- Indirect costs? What’s that?
- What is the base? Is the applicable indirect cost rate applied to all direct costs?
- Why do I want to include indirect costs in my proposal budget?
- How are the rates determined?
- Current Indirect Cost Rates
- What if a sponsor agency refuses to pay indirect costs?
Indirect costs? What’s that?
There are two basic types of project costs. Direct costs are those expenses which can be readily and specifically identified with benefitting a particular program or project. Indirect costs, sometimes called overhead, are those that are incurred for common or joint objectives and which cannot be easily identified with a particular project or grant with a reasonable degree of accuracy and without an inordinate amount of accounting. Indirect costs are real, actual expenses incurred by the university and associated with all activities of the university for facilities and administrative purposes.
What is the base? Is the applicable indirect cost rate applied to all direct costs?
The appropriate indirect cost rate is applied to a base figure known as Modified Total Direct Costs (MTDC) which is the Total Direct Costs (TDC) less:
- Capital expenditures
- Patient care charges
- Tuition remission
- Rental costs of off-site facilities
- Scholarships and fellowships
- Portion of each subgrant/subcontract in excess of $25,000
Why do I want to include indirect costs in my proposal budget?
The university, as a publicly funded institution, must conduct its activities, including sponsored projects, on a "no profit, no loss" basis. Accordingly, the university is required to cover all of the expenses associated with projects conducted for extramural sponsors.
However, direct costs in project budgets do not fully reimburse the institution for all of its costs. For example -- just to name a few items -- the salaries of those individuals involved in purchasing equipment for grant activities, payroll, inventory, or custodial services are not part of the direct costs. In addition, utilities consumed, telephone charges, general office supplies, or copying expenses are seldom included in budgets, yet those expenses are reasonable and necessary and must be borne by the institution.
The UC Regents' policy on full cost recovery imposes a duty on all university administrators and PIs to perform sponsored projects on a full cost recovery basis -- to ask for and obtain indirect costs from all sponsors. In fairness to all faculty and researchers, the full cost burden should be shared equally. Any exception reduces revenue to the University and to each campus. Full cost recovery is necessary to support the University's physical and administrative capacity to perform extramural projects.
How are the rates determined?
The rates are developed on a campus-by-campus basis, through complicated cost analyses isolating the various elements of overhead costs that can be allocated to the 3 types of sponsored activities:
1) Research; 2) Instruction (training and postdoc fellowships); 3) Other sponsored activities–including public service activities such as CE.
The rates are further elaborated according to whether the activity is on-campus or off-campus. On-or off-campus is determined by whether the University owns or pays rent for the office location for the majority of the people working on a particular award. Since our CE folks are usually located at county offices, we usually use the off-campus rates.
Off-campus rates are lower than on-campus because they don't include elements such as depreciation for buildings and equipment, operation and maintenance of the physical plant, library expenses, or student administration and services. Both off- and on-campus rates include general (systemwide and campus-level) administration, departmental administration and sponsored projects administration.
Once a campus prepares this cost analysis (called an "indirect cost proposal"), UC representatives negotiate overhead rates with our "federal cognizant agency" In our case, that's the Department of Health and Human Services (DHHS). In the negotiation, the federal auditor assesses the reasonableness of the costs presented in the analysis. We usually accept a rate several points below the calculated rate, which means UC collects considerably less than total overhead costs incurred in carrying out sponsored activities. University policy applies these rates to all sponsors, not just federal agencies, because infrastructure costs must be paid regardless of the sponsors involved. We cannot provide no-cost or low-cost facilities and services to other sponsors when full reimbursement is required from the federal government.
- Chapter 8 of the UC Contract and Grant Manual
- UC Costing Policy and Analysis: Facilities and Administration (F&A) Rates/Recovery
- UCD Rate Agreement
What if a sponsor agency refuses to pay indirect costs?
Sponsors sometimes restrict reimbursement of indirect cost to less than the full rate. An exception to approved indirect cost rates may be requested for a non-profit sponsor, including domestic governmental agencies, international organizations, and foreign charitable foundations, when the sponsor limits its payment of indirect costs by statute, codified and published agency regulation or policy, and when such a restriction is a non-negotiable condition for receiving the award. The sponsor's indirect cost rate must be a bona fide restriction initiated by the sponsor and not an ad hoc restriction based on discussion with the campus. This sponsor policy exception does not generally apply to for-profit organizations or foreign government organizations. The state auditor has ruled that reductions of indirect cost rates to such organizations are a gift of public funds for private benefit as the sponsor is not reimbursing the university for the full cost of the project. Without full indirect cost recovery, the university is subsidizing the cost of the project for the sponsor.
When funding flows from the prime sponsor through an intermediary sponsor, as in the case of federal flow-through awards, then the indirect cost rate applicable to the prime sponsor should apply.
At times, the development of campus research, training or public service programs or infrastructure may best be served by accepting a sponsored award at less than the indirect cost rate normally paid by the sponsor. Such interests must be viewed as vital to a campus to the extent that funding the proposed project at a loss is more important to the campus than recovering the full indirect costs. An exception request based on campus vital interest must be signed by the VP and must include the rationale for an exception.
To the extent that indirect costs are not recoverable, the amount should be shown and stated as a university contribution to the project.
When preparing a proposal budget, always start out assuming that full indirect costs will be applied. In the event that indirect costs may be reduced or waived by exception, you might be able to increase your programmatic budget by rebudgeting from indirect to direct costs. However, if you present a sponsor with a budget that does not include indirect costs, and it turns out that indirects are applicable, you will probably end up having to reduce funds budgeted for program activities in order to cover indirect costs.
If you think an award might be subject to lower-than-standard overhead, contact the ANR Office of Contracts and Grants. We can check to determine if the university has already granted an exception for an individual sponsor’s program or if a request to waive overhead in the particular case will be successful.