An Explanation of Facilities and Administrative Costs »

Introduction

Questions

1. What is the distinction between direct costs & facilities and administrative (F&A) costs?
2. What is the origin of the facilities and administrative cost concept?
3. Have the guidelines for the calculation of facilities and administrative costs remained fixed?
4. What are Cost Accounting Standards and how do they apply to sponsored agreements?
5. How is the overall facilities and administrative cost rate for sponsored research calculated?
6. How is the total facilities and administrative cost (TFAC) calculated?
7. What is the process for negotiating the final facilities and administrative cost rate?
8. Which expenditures are not allowable in cost pools according to revised Circular A-21?
9. What are the typical elements of a sponsored research project?
10. Why should a sponsored agreement pay facilities and administrative costs?
11. What are facilities and administrative cost charges to a sponsored agreement actually paying for?
12. What causes the variance in facilities and administrative cost rates between institutions?
13. What are the facilities and administrative cost rates at other research institutions?
14. Is the facilities and administrative cost rate the same across all A&M System Components?
15. Should the facilities and administrative cost rate be the same for all researchers at one institution?
16. How does funding from the state of Texas fit into the picture?
17. How important are facilities and administrative cost reimbursements to the A&M System?

Conclusion

Charts

I The Facilities & Administrative Cost Rate Formula
II Representative Unallowables
III Typical Sponsored Research Budget
IV Expenditures Allowed as F&A Costs
V New or Revised Federal Regulations Since 1988
VI Negotiated F&A Cost Rates at the Top Fifteen Research & Development Universities
VII Comparison of F&A Cost Components

 Introduction

This brochure is designed to provide background information to the components of The Texas A&M University System on facilities and administrative costs. Facilities and administrative costs (F&A costs) were historically referred to as indirect or overhead costs. This discussion contains excerpts from A Primer on Indirect Costs compiled by the University of Washington. It has been revised for use by the A&M System. The May 1996 revisions by Congress to the Office of Management & Budget (OMB) Circular A-21 have been incorporated into this brochure.

The brochure includes a definition of F&A costs, a history of F&A cost funding, a brief description of how F&A cost rates are calculated, and an explanation of how F&A cost reimbursement provides significant funding for the infrastructure and administrative activities necessary to carry out the A&M System's research programs.

 1. What is the distinction between direct costs and facilities & administrative (F&A) costs?

Direct costs are those costs which can, with relative ease and a high degree of accuracy, be identified specifically with a particular sponsored project. By contrast, F&A costs are those costs that are incurred for common or joint objectives. They cannot be identified readily and specifically with a particular sponsored project or instructional activity. F&A costs involve resources used mutually by different individuals and groups, making it difficult to precisely assess each user's share. Direct costs are easily assigned to a specific research project and paid by its direct sponsored agreement funding.

F&A costs involve resources used mutually by different individuals and groups, making it difficult to precisely assess each user's share.

In some cases it is easy to make this distinction. For example, if a researcher has to buy a chemical for a specific experiment, then that clearly is a direct cost to the sponsored agreement. On the other hand, a researcher's use of electrical power, water and other utilities, or the services of the purchasing and accounting offices, are not normally charged directly. In most circumstances, installing individual meters to monitor usage levels of electricity and carrying out the accounting and billing functions would not be cost effective.

Attributing an appropriate F&A cost amount for the use of space can be even more difficult. If, as is typical, a building houses dozens of researchers who are involved individually and collectively in teaching, research, public service and other functions, determining the building costs that should be attributed to a particular faculty member's research project may not be practical. In addition, each faculty member might have several sponsored agreements, which may use common space for different purposes. Although one could imagine a means of attributing a cost for the repair of a section of the roof (which may last 20 to 30 years) to a specific sponsored agreement, it has generally been agreed that using a macroscopic and statistically averaged method is much more practical and cost effective. This has been the accepted practice for over three decades and is accomplished by the allocation of use allowance to direct activities.

Regardless of whether a cost is categorized as a direct or as an F&A cost, consistent treatment must be given to similar costs for the same purpose.

 2. What is the origin of the facilities and administrative cost concept?

Federally funded research is a prominent feature at all major American research universities today. Prior to World War II, however, federal support for research as we currently know it was virtually nonexistent. The situation changed dramatically during the war as the federal government, initially through the Office of Scientific Research and Development, invested heavily in the discovery and development of new technological tools to support the war effort. Successes achieved by the scientific, medical, and engineering communities at American universities created a new awareness of the potential of university-based science and technology.

During and after the war, the Office of Naval Research (ONR) engaged university faculty members to carry out contract research for special projects. By 1947, ONR began to formalize such funding programs. In the process, the issue of institutional costs (now referred to as F&A or indirect costs) was addressed. It became apparent that a successful university-based research infrastructure could expand and improve only if the costs incurred in connection with these Navy contracts -- beyond the obvious direct costs of research -- were reimbursed. ONR formally acknowledged the legitimacy of establishing different F&A cost elements. They recognized that when reimbursing an institution for a given project, they had to take into account whether many or only a few capital facilities would be required, whether substantial or token utility costs would be incurred, and so forth. Despite ONR's formal acknowledgment of these F&A cost principles, the practice in the early years was to provide a flat rate reimbursement for F&A costs. Nevertheless, discussions of this issue continued between universities and the federal government.

Despite ONR's formal acknowledgment of F&A cost principles, the practice in the early years was to provide a flat rate reimbursement for F&A costs.

In 1958, a formal and extensive set of guidelines for determining F&A costs was issued as Bureau of the Budget Circular A-21. This circular stated that costs had to be justified according to a set of formal criteria. Methods had to be developed for distributing the costs between instruction and research. Additionally, adequate documentation had to be provided and certain costs were declared unallowable. Prior to 1958, the Department of Health, Education and Welfare (DHEW) had also acknowledged the ONR philosophy on F&A costs, but restricted recovery of F&A costs by setting an upper limit of 8%. Today this is still the mandatory rate for most National Institutes of Health (NIH) training grants. In 1958, the general rate for NIH was fixed by law at 15%, then raised to 20% in 1963. In 1966, the government removed the F&A cost ceiling and announced that, henceforth, federal policy would be to reimburse universities fully for the F&A costs incurred in conducting funded research projects. At the same time, mandatory cost-sharing language was instituted in the DHEW Appropriations Act, requiring that federally funded research be augmented with support from the university. At many institutions, including the A&M System, this cost sharing requirement has been satisfied by showing that a portion of faculty, staff, and graduate student time is devoted to the sponsored agreement but not reimbursed by federal sources. The guidelines in Circular A-21 provided a mechanism for universities to receive reimbursement for their costs, but the guidelines also imposed new compliance standards requiring detailed documentation.

 3. Have the guidelines for the calculation of facilities and administrative costs remained fixed?

Circular A-21, the federal guideline for calculating F&A costs, was revised six times between 1961 and 1976. In 1979, protracted negotiations among OMB (Office of Management and Budget, formerly the Bureau of the Budget), federal agencies and universities led to a major revision of Circular A-21. The government had been dissatisfied with the lack of uniformity in costing methods and documentation of salary charges. The universities hoped to get a clearer definition of allowable costs to protect themselves from unreasonable interpretation of the guidelines by government officials and the threat of future audit disallowances. The 1979 revision increased reporting requirements and reduced institutional flexibility. It also introduced the concept of Modified Total Direct Costs (MTDC) as the standard basis for calculating F&A costs (MTDC is further explained in Question 5).

In 1979...universities hoped to get a clearer definition of allowable costs to protect themselves from unreasonable interpretation of the guidelines by government officials and the threat of future audit disallowances.

Although revisions to OMB Circular A-21 were negotiated between government cost accounting experts and university counterparts from the mid-1960s through the 1970s, the Administration budget requests during the 1980s attempted to use regulatory language to modify cost principles. In 1983 the Department of Health and Human Services (HHS, the new name for DHEW after the Department of Education was established separately) proposed a ceiling for F&A costs. In 1985, HHS requested that F&A cost rates be frozen at their 1985 levels. In 1986, the Assistant Secretary for Management and Budget at OMB and the Deputy Associate Director for Health Programs at HHS teamed up to propose a limit of 20% for recovery of administrative costs.

While none of these attempts was approved by Congress, the December 1986 revision of Circular A-21 did set a 3.6% fixed allowance for faculty administrative costs, establishing a precedent for capping a component of the F&A cost rate.

Increasing budget pressures, demands from the research community for increased funding, revelations of cost-accounting errors, and the recognition that the federal guidelines are ambiguous renewed earlier efforts to limit F&A cost reimbursements and resulted in increased federal scrutiny of F&A costs at universities. This led to new restrictions and revisions of Circular A-21 in 1991, 1993 and again in 1996. The 1993 revision included a 26% cap on administrative cost components (General Administration & General Expenses, Departmental Administration, Sponsored Projects Administration, and Student Administration). Additionally, the 1996 revision applied four Cost Accounting Standards to educational institutions. It also required the submission of a Disclosure Statement by institutions meeting specific criteria.

 4. What are Cost Accounting Standards and how do they apply to sponsored agreements?

Cost Accounting Standards are a set of principles that are generally accepted and universally practiced. The 1996 revision of Circular A-21 extends four Cost Accounting Standards to all sponsored agreements. These standards were adopted to ensure that the federal government bears only its fair share of the total costs of a sponsored agreement. Universities must adhere to the following four Cost Accounting Standards:

Consistency in Estimating, Accumulating, and Reporting Costs: This standard ensures that each university's practice for estimating costs for a proposal is consistent with cost accounting practices used by the university in accumulating and reporting costs.

Consistency in Allocating Costs Incurred for the Same Purpose: This standard requires that each type of cost be allocated only once and on only one basis to any sponsored agreement.

Accounting for Unallowable Costs: This standard establishes guidelines for the identification and consistent application of costs specifically described as unallowable.

Consistency in Using the Same Cost Accounting Period: This standard provides criteria for the selection of the time periods to be used as cost accounting periods for sponsored agreement cost estimating, accumulating and reporting.

The 1996 revision also requires certain large universities to disclose their cost accounting practices by submission of a Disclosure Statement (DS-2). The A&M System is among those who must comply with this new regulation. The DS-2 is a description of the institution's cost accounting practices. It is prepared by the institution and filed with its cognizant federal agency. It is intended to establish a clear understanding of practices, under generally accepted accounting principles, that the institution follows.

 5. How is the overall facilities and administrative cost rate for sponsored research calculated?

A formalized process approved by the federal government in Circular A-21 (and consistent with generally accepted accounting principles) is used to determine the F&A cost rate for sponsored research. First, all F&A costs are assigned to one of seven cost pools (see Question 6). Then a portion of each is allocated to the research enterprise according to standard accounting practices. Adding these allocated amounts yields the institution's total F&A costs (TFAC) attributable to sponsored research.

This raw total is converted to a rate by dividing it by a quantity called "Modified Total Direct Costs (MTDC)." In 1979, the federal government adopted the MTDC approach for calculating F&A costs of individual sponsored agreements, as well as the overall F&A cost rate. MTDC is calculated as total direct costs minus the cost of equipment, renovation, training stipends, and subcontracts over $25,000. For most individual research, MTDC represents the direct costs less any equipment costs. See Question 6 and Chart I, "he Facilities and Administrative Cost Rate Formula"for a summary of this calculation.

 6. How is the total facilities and administrative cost (TFAC) calculated?

Circular A-21 describes in considerable detail the data that must be provided in calculating the total F&A cost. First, F&A costs must be assigned to one of two cost categories. The 1993 revision created two cost categories, Facilities and Administrative, that represent an institution's total F&A costs. Within these two categories, there are a total of seven cost pools.

The Administrative category is defined as pools of general administration & general expenses, departmental administration, sponsored projects administration, and student administration & services. This category's total rate is capped at 26%.

The Facilities category includes pools for operations and maintenance, use allowance, and library expense. This category's total rate is not capped.

The following is a summary of costs which can be included in each category.

ADMINISTRATIVE
(Capped at 26%)

General Administration and General Expenses. This cost pool encompasses personnel, payroll and purchasing services, financial management and accounting, safety and risk management, and general counsel, as well as a variety of other central administrative functions. In addition, expenses in the offices of the Chancellor, the President, the Provost, and the Service Agency Directors are included in this cost pool in proportion to the research activities supported.

Departmental Administration. Organizationally, this cost pool includes expenses at both the college and/or division and department levels. Functionally, this cost pool includes both program and technical support and administrative expenses. Typical expenditures include personnel costs in the dean's office as well as a portion of departmental salaries for the chair and selected faculty, administrative support staff, and technical support staff in the department. In addition, supplies, travel, and other operational costs are included. Departmental administration expenditures are distributed to research and other institutional/agency activities in proportion to the research activities supported.

Sponsored Project Administration. Sponsored project administration represents separate organizations within the institution that have been established to administer the research or training effort, regardless of the funding source. The primary elements in this pool are the costs associated with the office of grants and contracts, and some costs in the offices of sea grant, radiological safety, and vice president for research.

Student Administration and Services. This includes a portion of the costs of the Dean of Students, Admissions, Registrar, student counseling, and similar activities. Graduate students do much work on sponsored research. Therefore, a portion of the expense for administering their programs is allowed in the F&A cost formula.

FACILITIES

Operations and Maintenance. This category covers physical plant operations and maintenance expenses. It allows for the cost of utilities, maintenance, custodial services, environmental health and safety, and campus security. Additionally, this cost pool allows for the cost of debt service for building construction and improvements to the extent these costs are research related.

These costs are apportioned to research and other activities by several distribution methodologies.

Use Allowance. The largest segment of this cost pool is the building use allowance. Use allowance is essentially equivalent to a straight line depreciation schedule for a building life of 50 years. In other words, the A&M System is allowed to include an amount equal to 2% per year of the original building acquisition cost (less federal funding) in the building cost pool. Based on space utilization studies carried out by the Office of Planning and Institutional Research, an estimate is made of the portion of building use which can be attributed to the research effort. This cost pool also allows for the cost of land improvements (such as sidewalks, exterior lighting, landscaping) and non-federal equipment.

Library Costs. This pool is based on the cost of operating the institution's libraries. Small departmental libraries, operated by academic departments are not included in the cost pool. Detailed accounting is required to establish what portion of the total cost of the library enterprise is legitimately attributed to research activities versus instructional activities supported by the library.

Once all administrative and facilities costs are identified and calculated for a given year, the sum (TFAC) becomes the numerator in the F&A cost rate calculation. The modified total direct cost (MTDC) for that year is the denominator. These calculations are always carried out using data from the previous year's activities. The resulting quotient plus a carry forward percentage, if applicable, is the proposed F&A cost rate. Only a few schools have an approved carry forward amount. This percentage is subtracted or added to compensate for the previous years deviation from actual costs. The A&M System does not have a carry forward rate. Chart I summarizes this calculation.

 Chart I: The Facilities & Administrative Cost Rate Formula

Proposed F&A Cost Rate = ( TFAC/MTDC) + CF%

F&A Cost Definitions

TFAC
Total of all F&A costs for sponsored research based on summation of the seven federally approved indirect cost pools.

MTDC
Salaries and wages plus all other direct costs of research
Minus
Equipment, renovation costs,  sub-contracts, off-campus building rental costs.

CF%
The carry forward percentage subtracted or added to compensate for the previous year's deviation from actual costs.  (The A&M System does not negotiate a CF%).  

 7. What is the process for negotiating the final facilities and administrative cost rate?

Once the F&A cost rate information is assembled and appropriately documented, it is submitted to the cognizant agency. Cost negotiation cognizance is assigned based upon which of two agencies provided more federal funding during the past three years. The two agencies are the Department of Health and Human Services (HHS) or the Office of Naval Research (ONR). HHS is the cognizant agency for the A&M System. HHS negotiators make their own evaluation of the materials submitted and may seek to negotiate, usually downward, some of the costs included in the pools.

The A&M System's current negotiated rate for fiscal years 1997 and 1998 is 45%. This is the maximum rate which is permitted to be charged to federal grants and contracts for on-campus research.

Forty-five percent is the on-campus research rate for the A&M System. This is the maximum rate which is permitted to be charged to federal grants and contracts.

Other lower rates are established for off-campus research, where some of the underlying costs, such as space rental, are charged directly to the sponsored agreement and not borne by the A&M System. However, the federal government imposes selective restrictions on F&A costs attributed to certain grants, such as the 8% rate on many training grants. Additionally, the USDA limits sponsored agreements to no more than 14% for F&A cost reimbursements.

 8. Which expenditures are not allowable in cost pools according to revised Circular A-21?

Much of the discussion of F&A costs has focused on administrative costs, in part because the guidelines in Circular A-21 were often ambiguous with respect to expenditures allowed in this category. Whereas a number of administrative expenditures had been allowed before the intense scrutiny in 1991, new standards were later applied retroactively. In this new climate, it was no longer a question of whether an expenditure had been allowed by Circular A-21, but whether it was considered reasonable by "today's" standards.

In the turbulent atmosphere generated by congressional investigations, previous unallowable expenses were interpreted or made more explicit and new ones were added to the list. Many universities had always acted conservatively and had routinely excluded borderline costs. Nevertheless, the refined lists, applied retroactively, seemed designed in part to make institutions appear to have been in violation of Circular A-21. This gray area has been the main source of most of the recent controversy. A list of some unallowable expenditures are provided in Chart II for ready reference.

Under Circular A-21, none of these unallowables can be attributed to an F&A cost pool. In addition, the revised Circular A-21 requires universities to certify that no unallowable expenditures are in F&A cost pools. Some items listed are not even allowed by A&M System regulation.

 Chart II: Representative Unallowables

  • Advertising
  • Alcoholic beverages
  • Alumni activities
  • Bad debt expenses
  • Contingency provision cost 
  • Executive and legislative lobbying
  • Donations and contributions made by an institution
  • Entertainment
  • Fines and penalties
  • Fund raising activities
  • Goods and services for the personal use of employees
  • Housing and personal living expenses of an institution's officers 
  • Insurance against defects
  • Institution-furnished cars for personal use
  • Legal costs of criminal and civil proceedings, appeals and patent infringements
  • Memberships in any civic, community or social organization or country club
  • Selling or marketing of goods or services
 9. What are the typical elements of a sponsored research project?

Chart III outlines the budget for a representative research project in the sciences. Salaries and benefits often constitute approximately 50% of the project budget. The supplies and services component, including maintenance contracts, repairs and normal operating costs, is often only about 10% of the total. These budgeted items are then added together to determine the Modified Total Direct Costs of the sponsored agreement, a sum which forms the basis for calculating the sponsored agreement's F&A costs (the project's MTDC multipied by the institution's overhead rate for that year). The F&A costs and the MTDC together typically comprise 80% to 90% of the total award. Usually the remainder involves various items of equipment that might be needed to carry out the research but which are excluded from the MTDC calculation. Although the chart represents a typical project, the character of projects varies enormously across the A&M System. Some sponsored agreements can be as small as $50 and some can be as large as $5 million or more. Additionally, it is clear that each sponsored agreement will use different resources and, therefore, have a different F&A cost impact within the institution.

 

Chart III: Typical Sponsored Research Budget
Researcher's Summer Salary (1 month) $6,000
Post-Doctoral Research Associate 24,000
Subtotal: Salaries for Senior Personnel$30,000
Benefits (15.5%) $4,650
Graduate Student Research Associate (11 months; includes tuition and benefits) 13,700
Total Personnel Costs$48,350
Materials and Supplies $7,000
Publication Costs 1,000
Travel 2,000
Total (MTDC)$58,350
F&A Cost (45% of MTDC)  $26,258
Total (MTDC plus F&A)$84,608
Equipment $15,392
TOTAL AWARD$100,000

Every sponsored agreement is unique
Every sponsored agreement has a different F&A cost impact

 10. Why should a sponsored agreement pay facilities and administrative costs?

It is not uncommon for researchers to feel that when they successfully compete for a sponsored agreement, the F&A cost reimbursement is something that they are bringing to the institution and donating to its coffers. There is also a tendency to underestimate the nature and cost of essential support services. From the institution's point of view, the faculty member's proposal addresses the direct cost elements only. When a federal agency or other sponsor funds the research, the direct cost commitment to the faculty member must be supplemented to pay for a share of the institution's F&A costs. The reimbursement of F&A costs is a matter between the institution and the sponsor, based on the principles outlined in Circular A-21. However, the institution is forced to subsidize many proposals for which the F&A cost rates are arbitrarily restricted by the sponsor. From the sponsor's and the institution's point of view, the F&A cost component is distinct from the direct cost award,

From the sponsor's and the institution's point of view, the F&A cost component is distinct from the direct cost award, and in the best of circumstances it simply reimburses the institution for a portion of the real cost of a specific research project.

and in the best of circumstances it simply reimburses the institution for the real cost of a specific research project. The researcher may see it differently and this can be a cause for misunderstanding. The faculty member may feel that she or he is contributing significant F&A cost dollars to the A&M System, whereas the administration may feel that the institution is simply being appropriately reimbursed for the F&A costs of the project. All too frequently, the reimbursed F&A costs do not fully cover the actual F&A costs of such research. In many instances the cost of the space alone, if calculated at market rates, would be comparable to the total F&A cost reimbursement generated by the sponsored agreement.

The situation is even more complicated than the above analysis suggests. When a federal agency receives its appropriation from Congress, there is no distinction between direct and F&A costs. The agency receives a total budget to carry out its programs. Whatever funds the agency has to reimburse for F&A costs are clearly unavailable to award for direct cost purposes. Thus there is a fundamental trade-off made at the agency level between direct and F&A costs, which makes this issue of legitimate concern to faculty considering the long-term prospects for their disciplines.

Some faculty members feel that if they could force sponsors to reduce the reimbursements for F&A costs, there would be more money for their research program. That tactic might work in the short term, if the "savings" were used to help fund a larger number of sponsored agreements. However, long term, if the institution loses revenue in this way, it will be forced to cut services, cut staff and faculty positions, reduce available research space, and trim other expenses. Any initial advantage will be undermined and completely outweighed by later disadvantages. If the reduction of F&A costs were carried to the extreme, all F&A charges could be eliminated and the savings transferred to the direct cost category. Then an institution would either have to eliminate many research related activities and resources or charge each sponsored agreement directly for space, utilities, and every other service required to carry out the research activity. Such an approach would not be cost effective.

 11. What are facilities and administrative cost charges to a sponsored agreement actually paying for?

Chart IV shows a variety of activities and costs which are allowable components for calculating the university's overall F&A cost rate. While central administrative expenses may be the component of F&A costs that come most readily to mind, many institutional resources are used in support of research. A given project will require some of the resources on the list more than others but most projects draw on a substantial number of them. Moreover, a fairly small project proposal and subsequent award may require as much administrative work to process as a proposal with a million dollar budget. Since a number of F&A cost elements that support a sponsored agreement represent fixed costs, it is sometimes argued that smaller projects should pay higher rates. Such a variable rate structure would be quite cumbersome to apply, and inconsistent with the government's Circular A-21 guidelines.

Researchers in the humanities typically receive smaller sponsored research. Anyone receiving an NEH summer research salary of $3,500 in FY 1997 would generate an additional 45% in federal funds, or $1,575 for F&A cost reimbursement. They might wonder what the F&A costs are paying for. They may feel that they don't need laboratory space and expensive equipment and should instead be assessed at a different rate. A more comprehensive look reveals that more of the institution's resources are used than seems apparent on casual reflection. For example, costs of maintaining the library and its collection, support of graduate student assistants, and the cost of grant accounting and administration are all examples of F&A costs.

 Chart IV: Expenditures Allowed as F&A Costs

  • Accounting Office
  • Advertising Costs (for Personnel) 
  • Affirmative Action Monitoring
  • Animal Care Reviews
  • Central Administration
  • College Administration
  • Communications Costs
  • Custodial Services
  • Departmental Administration
  • Electronics Shops
  • Employee Benefits
  • Environmental Health & Safety
  • Facilities and Space Usage
  • Graduate Student Admissions
  • Graduate Student Services
  • Grant and Contract Services Office
  • Human Subjects Reviews
  • Interest on Debt
  • Library Services
  • Machine Shops
  • Operations and Maintenance
  • Payroll Office
  • Personnel Office
  • Recreational Facilities
  • Risk Management
  • Security (Campus Police)
  • Selected Publications
  • Selected Subscriptions
  • Seminar Costs
  • Stockrooms
  • Taxes
  • Transportation Costs
  • University Architect
  • Utilities

The library is a good example of a major resource necessary for research but often taken for granted and not recognized as a component of F&A costs. The library is used by virtually everyone engaged in scholarly activity, and the continued improvement of this asset depends on the flow of F&A cost reimbursements used to support the library system.

The increasing number and complexity of requirements imposed by the federal government to ensure compliance with various regulations also contribute to F&A costs. Chart V lists new or revised federal regulations that have come into effect just since 1988. They require institutions to establish new or expanded monitoring activities, to submit certifications, and, in general, to handle a great deal more paperwork than ever before.

 Chart V:New or Revised Federal Regulations Since 1988

  • Anti-Kickback Act (1988)
  • Anti-Lobbying Rules (1990-92) 
  • Certifying Accuracy of Indirect Costs (1991) 
  • Clean Air Standards (1988-90) 
  • Clean Water Standards (1988-90) 
  • Cost Accounting Standards (1996) 
  • Debarment and Suspension (1989) 
  • Drug and Alcohol Free Workplace (1989) 
  • Drug Free Workforce (1989) 
  • Drug Free Schools & Campuses Act (1990) 
  • Hazardous Waste Disposal (1988-90) 
  • Federal Misconduct in Science (1989) 
  • Non-delinquency of Federal Debt (1989) 
  • Medical and Infectious Waste (1988-90) 
  • NEA Clause on Obscenity (1990) 
  • Procurement Integrity (1990) 
  • Radioactive Waste Disposal (1988-90) 
  • Revisions to Circular A-21 (1991) 
  • Revisions to Circular A-21 (1993) 
  • Revisions to Circular A-21 (1996) 
  • Right to Know (1988-90) 
 12. What causes the variance in facilities and administrative cost rates between institutions?

The differences in the F&A cost rates between institutions have often been cause for scrutiny and discussion. Variances in rates create perceptions of mismanagement, inefficiency, or abuse. However, there are legitimate reasons to explain differences in F&A rates between institutions. These rate variances principally result from space related costs, cost recovery policies, and direct versus F&A costs.

Space Related Costs. Space related costs are the primary cause attributable to the variability in F&A costs. These costs include size, cost, and intensity of use of an institution's facilities; use allowance versus depreciation; and geographic location.

The size, cost, and intensity of use of an institution's facilities are the major factors atributing to the differences in F&A costs. As already indicated, one F&A cost pool is use allowance (or depreciation) for capital resources. An institution that has a large number of research facilities, with some built recently at higher cost, will have a higher expense in building use allowance than an institution that has smaller and/or older physical facilities. Institutions with expensive research equipment will also have a higher use allowance. Furthermore, institutions that have a large allocation of space assigned to research activities will have a higher use allowance.

The method by which an institution recovers equipment and facilities costs also contributes to the variance. Institutions may utilize either the use allowance or depreciation method. The A&M System employs the use allowance approach. The depreciation method requires a much more extensive accounting effort. This approach can be used to justify a significantly higher F&A cost rate if the institution is willing to bear the cost of the more extensive accounting effort. Some institutions, mainly private, choose to do so.

Simple variations in the cost of utilities or labor in different geographic areas will contribute to rate differences. A study conducted in 1988 showed utility costs in the New York area were ten cents per kilowatt hour compared to two cents per kilowatt hour in the Seattle area. Costs in Seattle have since gone up significantly, but they are still lower than most areas of the country. Similarly, heating and air conditioning costs vary widely across the country, as do labor and construction costs.

Cost Recovery Policies. The second major cause of F&A cost rate variance is cost recovery policies. On average, state universities propose lower F&A rates than private ones. Higher rates, which give greater reimbursement of appropriate costs, require special studies. Private institutions generally try to fully recover their appropriate costs. Public institutions have tended to be less aggressive since their buildings are often funded by the state. Another reason for public institutions not being as assertive is due to the fact that many states use F&A reimbursements as state appropriation offsets. In cases where the F&A reimbursements are merely budget offsets, institutions have less incentive to perform special studies.

Decisions made by states and their public institutions will affect cost recovery also. At some state institutions, F&A cost rates have deliberately been kept low on the theory that aspiring research institutions will then be more competitive for federal sponsored agreements. Such determinations can result from a deliberate plan by both the state and the institution to subsidize their research programs with nonfederal resources.

Direct versus F&A costs. The last major cause contributing to rate variance is internal institutional policies regarding direct versus F&A costs and how they are defined. For example, costs of adapting laboratories used in a particular project may be charged directly to a sponsored agreement by one institution, while similar improvement costs are reimbursed as part of the F&A costs at another. Different policies are allowed provided each institution applies its policies consistently. As a result, a given institution may show a higher direct cost on sponsored agreements and lower F&A cost rate than comparable costs at another institution, even though the actual cost of the particular function is exactly the same at the two institutions.

A frequent misconception is that administrative costs (General Administration, Departmental Administration, Sponsored Projects Administration, and Student Administration) are the major contributing factor to the differences in rates between institutions. Since the allocation of these costs is more difficult to quantify, they are the most criticized and questioned F&A costs. However, they do not contribute greatly to rate differences. This is in part due to Circular A-21's cap of 26% on administrative costs. The administrative component for the A&M System's 1997-98 negotiated F&A cost rate is 23%.

Administrative costs do not contribute greatly to F&A rate differences. This is in part due to Circular A-21's cap of 26% on administrative costs.

It is generally conceded that there are legitimate differences in costs among institutions across the country that should be recognized by the government in the negotiation of F&A cost rates. However, it can be argued that institutions which arbitrarily limit themselves to F&A cost rates below their actual costs are simply allowing granting agencies to underwrite disproportionately more services and newer facilities at competing institutions with relatively higher rates.

 13. What are the facilities and administrative cost rates at other research institutions?

Chart VI shows the negotiated F&A cost rates for the top 15 universities based on research and development (R&D) expenditures in 1994 according to the National Science Foundation. The F&A cost rates come from the Council on Governmental Relations (COGR) most recent survey of fiscal year 1994 rates. This chart points out that F&A cost rates vary greatly among major research institutions. The average F&A cost rate in fiscal year 1994 among all universities listed with COGR was 51.34%, with private universities averaging 8 points higher than that figure, and public universities more than 4 points lower. The A&M System has a rate of 45%.

 

Chart VI: Negotiated Facilites and Administrative Cost Rates at the Top Fifteen Research and Development Universities (On-Campus Federal Research FY 1994)
Johns Hopkins 66.50%
University of Michigan 52.00%
University of Wisconsin-Madison 44.00%
Masseceusettes Institute of Technology 55.00%
Texas A&M System 45.00%
University of Washington 50.00%
University of California-San Diego 50.50%
Stanford 61.33%
University of Minnesota 45.00%
Cornell 67.00%
University of California-San Francisco 43.00%
Penn State 43.00%
University of California-Berkeley 49.50%
University of California-Los Angeles 49.00%
Harvard 69.50%

Source: National Science Foundation, Total Expenditures at Universities and Colleges, Fiscal Year 1994 COGR Complilation of Rates Components for Five Years 1989-90 to 1993-94

Chart VII shows a comparison of F&A cost rates at the top 15 R&D universities in 1994. It shows both the rate the institution proposed and the rate that was assigned after negotiation. These rates also come from COGR's most recent survey. Clearly, relative values for some pools differ widely.

 

Chart VII. Comparision of Facilities and Administrative Cost Components
InstitutionAudit AgencyProposed FacilitiesProposed Admin.Carry ForwardTotal ProposedTotal Negotiated
Johns Hopkins HHS 42.50 26.50 0 69.00 66.50
U of Michigan HHS 35.30 32.70 0 68.00 52.00
U of Wisconsin - Madison HHS 19.81 25.87 0 45.68 44.00
Mass. Inst. of Tech. (MIT)  ONR 37.97 21.71 -3.68 56.00 55.00
Texas A&M System HHS 23.45 25.67 0 49.12 45.00
U of Washington HHS 27.92 26.00 0 53.92 50.00
U of California - San Diego HHS 29.99 29.94 0 59.92* 50.50
Stanford ONR N/A N/A N/A N/A 61.33
U of Minnesota HHS 24.74 26.00 0 50.74 45.00
Cornell U ONR 43.54 28.19 0 71.73 67.00
U of California - San Fran.  HHS 17.37 30.04 0 47.41 43.00
Penn State U ONR 20.89 22.06 .19 43.14 43.00
U of California - Berkeley HHS 31.63 30.17 0 61.80 49.50
U of California - LA HHS 35.12 31.60 0 66.73* 49.00
Harvard U HHS 53.70 28.50 0 82.20 69.50
average 31.71 27.50
58.96 52.69

Source: National Science Foundation, Total Expenditures at Universities and Colleges, Fiscal Year 1994 COGR Complilation of Rates Components for Five Years 1989-90 to 1993-94
(*)rounded

 14. Is the facilities and administrative cost rate the same across all A&M System Components?

The rate negotiated for "The Texas A&M University System" applies to the College Station-based Components and Texas A&M University at Galveston. Specifically, this rate applies to the following eight Components: System Administrative and General Offices, Texas A&M University, Texas A&M University at Galveston, Texas Agricultural Experiment Station, Texas Agricultural Extension Service, Texas Engineering Experiment Station, Texas Engineering Extension Service, Texas Transportation Institute and The TAMUS Health Science Center. As discussed earlier, this rate is calculated using Modified Total Direct Costs (MTDC) and is currently 45.5%. Circular A-21 allows those institutions that do not exceed $10 million in total direct cost expenditures to negotiate their rate based on a simplified calculation, which is based on salaries and wages. While the simplified calculation rate is generally higher than those calculated using MTDC, the F&A cost rate is only applied to direct salaries and wages to determine the amount of F&A costs allocable to sponsors.

 15. Should the facilities and administrative cost rate be the same for all researchers at one institution?

Implicit in the accepted procedures for determining a F&A cost rate is the notion of averaging. It has been a principle with the federal government that there should be a single F&A cost rate for each institution's on-campus research. Since every sponsored agreement is different and places unique demands on the institution's resources, some sponsored agreements reimburse relatively more in F&A costs and some reimburse less. Nevertheless, everyone should be aware that since the reimbursement of F&A costs is generally well below the actual cost of supporting research, no one is paying more than could be justified, even though someone may be paying more relative to another colleague.

There are of course disadvantages of using an average F&A cost rate. It is not a precise method and it lacks incentives for efficiency. Questions of fairness arise because comparisons can be made that superficially seem to suggest that one person is at a disadvantage relative to another.

It has been a principle with the federal government that there should be a single F&A cost rate for each institution's on-campus research.

However, the alternative to averaging would have few proponents. It would require an extremely complex and costly accounting effort to attribute a different F&A cost rate to each sponsored agreement. Substantial fluctuations in cost reimbursements rates would arise, depending on when a person utilized a particular resource, the starting of a sponsored agreement compared to the fiscal year, and so forth.

The averaging approach is a convenient and straightforward method. The differential impacts tend to balance out over time, and the stability of the rate benefits most participants. If one takes into account the broad range of variability over time and over various research activities, the averaging approach seems the best of admittedly imperfect alternatives.

 16. How does funding from the state of Texas fit into the picture?

The A&M System's total annual revenue is close to 1.3 billion dollars. The state of Texas provides approximately forty percent of this amount. Tuition and fees account for thirteen percent of the total. Contracts and grants provide twenty-three percent of the annual revenue. This includes the F&A cost reimbursements described in the previous sections, as well as direct costs. The remaining twenty-four percent is made up from other sources such as auxiliary enterprises, endowment & investment income, and gifts.

The forty percent provided by the state includes partial support for graduate teaching and associated research activities. This is provided primarily in two ways. First, the state pays the salaries of the faculty, who use part of their time to engage in graduate teaching and research. Some staff and operations support for the faculty is also provided by the state. The second way involves capital facilities; in most cases the state provides the majority of the construction and renovation funding that supports the graduate teaching and research program. However, only 2% per year can be charged to F&A costs for building use. Very few buildings are adequate for the 50 years it would take to recover their value from F&A costs, and this means that the state also contributes to the support of graduate teaching and research by providing functional buildings.

Compared to its capital and salary expenditures, the state provides relatively small amounts for direct research funding.

 17. How important are facilities and administrative cost reimbursements to the A&M System?

F&A cost reimbursement is an important source of support for the A&M System's extensive research programs. Consequently, any arbitrary F&A cost ceilings or other reductions in the F&A cost rate essentially amount to budget cuts impacting research. F&A cost reimbursements pay for a wide range of support services and administrative activities. They make it possible to operate a first-rate library system for research and scholarship; and they allow us to service, maintain, and renew our research facilities. Without F&A cost reimbursements, the A&M System's research and graduate teaching enterprise would be only a shadow of its present size and quality. It is our objective that this account of the nature and present management of F&A costs will be of value to The Texas A&M University System components. While the subject is of immediate relevance for those who propose and are awarded sponsored agreements, it is important that all members of the faculty, staff, and student body recognize that funding for a significant portion of the A&M System's programs are derived from F&A cost reimbursements.

It is hoped that this overview has promoted a broader understanding of facilities and administrative costs and the issues surrounding them. An ongoing goal is to address any questions and misunderstandings regarding F&A costs and to elicit suggestions for improving our present practices to enhance the environment for teaching, research, and scholarship within the A&M System. An increasingly important and parallel objective is to clarify this complex subject for the public, upon whose support and advocacy we depend. As pressure on federal budgets increases, an informed and united academic constituency will be necessary to sustain reasonable funding levels for research and for higher education in general.

 Conclusion

It is our objective that this account of the nature and present management of F&A costs will be of value to The Texas A&M University System components. While the subject is of immediate relevance for those who propose and are awarded sponsored agreements, it is important that all members of the faculty, staff and student body recognize that funding for a significant portion of the A&M System's programs are derived from F&A cost reimbursements.

It is hoped that this overview has promoted a broader understanding of facilities and administrative costs and the issues surrounding them. An ongoing goal is to address any questions and misunderstandings regarding F&A costs and to elicit suggestions for improving our present practices to enhance the environment for teaching, research, and scholarship within the A&M System. An increasingly important and parallel objective is to clarify this complex subject for the public, upon whose support and advocacy we depend. As pressure on federal budgets increases, an informed and united academic constituency will be necessary to sustain reasonable funding levels for research and for higher education in general.