U-M's Facilities & Administrative (F&A) Rates and Indirect Cost (IDC) Policies

F&A costs – also referred to as “indirect costs” – are essential costs of conducting research. The federal government’s longstanding recognition and payment of these costs has helped U.S colleges and universities build and support the required research infrastructure that has made the American research enterprise the best in the world. When the government provides a grant to a university for a research project, a portion (typically 67-75 percent) of the funds are distributed directly to the research team. This “direct costs” portion supports researcher salaries, graduate students, equipment, and supplies. Another portion (typically 25-33 percent) covers necessary research infrastructure and operating expenses that the university provides to support the research. These research expenses – officially called facilities and administrative (F&A) costs – include: state-of-the art research laboratories; high-speed data processing; national security protections (e.g., export controls); patient safety (e.g., human subjects protections); radiation safety and hazardous waste disposal; personnel required to support essential administrative and regulatory compliance work, maintenance staff, and other activities necessary for supporting research.

First note that:

• Responsibility for demonstrating that the off-campus rate is appropriate rests with the project team.
• The approved F&A cost rates applicable to all proposed projects are shown in F&A Cost Rates chart.
• Full recovery of these costs is expected on all grants or contracts.
• Any variance from stated F&A cost rates must be discussed with your School/College/Institute/Center administration in advance of proposal submission.

Following are questions to help you determine the criteria that must be met to determine whether a project is "on campus" or "off-campus." 

F&A costs are research costs. Universities and the federal government have a long-standing and successful partnership that grew out of World War II. The federal government relies on universities to conduct research in the national interest. This includes research aimed at meeting specific national goals such as health and welfare, economic growth, and national defense. Performing research on behalf of federal agencies incurs a variety of costs that would not otherwise exist for universities. Universities – not the federal government – assume the risk of building the necessary infrastructure to support this research in anticipation that their research faculty will successfully compete for federal research grants and thus the university will be reimbursed for a part of the associated infrastructure costs.

Yes. Universities are the second leading sponsor of academic research and development (R&D). Federal data show that colleges and universities pay for more than 24 percent of total academic R&D funding from their own funds. This university contribution amounted to $16.7 billion in FY15, including $4.9 billion in unreimbursed F&A costs. These institutional commitments to academic R&D significantly exceed the combined total of all other non-federal sources of support for academic R&D: state and local government, industry, and foundation, support was at 6 percent each in FY15 and other nonfederal sources provided 3 percent in FY15. Federal spending on higher education R&D has continued to decline and was just under $37.9 billion in FY15, or 55 percent of all funding for academic R&D (See figures 1-2).1 While universities contribute significantly to the costs of research, these institutions continue to be stretched thin. State support for public universities has declined greatly over the past 20 years and, in many cases, universities are educating more students. The notion that universities should cover even more of the costs of conducting research for the federal government is not realistic.

No, universities absolutely do not make gains from their F&A recoveries. Universities are not even fully paid for the expenses they incur to provide the necessary infrastructure and support to conduct federal research. As stated above, in FY15 universities contributed approximately $4.9 billion in facilities and administrative expenditures not reimbursed by the 2 government, many of which were not covered because of existing Office of Management and Budget (OMB) limitations on the amount the government can support universities for administrative and compliance related expenses, including federal mandates. (National Science Foundation, National Center for Science and Engineering Statistics, Higher Education Research and Development Survey. Higher education R&D expenditures, by highest degree granted, institutional control, and type of cost: FYs 2011–15.)

Increasing. Over the past several years, the share of institutional support that colleges and universities provide to support research conducted by their faculty has grown faster than any other sector. This growth in institutional spending on R&D has come at the same time that federal support has been declining (See figure 3).

The increase in institutions’ support for the R&D they conduct is due in part to the rising compliance costs associated with increased federal research regulations and reporting requirements. Despite the increasing administrative costs required for compliance, the amount universities can receive from the government for these costs has been capped at a flat rate by OMB since 1991. This cap only applies to higher education institutions. Unlike other sectors that conduct government research, universities must therefore subsidize compliance costs from their own financial resources. 

No. F&A costs recovered by research institutions have remained flat for over 15 years. For example, the National Institutes of Health’s percent of total funding going towards F&A costs has remained unchanged, at approximately 27-28 percent of total funding, for more than a decade (see figure 4). 

Generally, past studies suggest that total F&A costs for university research are slightly less than those costs for other research performers. A study in 2000 by the RAND Corporation found universities had the lowest percentage classified as F&A (31 percent). Federal laboratories were somewhat higher at 33 percent and industrial laboratories were higher still at 36 percent. This demonstrates that universities are efficient performers of research. (Goldman, Charles A., Traci Williams, David M. Adamson and Kathy Rosenblatt. Paying for University Research Facilities and Administration. Santa Monica, CA: RAND Corporation, 2000. https://www.rand.org/pubs/monograph_reports/MR1135-1.html) 

Unfortunately, a comparable study to the RAND study has not been undertaken in recent years. Such a study would be welcomed by the university community. Additionally, as indicated under the previous question, the federal payment to universities for their F&A costs does not cover the full costs to their institution. This is unlike other sectors that receive full compensation for all their costs. The federal government has smartly invested in university-based research: F&A costs at universities are lower than other sectors, the government does not pay a profit to universities like it must for industry research performers, there is a university-specific cap on the amount the government will cover for administrative expenses, and the system of agency oversight ensures universities continue to be excellent stewards of federal taxpayers’ dollars.

Comparing what can and cannot be charged to a federal grant versus a foundation grant is an “apples to oranges” comparison since foundations categorize and pay grant-related expenses very differently than the federal government does. For example, foundations often categorize some items as direct expenses that federal rules require to be counted as F&A expenses. This further underscores that direct and F&A costs are all part of total research costs and are inseparable when it comes to the actual conduct of research. 3 To the extent that a foundation does not pay for certain F&A expenses, these costs must be covered by the institution. OMB rules (2 CFR Part 200 - Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards) specifically require universities to ensure the federal government does not subsidize non-federally sponsored research activity – including research and associated infrastructure costs performed by universities for private foundations – in their support for F&A expenses. Additionally, as previously noted, after World War II the federal government consciously chose to encourage universities to conduct research on its behalf to help achieve national goals. A core tenant of the partnership between the federal government and universities is that the government shares in the costs of research by providing universities with competitively awarded grants to support the people, tools, and infrastructure necessary to conduct high-quality research for the nation. Historically, most foundations view their grants as supplementing research that scientists are already conducting. To this day, most foundation research funding is viewed as supplementing existing federal and non-federal research. Finally, foundation funding for university-based research remains a small proportion of total academic R&D funding (only 6 percent) compared to federal funding (55 percent) and the funding provided to support academic R&D by the colleges and universities themselves (24 percent).

No. OMB rules (2 CFR Part 200 - Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards) require that F&A cost reimbursements can only be based on federally funded research space and related research activities, not education or other university facilities or activities.

Here’s how it works: To determine the level of F&A expenses the federal government will cover, every 3-4 years, the agency responsible for setting a university’s F&A rate (either the Department of Defense Office of Naval Research or the Department of Health and Human Services) will comprehensively audit and assess these shared costs to determine the appropriate federal share based upon specific costs that have been deemed allowable expenses by the OMB. The overall figure is ultimately calculated as a percentage of the amount the federal government awards for direct research costs (not a percentage of the overall funds, the figure most people see). For example, after reviewing all the expected costs and considering past research projects, a university and the federal government may determine that an amount equal to 50 percent of direct research costs is appropriate for the federal government to contribute toward F&A costs. In that case, if the federal government awards a university $300,000 for the direct research portion of a grant, then it also awards $150,000 for F&A costs, for a total of $450,000. These overall institutional F&A cost rates are then applied uniformly to each grant at the university to avoid the very tedious, expensive and inefficient process of computing the F&A expenses for individual awards – which would add additional costs for both the government and the university. 

Federal agency officials and university administrators predetermine an overall percentage of allowed F&A costs to be paid, based on documented historical costs and cost analysis studies. The final rates allowed for F&A expenses are established based on a rigorous review and audit of the actual funds previously spent for such costs. F&A cost rates vary from institution to institution because construction, maintenance, utilities, and administration costs vary by institution and by region. Additionally, F&A rates depend upon other factors such as the age and condition of facilities and buildings and the amount of renovation and construction needed to house certain types of research projects. For example, the F&A costs for a biomedical research facility built in an urban area that experiences earthquakes is different than an engineering research facility built in a rural area. 

No. A university’s F&A cost rate is not a percent of the total grant, but rather a percentage only of the research project’s direct costs. Currently, the average amount paid to universities for F&A costs is approximately 25-33 percent of the total amount of a grant. (Campuses with medical centers tend to be closer to 33 percent because of the increased costs and expenses involved in providing for medical research facilities.)