Congratulations, your proposal has been funded!
These are words that every principal investigator (PI) wants to hear. But much like the lottery, the amount that glitters on signage near freeways is not the amount the investigator will receive. When the money is set up in the PI’s project cost center, a portion of the awarded amount, which is based on the university negotiated indirect cost rate, is withheld as expenses are incurred. The question from most investigators across the university research enterprise is: why?
Indirect cost – also known as Facilities & Administrative (F&A) cost or IDC – has continued to be a topic of great debate within universities because it is widely misunderstood. Many investigators do not understand how F&A costs are determined or when it is applied, along with its overall purpose in supporting research. Is it because many research offices fail to explain it adequately?
When the government or any other sponsor, issues a grant to an academic institution for a project, part of the grant funds is used to pay for the team of researchers, purchase supplies and equipment, and pay for other goods and services directly related to the project. These funds are called “direct costs.” F&A costs, however, could support any number of things across a university’s research operation, and exactly what it supports varies from institution to institution.
The question of “why does the federal government provide support for indirect costs of research?” springs up quite consistently.
Unpacking the F&A cost situation
Let’s take a look at the University of Houston. Beverly Rymer is the executive director of the Office of Contracts and Grants at UH. According to Rymer, the portion of awards that go toward general upkeep and management is 53% of the modified total direct cost (MTDC) of the award (total cost less the cost of equipment, tuition, participant cost and a portion of sub-awards).
Of the 53% that is withheld from the faculty’s award at UH, over 40% of that amount is returned to colleges and departments as “F&A cost return” to be used as discretionary funds by the units. Many faculty may not be aware of this.
“Our faculty often ask for a reduction in IDC when submitting proposals. Although they understand its purpose, not knowing where the money goes is the biggest concern,” said Cris Milligan, assistant vice president for research administration at the University of Houston. “From the PI perspective, they question why they have to pay for facilities when it’s technically been paid for.”
But faculty want to know: What are indirect costs really paying for?
In a simple internet search, you will find that many investigators throughout the academic community are worried that funds aren’t actually going toward research infrastructure. In fact, many do not have a clue where the money goes.
“As a key stakeholder in the process, research institutions can do a better job of enhancing transparency and eliminating some of the mystery around F&A cost reimbursement. Similar to the University of Houston, most research institutions post their F&A cost rate agreements on their institutional websites,” said Milligan. “Where we miss the mark is our failure to answer to the question: What does the XX% F&A cost rate really mean for our research institution?”
It is the same frustration many Americans can liken to paying taxes. Monies disappear from your paycheck and you never know what they end up funding. But different from our tax money going to the government, investigators’ funds go to the university, players on the same team who depend on each other to make the enterprise successful. So what’s the problem?
Milligan also suggests that it’s essential to accurately and transparently describe the F&A activities and their corresponding portion of the cost rate, which is necessary to conduct research at an institution. Providing clear, robust and meaningful data enhances transparency and reduces the myths and misunderstandings surrounding reimbursement of F&A costs.
Institutions such as Stanford and the University of Florida have recently published materials trying to “unpack” the discourse surrounding F&A costs as a way to get faculty to buy in.
Although concerns of how F&A monies are utilized may be university-specific, as a collective, the academic research administration has to do a better job at demonstrating the value of F&A payments to its faculty members. Talks in Washington of reducing F&A costs may further cement the belief that funds would be best served if used to cover direct research costs.
As previously explained, F&A monies are recouped for infrastructure, administrative and operational costs. Most federal agencies and sponsoring agencies pay the university for indirect costs in addition to the direct costs of a grant or award. Essentially, F&A is like a fixed, pre-tax contribution and not an expense that the faculty has to pay the university upon receipt of the award.
According to the American Association for the Advancement of Science, the percent of U.S. GDP spending on federally funded research and development annually has been stagnant or dropping for 40 years.
How are F&A rates determined?
One lingering concern is what determines how much a university receives for indirect costs on a grant.
According to the Council on Governmental Relations, “To determine the level of F&A expenses the federal government will cover, every 3-4 years, the agency responsible for setting a university’s F&A rate (either the Department of Defense Office of Naval Research or the Department of Health and Human Services) will comprehensively audit and assess these shared costs to determine the appropriate federal share based upon specific costs that have been deemed allowable expenses by the Office of Management and Budget (OMB). 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).”
Let’s say that, based on past research projects and expected costs, UH and the federal government determine that an amount equal to 50% of direct research costs is prudent for the federal government to contribute toward F&A costs. In this case, if the federal government awards UH $500,000 for direct research costs, it will also award half of that, $250,000, for F&A costs, totaling $750,000. These rates are then applied to all other university grants to avoid the inefficiency and expense of computing F&A rates for every single award.
Do universities profit from indirect costs?
There is a misconception that permeates Divisions of Research (DORs) nationwide. There’s this idea that academic institutions profit from F&A costs associated with research grants. No, universities do not profit from their F&A recoveries. Universities aren’t even fully compensated for the expenditures they cover to develop the infrastructure and support needed to conduct the research the federal government needs from them.
A recent article from Inside HigherEd confirms that, “Indirect costs are infrastructure, not gravy that gets spread around. They cover the facilities and administration that support the specific research, which could not take place without the general staff, buildings, utilities and everything else that houses the research.”
The article continues, “All this costs more than any collection
of research sponsors want to pay, even over many years. So universities lose money on indirect costs paid by NIH and every other sponsor under the sun.”
In fact, in 2015, universities contributed about $5 billion in F&A expenses that were not reimbursed by the government. Most of these expenses were not recompensed because of the OMB’s limitations on how much the government can support academic institutions for administrative and compliance related expenditures.
Transparency helps demystify F&A costs
The Council on Governmental Relations published a comprehensive guide earlier this year titled “Excellence in Research: The Funding Model, F&A Reimbursement, and Why the System Works.”
According to the guide, “Clearer language and more transparency would eliminate some of the mystery around F&A cost reimbursement. The fact is, reimbursement of F&A costs should not be a controversial concept.”
Accurate language will better communicate the details of F&A costs and will minimize potential misunderstandings and misinterpretations. Improved transparency and more detailed data will allow stakeholders to enhance communications and engage in more productive, informative discourse regarding F&A cost reimbursement.
“Current language, rather than creating a common understanding, has made the practice of requesting reimbursement for F&A costs, at times, cryptic. As such, we propose that more accurate and responsible language be used by all stakeholders and, when possible, be incorporated into official policy documents, campus communications, all publications at the federal government level, and through all media outlets and publications.”
Although F&A contribution subsidizes many research-related expenses, it’s a relatively small percentage of the actual costs that a university spends on:
- Operations and Maintenance (utilities, janitorial, security, environmental safety)
- Department Administration (the Division of Research and college-level research administrative units that endorse sponsored project proposals, accept awards and establish financial accounts)
- Sponsored Program Administration (proposal submission, grant management, grant accounting, regulatory compliance)
- General Administration (central IT, finance, risk management, HR)
- Buildings (labs and offices)
- Libraries and Research Facilities
University contributions include:
- Research buildings and laboratories
- Costs incurred above the 26% cap mandated by the federal government for the Administrative component of the F&A cost
- Startup funds and seed funding for faculty that support early career research labs and activities
- Research administrative staff
- University subsidies (mandatory cost sharing)
- Investment in physical and digital library collections and digital repository of research data and results
- Administrative and financial management tracking systems