Information for Faculty and Staff About Facilities and Administrative Costs
(formerly known as Indirect Costs)

 Charging F&A Costs to Grants and Contracts

Introduction

 Most faculty and staff who have ever prepared a proposal to another organization for the support of a research project, or for another proposed activity, included an amount for indirect costs in the total cost of the project’s budget.  For many of these faculty and staff, the concept of indirect costs associated with their proposed project was somewhat abstract because there was no direct relationship between these costs and the activities for which support was requested.  Many believed the necessity for a sponsor to provide funding for these “indirect” costs reduced the amount available to them to pay salaries and buy the necessary supplies and equipment to carry out their proposed project.  While there was an acknowledgment that such costs were necessary, how these costs were determined and reimbursed through individual sponsored agreements was not always clearly understood. 

 Before we proceed any further, 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” costs.  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.

 The primary purpose of this article is to provide some general information about how these costs are grouped and subsequently allocated to the various activities of a university to arrive at a series of calculated rates.  The article will also try to answer some of the more common questions posed by our faculty and staff about why F & A cost rates vary so much between universities, how our F & A cost rates compare with those of other universities, and how our F & A cost recoveries are utilized.

 What are F & A Costs?

 As the term suggests, the costs associated with providing facilities and administrative support for the conduct of research and other sponsored activities are necessary if faculty and staff are to be successful in their efforts.  These real costs of a university are not readily identifiable with a particular project or activity but, nonetheless, are necessary to the general operation of a university and the conduct of its activities.  They include the costs of operating and maintaining buildings and grounds, equipment, the libraries, and of providing administration at the university, college and department levels.

 On the other hand, direct costs are those costs which can be identified with a sponsored project or any other university activity with relative ease and a high degree of accuracy.  They might include costs such as salaries and benefits, equipment, supplies and services, and travel.

 Can the same type of cost be either a Direct Cost or a F & A Cost?

 Yes.

 The Office of Management and Budget (OMB) Circular A-21 requires that costs incurred for the same purpose in like circumstances be treated consistently as either a direct cost or a F & A cost.  There are special situations in which costs may be incurred for the same purpose but the circumstance is not the same.  For example, the salaries of administrative personnel normally would be treated as a F & A cost since they are being incurred for the same purpose.  However, when these personnel perform project specific activities or extraordinary amounts of routine business activities associated with large projects that involve multiple investigators, they may be direct charged according to the relative time spent on the project.

 What are the components of F & A rates?

 F & A costs are divided into seven components.  They are:

• Use allowance or depreciation on buildings and campus improvements
• Depreciation of fixed and movable equipment
• Physical plant (buildings and grounds) operations and maintenance
• General administration (university)
• Department administration (includes department and college)
• Sponsored projects administration
• Libraries

 A rate is calculated for each of the above mentioned 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 and is applied to those projects that are conducted predominantly in facilities not owned, leased or rented by a university.  Each rate is expressed as a percentage of 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.

 In simple terms, how are F & A rates calculated?

 The F & A components mentioned previously are also referred to as F & A “cost pools”.  Each university must be able to 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. 

 How are F & A cost rates negotiated?

 Each university must submit a formal F & A cost rate proposal to its cognizant federal agency, which for the University of Iowa (UI) is the Department of Health and Human Services (DHHS).  The proposal, which is based on the most recent year for which complete cost data is available, is evaluated by DHHS (or other cognizant 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 university 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 the university.  Federal negotiators prefer to negotiate rate agreements for multiple years.  This type of negotiated rate settlement provides a greater degree of assurance for both the government and universities as to the general level of future F & A funding that can be estimated for budget purposes. 

 Why do F & A cost rates vary so much from one university to another?

 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.
  
• 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.  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.

 How does the UI’s F & A rate compare with that of other universities?

 The UI’s current on campus research rate is equal to the national average of public institutions.

 Does the UI receive full reimbursement for its F & A costs?

 No.

 Most universities calculate a F & A cost rate greater than the negotiated F & A cost rate.  The UI has historically accepted some reduction of its calculated rate in the interest of reaching a prompt agreement with federal negotiators. 

 Many federal programs either do not provide F & A funds or limit the F & A reimbursement to a prescribed rate such as 8%.  A good example of the former would be conference grants, while a good example of the latter would be training grants.  Most non-corporate private sponsors also have policies limiting F & A reimbursement to a prescribed rate.

 Universities are also asked to cost share both direct and F & A costs under many sponsored agreements as a way to show their commitment to a project.   

 Aren’t F & A costs taking up an increasing portion of the total federal research budget?

 No.

 F & A costs expressed as a percentage of total research costs have not changed appreciably in the last two decades. 

 How are the UI’s F & A fund recoveries utilized? 

 It is important to note the term “recoveries” in this context refers to recapturing F & A costs that have already been incurred, not those to be incurred in the future.  Nonetheless, many universities have established policies to return a portion of the F & A cost recoveries to the faculty or department in which the funded research occurs.  Other universities (primarily state universities) must apply recovered F & A costs as a budget offset (i.e., reduction) in accordance with their states’ policies. 

 The UI must include an estimate of its F & A cost recovery as a part of its General Fund budget request to the Board of Regents.  This estimate does not include that portion which is returned to those campus operating entities (e.g, UIHC, Oakdale campus) that pay for certain F & A costs from their operating budgets.  In addition, each year, the UI is required to fund salary increases related to the F & A portion of the General Fund budget from F & A cost recoveries.  The combination of the money received from state appropriations, tuition and fee income, and F & A cost recoveries comprises the general operating budget of the University and is allocated through the annual budget process to all departments. 

 A portion of the allocated budget is reserved for the support of various research initiatives under the auspices of the Vice President for Research.  In addition, there are some significant annual allocations of funds as well as a number of special funding requests for new initiatives, bridging funds and emergencies that are approved by central administration officials to support and enhance the research enterprise.  Examples of F & A cost recoveries being returned directly to the campus include: 1) returning a percentage of the total F & A costs recovered, by college and department, each year to the Deans for reallocation and, 2) returning a percentage of the F & A costs recovered as the result of conducting clinical trials to the applicable departments for reallocation. 

 Summary

 Facilities and administrative (F & A) costs are an important element of a university’s overall costs of research and contribute to its success as a research institution.  They are subject to the rigid definitions and processes outlined in OMB Circular A-21 developed and refined by federal officials over many years in an effort to control their portion of the total federal research budget.  The rate calculation and negotiation process assures that universities are fairly and equitably reimbursed for their F & A costs incurred under federally funded projects.  However, both federal and private sponsors impose limitations on the reimbursement of F & A costs, thus  ensuring that universities cost share a portion of its F & A costs.  F & A cost rates can vary significantly from one university to another because of: 1) the size and intensity of use of a university’s research facilities, 2) its ability to obtain financing to construct new research facilities or to renovate existing research facilities, 3) its location and the cost of its utilities, 4) its mix of research, 5) its cost recovery strategies and, 6) its treatment of costs as either direct or F & A.  The UI’s F & A cost rates compare very favorably nationally and with the top research universities in the country.  Finally, the UI is subject to state restrictions on the use of F & A cost recoveries, but is able to effectively utilize its financial resources to support and enhance research.

 Faculty and staff who may have more questions about F & A costs are encouraged to contact any of the following individuals: Kirby Tenhulzen, University Financial Analyst, (33)5-0083; , Audra Haddy,Manager, Grants/Contracts Accounting, (33)5-0827, or Twila Fisher Reighley, Assistant Vice President for Research and Director of the Division of Sponsored Programs, (33)5-2123.

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