The Recovery of Indirect Costs

A Necessary Source of Revenue for the Advancement of Texas Tech University

If Texas Tech University is to continue progressing toward its goal of being recognized as a major research university, we must recover and retain all of the indirect costs we earn. In order to do this, we must have the cooperation and support of the faculty. Garnering such faculty support is contingent upon their having a complete understanding of indirect costs and of the associated benefits that accrue to Texas Tech University=s research programs.

Robert M. Sweazy

Vice President for Research and Tech Transfer

What costs are involved in research?

Funded research involves two types of costs, direct costs and indirect costs. The Principal Investigator has explicit control over expenditures for direct costs, those costs that are directly related to and easily identified with his or her research project. Equipment, supplies, salaries, fringe benefits, and travel related to the project are examples of direct costs.

The concept of indirect costs, on the other hand, is a budgeting mechanism used both in private industry and in public institutions. Identifying the costs of such items as utilities, facility maintenance, and accounting and charging them to each individual project would be an almost impossible task that would further increase paperwork and the costs of conducting research. Instead, universities use indirect costs to charge to sponsors those costs that are associated with the conduct of sponsored projects, but are difficult to identify specifically with any single project. Although they are more difficult to identify, these administrative and infrastructure costs are still a very necessary component in the conduct of the Principal Investigator=s research. The Federal government refers to indirect costs as facilities and administrative costs.

The Federal government defines facilities and administrative (F&A) costs as those costs that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity. Rather than trying to bill all of these costs to each project individually, an F&A cost rate is applied to the sponsored project at the time the budget is prepared.

What makes up facilities and administrative costs?

The Federal government allows universities to be reimbursed for facilities and administrative costs associated with sponsored activities related to:

$ Depreciation and use allowances - use of buildings and equipment;

$ Operation and maintenance expenses - costs of all utilities and services such as janitorial services, security, fire protection, etc.;

$ General administrative expenses - a portion of general administrative expenses including the President=s office, business operations, legal counsel, college deans and departmental administration; sponsored projects administration and student administration and services; (Note: student administration and services costs are only applicable to Instruction and Training grants, contracts, and agreements.)

$ Library expenses - based on the proportion of user population associated with separately budgeted research.

How are F&A cost rates established?

The F&A rate is not a number that is arbitrarily selected. Negotiations of this rate between Texas Tech and the Federal government have occurred as often as annually, and as infrequently as every three years. Several steps must be completed by universities before the Federal government will approve an institution=s F&A rate. Annual operating expenses of the primary activities of the institution are distributed into the previously noted cost categories. These expenses are further distributed within each cost category among the university=s primary activities including instruction, organized research, service, and auxiliary enterprises. This information becomes the basis for Texas Tech=s proposal when it enters into negotiations with the Federal government to establish each component of, and the overall F&A cost rate. The university and the Federal government must decide what portions of the costs should be allocated to sponsored research and what portions should be allocated to the institution=s other activities.

Once an institution=s F&A cost rate has been agreed upon, Federal agencies recognize this rate and, unless prohibited by statute, accept F&A costs calculated at this rate as a part of the project budget. The agreed upon F&A cost rate is typically kept in effect for a two- to three-year period before it is renegotiated to take into account changes in the F&A costs associated with the conduct of research.

What are the components of Texas Tech=s current F&A cost rate?

Texas Tech University=s current government-approved F&A cost rate for research is comprised of the following components:

Building Use. . . . . . . . . . . . . . . . . . . . . . . 1.0%

Equipment Use. . . . . . . . . . . . . . . . . . . . . 3.5%

Operations and Maintenance . . . . . . . . . . 14.9%

Library . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%

Administration. . . . . . . . . . . . . . . . . . . . . . . 26.0%

Negotiated Rate (Percentage). . . . . . . . . 46.5%

Texas Tech=s F&A cost rate for instruction and training is the same as the indirect cost rate for research. Although our cost studies indicate that the actual F&A costs associated with instruction and training projects are much higher than for research projects, federal negotiators are generally unwilling to negotiate a separate, higher F&A cost rate for instruction and training projects.

A separate F&A cost rate of 26% also has been established for research projects that are considered off-campus research projects. Projects are considered off-campus when the activities are performed in facilities not owned by Texas Tech and to which rent is directly allocated to the project(s). The off-campus F&A cost rate does not include Building Use, Equipment Use, Operations and maintenance, and Library because projects conducted in off-campus facilities have easily identifiable site-specific costs that can be charged directly to the research project.