Research Policy Analysis and Coordination
Background on the Indirect Cost Rates Used at the University
The successful negotiation of indirect cost rates involves the calculation of the actual costs of all University activities. Institutions of higher education must support indirect cost rate proposals to the federal government with cost accounting data per 2 CFR § 200.
Each campus has a federally-negotiated rate agreement in place for the purpose of recovering indirect costs primarily from federal agencies. Federal agencies are required per 2 CFR § 200 to apply these agreements to sponsored projects using federal funds.
These federally-negotiated rate agreements, which are usually effective for a period of one to five years, contain indirect cost rates to be used for organized research, instruction, other sponsored activities, and other institutional activities as well as any escalations of these rates (Federally-Negotiated Rates). Though its federally-negotiated rates yield less recovery than the actual full-cost recovery, the University considers our federally-negotiated rate a proxy for full cost recovery.
All federal awarding agencies are required to use the rates outlined in a federally-negotiated rate agreement. However, in special circumstances, they “may use a rate different from the negotiated rate for a class of Federal awards or a single Federal award only when required by Federal statute or regulation, or when approved by a Federal awarding agency head or delegate,” per 2 CFR § 200.414.
To put a federal rate agreement in place, the University must negotiate with its cognizant agency. A “cognizant agency for indirect costs” is “the Federal agency responsible for reviewing, negotiating, and approving cost allocation plans or indirect cost proposals developed under this part on behalf of all Federal agencies. The cognizant agency for indirect cost is not necessarily the same as the cognizant agency for audit.” 2 CFR § 200, Appendix III.C.11.
For most institutions of higher education, cost negotiation cognizance is generally assigned to either the Department of Health and Human Services (DHHS) or the Department of Defense Office of Naval Research (ONR), based on which agency provides the most funding to the educational institution. DHHS is the University’s cognizant agency.
In coordination with the Office of the President, F&A rates are prepared and negotiated by a campus, or if requested by a particular campus, UCOP Costing Policy and Analysis can prepare the proposal and negotiate indirect cost rates with DHHS on behalf of the campus. After submission of the indirect cost proposal and negotiation with DHHS for a particular campus, DHHS offers a Rate Agreement signed by an authorized DHHS representative. The Rate Agreement must then be approved and signed by the Executive Vice President - Chief Financial Officer. The fully executed agreement is returned to the cognizant agency and a copy of this Rate Agreement is returned to the campus.
UCOP has established certain UC Rates, indirect costs rates for certain classes of sponsored activities separate from federally-negotiated rates.
UC Rates were created in response to Recommendation 5 of the 2012 Indirect Cost Waiver Policies and Practices Workgroup Recommendations Report: Centrally Publish A Set Of Systemwide Minimum Rates For Specific Types Of Projects Or Sponsors Where Expectations For Cost Recovery May Differ From Standard Practices (e.g. Clinical Trials).
UC Rates have been established for, but not limited to, the following classes of sponsored activity:
The UC Rates will be posted on the RPAC website.
The University applies different indirect cost rates based on the major functions of the institution. 2 CFR § 200 Appendix III defines four types of sponsored projects or “Major Functions of an Institution” as described in Appendix III to Part 200 - Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Institutions of Higher Education (IHEs):
- Organized Research
- Other Sponsored Activities
- Other Institutional Activities
The federal government or the campus may also request additional rates for distinctive programs with special costing environments. For example, a special rate can be developed for a program located in a building paid for with federal funds or for an organized research unit which is entirely supported with federal funds. Thus, institutions will normally have separate rates for instruction, organized research, and other sponsored activities as well as for any special program for which a unique rate is requested by the federal government. The federally-negotiated rate agreements do not provide a rate for other institutional activities.
[T]he teaching and training activities of an institution. Except for research training as provided in subsection b, this term includes all teaching and training activities, whether they are offered for credits toward a degree or certificate or on a non-credit basis, and whether they are offered through regular academic departments or separate divisions, such as a summer school division or an extension division. Also considered part of this major function are departmental research, and, where agreed to, university research. (2 CFR § 200 Appendix III.1.a)
Under 2 CFR § 200, instruction activities can be for credit or non-credit courses. Research training may be included in either organized research or instruction as long as this is done on a consistent basis by the campus.
Instructional activities can include instructional or training workshops for participants not enrolled as University students. If awards for such workshops are assigned to the instructional function, then the instructional indirect cost rate should apply to them. If campuses treat such workshops as public service, the award should be assigned to an accounting function other than instruction or research, e.g., public service, and use the "other sponsored activities" indirect cost rate.
Campuses may treat sponsored work performed by University Extension (UNEX) as other sponsored activities or as instruction. However, this must be done on a consistent basis by the campus. (See 8-360.)
Organized research means:
[A]ll research and development activities of an institution that are separately budgeted and accounted for. It includes:
(1) Sponsored research means all research and development activities that are sponsored by Federal and non-Federal agencies and organizations. This term includes activities involving the training of individuals in research techniques (commonly called research training) where such activities utilize the same facilities as other research and development activities and where such activities are not included in the instruction function.
(2) University research means all research and development activities that are separately budgeted and accounted for by the institution under an internal application of institutional funds. University research, for purposes of this document, must be combined with sponsored research under the function of organized research. (2 CFR § 200 Appendix III.1.b)
Other sponsored activities means:
[P]rograms and projects financed by Federal and non-Federal agencies and organizations which involve the performance of work other than instruction and organized research. Examples of such programs and projects are health service projects and community service programs. However, when any of these activities are undertaken by the institution without outside support, they may be classified as other institutional activities. (2 CFR 200 Appendix III.1.c)
Other institutional activities means:
[A]ll activities of an institution except for instruction, departmental research, organized research, and other sponsored activities, as defined in this section; indirect (F&A) cost activities identified in [Appendix III] and assignment of indirect (F&A) costs; and specialized services facilities described in § 200.468 Specialized service facilities of this Part.
Examples of other institutional activities include operation of residence halls, dining halls, hospitals and clinics, student unions, intercollegiate athletics, bookstores, faculty housing, student apartments, guest houses, chapels, theaters, public museums, and other similar auxiliary enterprises. This definition also includes any other categories of activities, costs of which are “unallowable” to Federal awards, unless otherwise indicated in an award. (2 CFR 200 Appendix III.1.d)
The July 28, 1993 Memo to Accounting and Budget Officers from the University Budget Director and the Controller provides guidance on activities that the University considers sponsored projects and not sales and services of educational activities. While these sponsored projects may or may not be administered through the campus Contract and Grant Office, they still must include the applicable indirect cost rate to achieve full cost recovery. Some examples of such sponsored projects are:
- Nonstandardized testing
- Agreements to test a company’s drug or device
- Agricultural Marketing Board orders
- Sales of survey services (data collection and/or data analysis)
- Service to industry agreements
- Use of unique facilities when staff support or analytical services are also provided (i.e., not sold at pre-established, per unit, uniform prices for standard routines)
- Agreements with an external party to run a conference
- Educational services provided at sponsor’s site for sponsor’s personnel (e.g., through University Extension)
- Sales of consulting services not including outside consulting activity by faculty performed in their individual capacity under University Policy on Outside Professional Activities of Faculty Members (APM 025 -August 16, 1995)
- Agreements with non-University hospitals or clinics to provide medical services (e.g., scarce anesthesiology or radiology services)
Indirect costs are incurred for common or joint objectives which generally benefit sponsored projects. They cannot be specifically identified with any one particular sponsored project.
The University pools its costs in accordance with the indirect costs (F&A) categories found in Section B of Appendix III to 2 CFR § 200. (See 8-110 for definition of F&A.)
The F&A categories include:
- Depreciation for buildings and equipment;
- Interest on debt associated with buildings, equipment and capital improvements;
- Operation and maintenance of the physical plant;
- Library expenses;
- General administration;
- Departmental administration;
- Sponsored projects administration; and
- Student administration and services.
The financial data from a given fiscal year (called the base year) form the basis for an indirect cost rate proposal submitted to DHHS, which will lead to negotiated rates applicable to a stated number of future fiscal years.
Once each cost category is defined and expenses related to the activity pooled into a cost center, the costs must be allocated to all direct activities of the university/campus. The amounts in each category of indirect costs incurred by the University for both sponsored and non-sponsored activities are allocated to the various functions of research, instruction, other sponsored activities, and other institutional activities. This allocation process is carried out in accordance with the general guidelines found in Appendix III to 2 CFR § 200, Section C.2.
Depreciation expenses for buildings, capital improvements to land and buildings, and equipment are calculated on the basis of acquisition costs of the assets involved and their functional use.
Interest on debt associated with buildings, equipment, and capital improvements is based on information provided by the Corporate Accounting Office.
Expenses for operation and maintenance of the physical plant are taken from the Financial System.
Expenses for library use (including book purchases) are taken from the Financial System, and should only include expenses relating to the operation of campus-wide and branch libraries. Typically, departmental libraries are not included in the library cost pool.
Expenses for general administration are extracted from the institutional support expenditures shown in the Financial System.
Departmental administration cost pools include administrative expenses incurred by Dean’s Offices and academic departmental administration. Under Appendix III to 2 CFR § 200B.6.(2), faculty administrative effort is now a fixed component of departmental administration elements.
Expenses for sponsored projects administration consist of the expenses of separate departments or organizations whose sole function is the administration of sponsored projects. These are typically units that handle pre- and post-award administration including compliance committee expenses such as conflict of interest, and human and animal subject offices. With limited exceptions, sponsored project administration within a department is normally viewed as departmental administration.
Expenses data for student administration and services are taken from the Corporate Financial System.