Part I: Loch Ness Monster, Indirect Costs, and other folklore.

November 1, 2023

Nessie is back! New sightings of the famed ~1500-year-old Loch Ness monster have surfaced recently along with a full investigation of the lake she is purported to live in. Like Nessie, but admittedly less fun, the folklore surrounding indirect costs continues to persist.

Lack of understanding about indirect costs runs rampant in the research community. Myths like: Indirect costs are arbitrary; Universities make up the percentage they collect. Folklore like: Indirect costs are just taxes; Having to include indirect costs decreases how much research I can do; etc., are just that – myths and folklore. To help dispel these let us look at the history of indirect costs in Part I and then in Part II how they are negotiated, and what they cover.

Before WWII, scientific research was mainly conducted in private, industry-based labs, not universities. During the war, the Office of Scientific Research and Development tapped into universities to provide expertise, labs, and an available workforce in the form of students to help with research that could help the war effort. After the war, government-sponsored research expanded to include nonmilitary activities and sponsors like the National Institutes of Health, the Department of Energy, and the National Science Foundation. In 1947 the Office of Naval Research (ONR) was the first sponsor to recognize that universities were expending their resources to support this research on their campuses and began encouraging these institutions to add a percentage to their budgets to ‘pay for’ items that were hard to quantify discretely for each specific project. These items include Facilities, e.g., new or upgraded equipment and buildings used for multiple projects and shared maintenance and services on those facilities; and Administration, e.g., personnel associated with adequately managing the funding and complying with all the mandates associated with conducting research. Other sponsors soon followed suit, but each sponsor, and even different programs within those sponsors, had different rates, and how they were applied was not uniform and burdensome.

The practice of sponsors reimbursing universities for institutional contributions to a sponsored project as “indirect costs” has gone through many policy milestones, and those costs go by several different names, the most common two being Indirect Costs and Facilities and Administrative Costs (F&A). Here are a few milestone highlights:

Fun Facts:

  • 1947: The Department of Navy publishes the first formal document for budgeting for indirect costs
  • 1958: Guidance (“circulars”) issued by the Office of Management and Budget (OMB) clarifies cost accounting standards for Federal funding, defines what costs are considered direct vs. indirect, and defines allowability
  • 1965: The process of negotiating rates based on actual costs starts.
  • 1991: Congress caps the ‘A’ in Facilities and Administrative (aka Indirect cost) rates at 26%
  • 2014: Adoption of Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, otherwise known as Uniform Guidance. Uniform Guidance is currently the government-wide framework for grants management including how indirect costs are negotiated, applied, and reimbursed.

In Part II, next week, we continue to uncover the mysteries of the elusive Nessie and the Indirect Cost Rate negotiation. We will dive into a loch look at various sponsored activities and the realities of supporting our institution through sponsored programs funding. We may even discover if Nessie is real.

Blog post by Shannon Irey, OSP Training and Information Coordinator, with contributions from Chris Carsten, OSP eRA Systems Officer, Bill Moseley, OSP Pre-Award Manager, Jacque Clark, BFS Manager – Cost Analysis, Property Management & Banner Admin, and Doug Leavell, OVPR Director Research Analytics.

Fun Fact: 

The oldest indirect rate proposal found between CSU and HEW (Health, Education, and Welfare Department- Department of Health and Human Services- DHHS predecessor) in the CSU Morgan Library archives was for the period July 1, 1976, and June 30, 1977.