Indirect Cost Rates
What are Direct and Indirect Costs?
Direct costs are expenses that can be measured and applied to the performance of a specific project. Examples of direct costs are salaries and wages, fringe benefits, equipment, supplies, travel, and publication expenses.
Indirect costs are expenses that are incurred as a project is being conducted, but they are not project-specific. Under current federal guidelines, indirect costs are classified into two groups: those related to administrative expenses and those related to facilities.
Office of Management and Budget (OMB) Circular A-21 defines the indirect cost process for federal awards. The Research Foundation Central Office assists campuses with developing indirect cost proposals and submitting and negotiating indirect cost rates.
As an institution receiving less than $10,000,000 in federal research funding, the methodology for Fredonia's indirect cost rates involves a ratio of indirect cost on a salary and wage base for all activities of an institution. The total indirect costs incurred by all functions of the institution, including instruction, sponsored research, and other organized research are calculated. These costs are allocated among the four basic functions defined in OMB Circular A-21:
The indirect costs are then calculated as a percentage of the appropriate base (for us, salaries and wages excluding fringes).
The Research Foundation negotiates indirect cost rates with the U.S. Department of Health and Human Services (DHHS), our cognizant federal agency.
The federal rates apply to all programs funded by federal agencies (directly or flow-through). The federal rates also apply when a nonfederal sponsor's policy requires the application of the federal rate to its programs. There is both an on-campus and an off-campus rate. The on-campus rate includes administration and facilities components, whereas the off-campus rate includes only the administrative portion.
Nonfederal sponsors include businesses and industries, foreign governments, state governments (except in cases of federal flow-through funds), local governments, philanthropic organizations, voluntary health organizations, and professional associations. Nonfederal rates are developed by conducting cost studies in the same manner in which federal rates are developed. The nonfederal rates are expressed as a percentage of the total direct costs expended on sponsored activities.
The direct cost base for nonfederal programs is total direct costs (TDC) expended on a program regardless of the type of activity. There are separate rates for on-campus and off-campus program locations. The nonfederal rate can be used in applications to and awards from nonfederal sponsors if the sponsor does not have a formal, uniformly applied, published policy that specifies an allowable indirect cost rate.
When a nonfederal sponsor does not allow the use of the applicable full rate, the sponsored program office and the project director should identify and include program-specific overhead costs in the direct cost section of the budget. Examples include use allowances on equipment, maintenance on space used, use of the library, etc.
The purpose of the administrative rates is to recover the Research Foundation's overhead costs for administering activities not subject to sponsor-imposed restrictions. The administrative rates for sponsored programs are developed based on the average cost across all locations. The administrative rate should be used as a guideline for recovery of administrative costs. Examples are an unrestricted gift to a researcher to aid in studies conducted within a certain discipline, self-supporting laboratories, multiple sponsor accounts, and balances from sponsored programs available for expenditure at the discretion of the institution.