. Such shared costs encompass the maintenance of sophisticated, high-tech labs for cutting-edge research; utilities such as light and heat; telecommunications; hazardous waste disposal; and the infrastructure necessary to comply with various federal, state, and local rules and regulations.

Indirect cost payments are actually reimbursements for costs that universities have already paid for expenses incurred in conducting federally-sponsored research. Universities and the federal government both contribute to the cost of supporting the infrastructure and environment necessary to keep labs running and research advances coming. Universities typically pay many of these costs in advance, and the federal government reimburses them for part of that expense. Such shared costs include the portion of construction and upkeep of labs that are devoted to federally-sponsored research projects. These costs also include expenses such as utilities, telecommunications, radiation safety and hazardous waste disposal, security and fire protection, and liability insurance. IDC also cover the personnel, paperwork, and other costs involved in complying with various federal, state, and local rules and regulations. This includes, for example, compliance with human or animal subjects protection rules, biosecurity regulations, chemical safety rules, and regulations to guard medical research from conflicts of interest. Research could not be conducted without these necessary expenses.

No, it is not true. A university’s indirect cost rate does NOT indicate the percentage of the total federal research grant spending for indirect costs. Rather, a second calculation must be done to determine that percentage.

Here’s how it works: In order to determine the level of reimbursement, a university and the federal government periodically assess all of these shared costs and work together to figure out the appropriate federal share. The overall figure is ultimately calculated as a percentage of the amount the federal government awards for direct research costs (not a percentage of the overall funds, the figure most people see, which is a common misperception).

For example, after reviewing all of the expected costs and looking at past research projects, a university and the federal government may determine that an amount equal to 50 percent of direct research costs is appropriate for the federal government to contribute toward IDC costs. In that case, if the federal government awards a university $300,000 for the direct research portion of a grant then it also awards $150,000 for IDC costs, for a total of $450,000. These overall institutional indirect cost rates are then applied uniformly to each grant at the university to avoid the very tedious and expensive process of computing the additional costs for individual awards. (Note: In practice, the total  IDC reimbursement would likely be slightly less since certain elements of direct costs are excluded from the IDC calculation.)

Yes, universities use their own funds for research. Universities are the second leading sponsor of research conducted on their campuses. They fund nearly 20 percent of university research expenditures – significantly exceeding the combined total of state, industry, foundation, and other non-federal support which equals only about 10 percent of total support for academic research. Over the past 20 years, according to National Science Foundation (NSF) data, the university share of support for university-based research has grown faster than any other sector. Included in this amount are the costs of compliance and administration which are above the cap for which the federal government reimburses costs; universities subsidize these costs from their own financial resources.ⁱ

ⁱ NSF is working to improve the data on university R&D expenditures, which currently relies on a faulty system of institutional self-reporting. In some instances where institutions have, for various reasons, not reported this information to the NSF, they have inaccurately represented it in their data tables that the institution has not contributed any money to support research. In addition, many other institutions have been significantly underreporting the contribution they make to research.

Total IDC costs 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. Moreover, since 1991, the Office of Management and Budget (OMB) has had in place a cap of 26 percent 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). Universities are the only sector with such a cap. They are always mindful of their responsibility to be good stewards of federal resources and to contain costs to get the most out of federal research project grants.

No, this is prohibited by current OMB rules. Rules outlined in the OMB’s Circular A-21 (which governs federally sponsored research at universities) specifically requires universities to ensure the federal government does not subsidize other non-federal activity in the reimbursements it provides for indirect costs associated with the performance of federal research. Under these rules, universities must demonstrate and explain exactly how they do that and thus are held accountable. In fact, all the funds received from any source go into the IDC base, from which the rate is calculated. What this means is that additional dollars from foundations or industry go into the denominator of the rate calculation. This has the effect of lowering the final IDC rate, actually reducing the total reimbursement from the federal government.

Historically, most foundations view their grants as supporting an activity or a scientist currently doing research in an area of science that falls within the mission of the foundation, therefore supplementing existing support the researcher or university has from other sources. Until recently, the amounts of funding provided by foundations have been relatively small, compared to what federal agencies provide, for example. This is still the case for many foundations, although fairly new foundations such as the Gates Foundations have provided much larger grants, with specific project goals and expectations. While these larger organizations acknowledge the reality and necessity of IDC costs, they continue to only pay 10 or 20 percent. So most universities decide to accept such grants, knowing that the university (not the federal government) will be subsidizing the research conducted under such grants, and possibly end up with a somewhat lower IDC rate in its next rate negotiation. This is one of the key ways universities leverage their own funds to support research.

No, this is prohibited by current OMB rules which require that indirect cost reimbursements be based ONLY on research space, not on education or other university facilities. Research costs are accounted for with a great deal of care. In recent years, federal agencies have increased audits and oversight of university accounts. The government requires yearly independent audits of university accounts in accordance with government prescribed guidelines in OMB Circular A-133. OMB has tightened the rules governing accountability several times over the past 15 years. In addition, historically, most research facilities have been planned and funded by universities. In committing to a major new research facility, a university assumes all of the risk. It plans the building, raises the capital, and then constructs the facility. Only after that process is completed – and then only if the faculty can successfully compete for research dollars – does the university recover some portion of the costs already incurred through its negotiated facilities and administrative cost rate. Again, indirect cost payments are actually reimbursements for allowable research expenses already paid for by universities.

The percentage resulting from the IDC calculation varies from university to university because actual costs vary based on a variety of factors that include energy costs for heating and cooling, which depends upon geographic location, the age and condition of facilities and buildings, and the amount of renovation and construction needed to house certain types of research projects.

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 federal government requires a rigorous review and audit of a university’s facilities and administration expenses to ensure that the school is using the funds appropriately. The rate is reexamined at the end of that period, and upward or downward adjustments are made as warranted.

Universities have a limited number of funding sources. The primary funding sources for research universities to perform their research and educational missions are tuition, research grants and contracts, philanthropy, endowment income, and, in the case of public institutions, state appropriations. When universities are unable to recover the full allowable costs of research, they must rely on other primary funding sources to make up the difference. A cap on IDC costs might result in:

• institutions refusing to accept research awards that require significant institutional subsidy;
• the deterioration of research facilities as the risk becomes too great to invest institutional funds;
• a substandard compliance environment because institutions cannot afford to pay for mandated compliance costs; and,
• increases in tuition rates to cover costs that have been shifted to the institution.

Each of these would result in harm to not only the institutions conducting research, but the nation which would lose its competitive edge in science and innovation.

Indirect costs recovered by both public and private institutions across the nation have remained, as a fraction of total costs, flat for decades. For example, according to NIH’s FY2014 Congressional Justification, the agency’s percent of total funding going towards indirect costs has remained unchanged, at approximately 27-28% of total funding, for more than a decade.

— Prepared by the Association of American Universities and the Association of Public and Land-grant Universities – Update March 2017

According to NAU’s rate agreement, “The off- campus rate is applicable to those projects conducted in facilities not owned or leased by the University. However, if the project is conducted in leased space and lease costs are directly charged to the project, then the off-campus rate must be used. A project is considered off-campus if more than 50% of its salaries and wages are incurred at an off-campus facility. If a project is determined to be off-campus, it shall be considered wholly off-campus. Separate on and off-campus rates will not be used for a single project.”

Based on this definition, the following conditions MUST be present to use the off-campus rate:

• The project is conducted in leased space and lease costs are directly charged to the project, OR
• More than 50% of the NAU salaries and wages are incurred at an off-campus facility.

The following conditions cannot be used to justify an off-campus rate:

• Field work that is conducted in and around Flagstaff, with the ability to return to campus each day.
• Use of non-NAU temporary employees hired, e.g., for field work out of country.