Research Policy Analysis and Coordination
Indirect Cost Exceptions
As stated in 8-310, every effort should be made to recover all costs of extramurally-funded projects by applying an appropriate federally-negotiated rate or a UC Rate to an appropriate base. If a campus elects to use an indirect cost rate other than either of these, then an indirect cost exception is needed.
An indirect cost exception is the official authorization to accept indirect cost recovery other than what would be recovered under the appropriate federally-negotiated rate agreement or UC Rate for a given award. Each approved exception may reduce necessary financial support for critical University administrative functions and campus infrastructure.
Any reduction in indirect cost recovery must balance the University’s interests in performing the work of an extramural award and the resources the University or the campus must use to cover the lost revenue.
The authority to approve indirect cost exceptions comes from the President to the Chief Financial Officer, who has delegated to the Chancellors, to the Vice President–Agriculture and Natural Resources, and to the Vice President–Research and Innovation the authority to approve exceptions to certain indirect cost rates. See 8-130. Campuses and UCOP may redelegate this authority based on location needs.
At UCOP, the Vice President–Research and Innovation has redelegated the authority to approve indirect cost rate exceptions to the Research Policy Analysis and Coordination (RPAC) unit. RPAC is responsible for formulating University policy regarding indirect cost rate exceptions, developing the administrative procedures for submitting and reviewing exception requests, and reviewing and coordinating requests for indirect cost rate exceptions. On behalf of the UC system, RPAC may contact sponsors directly to clarify their policies on paying indirect costs.
Only those administrators who have been delegated authority to approve an indirect cost exception may authorize less-than-full indirect cost recovery. Principal Investigators are not delegated this authority. This means that Principal Investigators are not authorized to negotiate with or to accept reduced indirect cost rates from any sponsor.
The reduction of indirect cost recovery, whether imposed by a sponsor or volunteered by the University, may be a form of cost sharing if the project is not recovering its full cost.
Per 2 CFR § 200.306, voluntary committed cost sharing (e.g. reduction of indirect cost recovery) is not expected in federal funding.
Further, the National Science Foundation (NSF) has stated that the voluntary reduction of indirect cost recovery is a form of cost sharing; therefore, NSF does not allow for unauthorized indirect cost reductions. Reduced indirect costs may only be included in NSF funding requests if explicitly authorized under its Cost-Sharing Policy.
Each indirect cost exception must be recorded in the Research Enterprise Management System (REMS). An exception request should be approved before an award is accepted. For those indirect cost exceptions that require UCOP approval, the requestor should follow the process described in RPAC Guidance Memo 22-04.
The VSP list is published, and Case-by-Case Exceptions, can be requested, in the Research Enterprise Management System (REMS).
UC locations have the authority to approve most indirect cost exceptions. In cases where federal and State of California agencies do not have a sponsor policy, applicable to all grantees, to justify the reduction of indirect cost recovery. UCOP has authority to approve these exceptions using the "Special Approval" process described in 8-560.4 below.
Locations may document location-authorized IDC exceptions in REMS either at the proposal stage or upon receipt of a notice of award. Regardless of when this occurs:
- Correct IDC rates and bases should be confirmed at the time of proposal.
- Case-by-Case Exceptions should be approved before an award is accepted.
Review RPAC Guidance Memo 22-04 for details of the current practices and procedures outlined for Indirect Cost Exceptions as of 2022.
UCOP maintains a Verified Sponsor Policies (VSP) list of sponsors whose policies limit indirect cost recovery. Sponsors listed on the VSP list have been reviewed and vetted by UCOP as having legitimate policies limiting indirect cost recovery, applicable to all grantees. Campuses may use this list as part of an expedited approval process if they wish. The VSP list can be found in the REMS application.
Inclusion of a sponsor’s policy on the VSP list is prompted when a policy is verifiable, applied to all grantees, and the campuses frequently submit proposals and receive funding from that sponsor. UCOP reviews the VSP list on a periodic basis to ensure that it is current and reliable. UCOP may request campus participation in maintaining and documenting VSP records. There is no requirement to request a case-by-case exception when the VSP listing is applied.
When applied to a specific proposal or award, the VSP identifier code should be noted in quarterly reporting in the Corporate Sponsored Projects Information System (SPX).
The VSP list should be reviewed prior to requesting a Case-by-Case Exception.
University policy requires full recovery of costs for extramurally funded projects. Under exceptional circumstances, a project may recover costs other than the appropriate federally-negotiated rate or the appropriate UC Rate. Indirect cost exceptions are approved on a case-by-case basis for a specific project and are valid only at the campus of approval.
As described in 8-540 above, RPAC published a list of Verified Sponsor Policies (VSPs) in REMS. A VSP listing may be used in lieu of a Case-by-Case Exception in certain situations.
In cases where a project has a multi-campus award (MCA) to another UC campus, the participating campus (i.e., the campus receiving the MCA) may use the rate and the respective rationale in effect for the prime campus award. However, separate Case-by-Case Exceptions must be approved by the respective campuses because indirect cost exception approvals are linked to delegations of authority to each Chancellor. A campus receiving an MCA may not be forced to accept a reduction of indirect cost recovery if it does not agree to the reduction. See Chapter 8-330 for additional information on MCAs.
The copy function in REMS can be used to expedite the creation of a case-by-case exception, whether it is for an exception for an MCA or for a sponsor policy not currently on the VSP list.
Per delegations of authority, UCOP continues to approve indirect cost exceptions for federally-funded and State of California-funded projects where there is no documented IDC recovery restriction. A "documented IDC recovery restriction" means a written restriction on the recovery of indirect costs broadly applicable to a sponsor's grantees, for example in a statute or regulation, a funding opportunity announcement, or a sponsor policy. Campuses have the delegated authority to approve indirect cost exceptions for all other circumstances, but have the option to route any indirect cost exception to UCOP for review and approval consideration.
For exceptions that fall within their delegated authority, campuses shall determine their criteria for approving case-by-case exceptions. Requests to reduce indirect cost recovery should be carefully reviewed by appropriate and responsible parties and approved only in cases where the vital interests served by conducting the project outweigh the financial cost to the University, regardless of whether a sponsor proffers a policy on indirect cost recovery.
The basis for a case-by-case exception must be identified in an exception record. The basis types for an exception are:
- Sponsor Policy
- Campus Determination
- Agricultural Interest
- Special Approval
Most indirect cost exceptions arise from a sponsor’s restriction on indirect cost recovery.
When considering such an exception, the basis for approval should stem from a sponsor’s established, published policy. Sponsor restrictions on indirect cost recovery may be by statute, codified agency regulations, or program terms published in the sponsor’s solicitation or announcement.
- To assist the University in its advocacy with sponsors and the on-going curation of the Verified Sponsor Policy list, an indirect cost exception record in REMS should indicate if a sponsor policy is the reason for the exception.
- If approving an exception because of a sponsor’s restriction, it should be a bona fide restriction initiated by the sponsor and not an ad hoc restriction based on discussions with the campus.
- Any sponsor documentation of its restriction of indirect cost recovery should include all required elements needed to calculate the indirect cost recovery, including a rate and a base. Documentation should be unambiguous in describing how indirect cost recovery is calculated so that UC may recover its entitled indirect cost under a sponsor’s policy. For example, many small foundations do not clearly state an indirect cost base. Typically, these sponsors do not use the MTDC, as defined in UC’s negotiated rate agreements. Instead, they may cap the total cost of an award and permit recovery as an allocation of the Total Costs. Thus, it is necessary for the campus to seek clarification from a sponsor when there is any ambiguity.
- The State Auditor has ruled that reductions of indirect cost rates to for-profit entities and foreign governments is a gift of public funds for private benefit as the sponsor is not reimbursing the University for the full cost of the project (PDF). Without full indirect cost recovery, the University is subsidizing the cost of the project for the sponsor.
- Under certain circumstances, an exception based on sponsor policy from a for-profit corporation or a foreign government may be considered for a legitimate, general University community service, scholars’, or fellowship program sponsored by a for-profit corporation. The criteria for considering an exception for such a program would include: (1) the corporation has published an announcement calling for proposals under which grants would be awarded; (2) exceptions to University policies for the subject program, such as intellectual property language, are carefully considered and justified, specifically in light of the indirect cost rate exception, and approved by the appropriate University authority; and (3) the announcement does not require a specific deliverable to the corporation other than technical/final and financial reports. Such a program would have to be clearly distinguishable from research contracts which state anticipated outcomes in specific areas of corporate interest solicited by the corporation.
It is the responsibility of each campus to determine criteria for approving indirect cost exceptions when there is no sponsor policy supporting the reduction of the recovery.
- Despite campus-developed criteria for case-by-case exceptions, UCOP may implement special criteria for approvals for certain sponsors where it is in the interest of the University to seek a common cost recovery approach for these sponsors.
- Campus criteria should not be developed to usurp due diligence in confirming a sponsor's policy.
- Criteria may vary by campus.
Effective August 6, 2019 in a letter from UC President Janet Napolitano, "awards to the University based on grower assessments or fees on agricultural products from agricultural commodity groups are not required to include indirect cost recovery."
Such awards are typically made by an agricultural commodity group such a Marketing Order, Agreement, Council or Commission, created either by the California Department of Food and Agriculture (CDFA) or the United States Department of Agriculture. This funding may also be provided by internal CDFA programs funded by grower assessment or fees on agricultural products, and by non-profit associations and other types of entities.
When accepting an agreement where President Napolitano's letter is applicable, an indirect cost exception should be designated as "Agricultural Interest" in REMS and include a copy of the Napolitano letter (pdf) as well as a copy of the sponsor's indirect cost policy (if it permits any indirect cost recovery greater than zero percent).
In 2022, UCOP delegated authority to campuses and ANR to approve most types of Indirect Cost Exceptions except in cases where the sponsor is a State of California agency or a federal agency and the campus is unable to justify reduction of indirect costs through a sponsor policy (see 8-570 and 8-580 below). Such Special Approval exceptions must first be reviewed by campus/ANR leadership and then routed to UCOP for approval.
Such exception requests should be rare as there is a general principle that UC should not provide cost sharing, including the reduction of indirect costs, for extramurally-funded activities.
Special Approval requests must address the exceptional nature of the situation to justify the reduction of indirect cost recovery.
Where 2 CFR § 200 applies to a federal award, it is expected that UC’s federally-negotiated rate applies. Many federal programs that have valid restrictions, as defined in 2 CFR § 200, appear on the Verified Sponsored Policy (VSP) list.
When asserting that indirect costs must be reduced in a federal award, the federal agency or Pass-Through Entity (PTE) must demonstrate that it has the authority to require this reduction. Specifically, 2 CFR § 200.414(c) states:
"(1) The negotiated rates must be accepted by all Federal awarding agencies. A Federal awarding agency 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 based on documented justification as described in paragraph (c)(3) of this section."
Exceptions where there is no documented basis for reducing indirect costs require routing to UCOP for Special Approval.
For flow-through funding under 2 CFR § 300, where a PTE has made a subaward to a UC location, it is expected that UC's federally-negotiated rates be honored.
The California State University and UC have established an indirect cost recovery model for State of California funding. It is expected that State of California sponsored projects use the appropriate UC Rate for indirect cost recovery.
If a State agency has a "documented IDC restriction" limiting IDC to an amount below the UC Rate, campuses should follow their local processes for reviewing and approving the lower rate as a Case-by-Case Exception. If a State agency does not have a "documented IDC restriction," campuses must seek to apply the UC Rate.
State agencies acting as pass-through entities of federal funds are expected to use the federally negotiated rate (or the rate allowed by the federal sponsor, if the sponsor has rightfully imposed an IDC restriction), rather than the UC Rate.
A State agency may not impose limits on indirect cost recovery of federal funding under 2 CFR § 200 except where there is a statutory, regulatory, or agency head basis for that restriction as described at 2 CFR § 200.414.
See 8-560.3 Agricultural Interest for the treatment of agricultural marketing entities, some of which fall under the authority of the California Department of Food and Agriculture (CDFA).
A request for an exception to applicable indirect cost rates requires consideration of the intellectual property rights to be provided to the sponsor under the terms of the subject agreement. The campus must consider what intellectual property rights, a potentially valuable consideration, to provide to a sponsor that does not pay full applicable indirect costs to the University (See Chapter 11). If intellectual property rights arrangements requiring exceptions to University policy are desired, approvals must be secured from the appropriate University authority prior to approval of the related indirect cost rate exception. Lack of full cost recovery could lead to of a policy exception request.
Sometimes a sponsor may not allow for a campus’ approved indirect cost rate to be charged to an award, but instead provides an administrative fee or institutional allowance. This amount should be remitted as indirect costs unless the sponsor has restricted it (e.g., paying for fringe benefits on a fellowship).
If the allowance is greater than the amount recoverable as indirect costs using the approved campus rates, the excess amount may be retained by the campus and re-budgeted at the campus’ discretion.
Indirect cost exceptions are not required for awards issued by University-administered programs when those are funded by intramural funds within the University. For the purposes of this section, “intramural funds” are funds appearing on the University’s general budget, such as direct appropriations to the University of California budget by the State, as opposed to those received via a contract, grant, or other agreement with a sponsor external to the University (i.e., “extramural” funds).
If you are unsure whether the funds are intramural or extramural, you should contact the program making the award.
"Pass-through"" or "flow-through" are both terms used when funds flow from a prime awardee or prime contractor to a subrecipient or subcontractor. The federal government uses the term "Pass-Through Entity" (PTE) to refer to the party directly awarding funds to a subrecipient other than the originating federal agency.
If a campus is a subrecipient of federal funds, the campus should receive its federally-negotiated indirect cost rate from the entity providing the funds to the University (or the rate allowed by the federal sponsor, if the sponsor has rightfully imposed an IDC restriction). Uniform Guidance at 2 CFR § 200.331 requires the PTE to provide subrecipients their federally negotiated indirect cost rate (unless the federal sponsor has rightfully imposed an IDC restriction on all funding recipients).
If the campus is the pass-through entity/flow-through entity, to the extent allowed under the prime award, it should honor the subrecipient’s indirect cost rate. As required by Uniform Guidance at 2 CFR § 200.331, the campus must permit a subrecipient to receive its federally negotiated indirect cost rate when passing through federal funds, or a de minimis as defined in 2 CFR § 200.414 if no such rate exists.
Campus Principal Investigators or administrators may not unilaterally limit indirect cost recovery on an extramural award for subgrants to non-UC institutions or Multiple Campus Awards (MCAs) to other UC campuses.
Case-by-Case Exceptions apply to the period of performance of the underlying award, provided there is no material change in the project that affects the basis on which the exception was approved.
A new exception must be requested for each competitive period of the project. Since an exception addresses the amount of funding the campus is willing to forego in indirect cost recovery at the time of the submission, a new assessment of that campus’ position on the basis of additional funding in the new application must be considered by the campus and entered into REMS.
Indirect cost rate exceptions are not approved retroactively after the completion of the period of performance of the underlying award or after termination to cover expenses not paid for by the award sponsor. Such situations can include: overdrafts of the award amount, disallowed costs, sponsor default where the sponsor does not provide full payment, and withholding of payments due to non-performance or disputes.
Campuses play an active role in negotiating and preparing indirect cost rate agreement proposals. University of California Office of the President (UCOP) Costing Policy and Analysis is jointly responsible, along with campuses, for determining what information is needed to compute indirect costs. The information collected may change over time in response to federal requirements and the degree of sophistication of relevant computer systems. Indirect costs are computed in accordance with the applicable provisions of Appendix III to 2 CFR § 200.
Throughout the lifecycle of a sponsored project, campuses provide data to UCOP for analysis and reporting to key stakeholders, including to the President, the Regents, and the State of California. These data are collected three ways:
- Campuses create records in Research Enterprise Management System (REMS) to manage the approval process of indirect cost rate exceptions and capture data for each exception.
- On a quarterly basis, campuses report sponsored project proposal and award data, including data on indirect cost recovery, through the Corporate Sponsored Projects Information System (SPX).
- Extramural Funds Officers report the indirect cost rate and base applied to each award in the Corporate Financial System (CFS).