Federal Grant Indirect Costs Set Off Public Debate

Lab iStock_000009534994XSmallMost partnerships between grant recipients and the federal government are productive and, oftentimes render world-class innovations in multiple disciplinary fields such as health care, food & agriculture and national security. But this comes at a cost to American taxpayers.

The recent release of the Trump Administration FY 2018 budget proposal calls for a $6 billion cut in the budget of the National Institutes of Health that is the “largest public funding agency of biomedical research in the world…enhanc(ing) health, lengthening life, and reducing illness and disability.” Earlier this year, the Department of Health and Human Services Secretary Tom Price said his department found that on average from FY 1994 to FY 2014, NIH spent approximately 30 percent of its research resources on indirect costs, leaving only 70 percent for direct research and other supporting research activities.  Other entities, including private foundations spend a much higher portion of their grants on direct science. More recently, Secretary Price has said that he may find the necessary cost savings from “indirect expenses” related to NIH funds.

The proposed cuts have set off a public debate about taxpayer funds used to reimburse “indirect costs” for grant recipients.

Indirect Costs, from an initial 8% to 20% in 16 Years

According to Nature, the U.S. began reimbursing universities for indirect costs in the 1950s, as part of a push to encourage more research. An initial cap was set at 8%, but that had risen to 20% by 1966, when the government began to allow institutions to negotiate their rates.

The newly revised (2014) Code of Federal Regulations (CFR),  Title 2 Grant and Agreements Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, grants awarded after December 26, 2016, “Indirect (F&A) costs means those costs incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved. To facilitate equitable distribution of indirect expenses to the cost objectives served, it may be necessary to establish a number of pools of indirect (F&A) costs. Indirect (F&A) cost pools must be distributed to benefitted cost objectives on bases that will produce an equitable result in consideration of relative benefits derived.”  [78 FR 78608, Dec. 26, 2013, as amended at 79 FR 75880, Dec. 19, 2014]

Negotiated Rates

Indirect cost rates are negotiated by the organization doing business with the U.S. Government.  Negotiations for indirect costs are conducted between the organization doing business with the federal government and its assigned agency, typically the agency with the largest dollar volume of contracts with the organization. The result is a Negotiated Indirect Cost Rate Agreement (NICRA) that is binding on the entire federal government.

Common Misconceptions

Nature, highlights that a common misconception is that indirect-cost rates are expressed as a percentage of the total grant, so a rate of 50% would mean that half of the award goes to overheads. Instead, they are expressed as a percentage of the direct costs to fund the research. So, a rate of 50% means that an institution receiving $150 million will get $100 million for the research and $50 million, or one-third of the total, for indirect costs. But there are multiple caps that lower the base amount from which the indirect rate is calculated, or that limit the amount of money that a research institution can request. So very few institutions receive the full negotiated rate on the direct funding they receive.”

Agriculture Research

On June 22, the issue of indirect costs was raised during a U.S. House Committee on Agriculture hearing on University Research and The Next Farm Bill. Title 7 of the Farm Bill, Research and Extension, “authorizes funding for research, extension, and education—including competitive grants and capacity funding (i.e., awarded by formula) to Land Grant institutions and State agricultural experiment stations, and intramural funding for USDA research agencies; identifies high-priority research areas and new research initiatives.” During the hearing Congressman Neal Dunn (R-FL), raised the issue

Congressman Neal Dunn (R-FL)

Congressman Neal Dunn (R-FL)

with witnesses from varying research universities from across the U.S. including Dr. Jacqueline Burns, Dean for Research and Director, University of Florida Institute of Food and Agricultural Sciences. Congressman Dunn asked her to speculate on how the University of Florida would be impacted by a proposal from the White House Office of Management and Budget (OMB) to place a 10% cap on the amount of facilities and administrative reimbursement under competitive federal grants.

Director Burns, responded, “We depend on our indirect cost recovery to help us with all things related to research, especially as it relates to infrastructure improvement, building capacity and research – doing the administrative side of a research program is tremendous.  This indirect cost recovery is very important and cutting that would be detrimental to the research enterprise at the University of Florida.”

Congressman Neal asked Dr Burns for a specific example of, “a program or research that is going to go unfunded because of the (proposed) cap.”  Dr Burns responded but gave no specific example, “we would have to strategize and prioritize research programs based on the amount of indirect cost that would come in.  I think it’s really important to once again emphasize the importance of our direct cost recovery on our federal grants because they are so important to maintain the capacity of research, the administrative side of research that really is not visible to our stakeholders and to our funding agencies that we all know is really important to sustaining our research programs.”

Indirect Costs 52.5%!

During a June 24 U.S. House Committee on Agriculture Listening Session on the upcoming 2018 Farm Bill, Dr. David Norton, Vice President of Research, University of Florida testified, “What I wanted to touch base on is a particular policy change that’s being proposed by the Office of Management and Budget (OMB). It quite frankly will completely cripple the ability of universities to carry out research.

This is the proposed 10% cap that is being pushed forward by OMB for the Department of Health and Human Services.  This ten percent cap is on the overhead that universities can charge.

Research at universities costs a certain amount of money. There are two pots (of funds), one is a pot for direct charges for things in the laboratory, and two, there are other things around the laboratory that we have to have in place.

At the University of Florida I know that for every $2 that I spent in the lab, I spend $1 for activities outside the laboratory for things like air conditioning, an accountant to track the money and for fiscal oversight. I know this number because the federal government comes in and evaluates that number every three years with a very intense process. I know how much my research costs and that’s what I charge the government. So for me it’s a rate of 52.5%.

The current proposal from OMB would take that 52.5% at the University of Florida and cap it artificially at 10%. This means the University of Florida would be forced to sell $3 worth of research to the federal government and only get back $2.20. You do not have to have an MBA from Harvard to know that this business model is not going to work. This is going to be detrimental to all universities and the research they would do for all federal agencies.”

Large Disparities in Indirect Costs

In 2013  Nature obtained federal government data through the Freedom of Information Act and announced their findings of disparities in the outcomes of negotiated rates ranging “from 20% to 85% at universities, and an even wider spread at hospitals and non-profit research institutes (see interactive graphicdata for all institutes and methods used).”

Globally, indirect cost reimbursements for overhead also vary greatly.  According to Nature, the United Kingdom calculates indirect costs on a per-project basis. Japan has a flat rate of 30%. In 2013 the European Union announced that it would no longer negotiate rates and instituted a flat rate of 25% for all grant recipients in its Horizon 2020 funding programme (see Nature 499, 18–19; 2013).

There ARE Programs With Caps on Indirect Cost

The US Department of Agriculture National Institute of Food and Agriculture (NIFA) discloses the indirect cost caps in their Request for Application (RFA).  The Request for Application (RFA) limits indirect cost reimbursement to 30 percent of
Total Federal Funds Awarded.  Some organizations may choose not to apply for NIFA funding if they are unable to forgo full indirect cost reimbursement.

Needed Reforms to Indirect Costs

Exacerbating an already contentious circumstance, on June 29 the nonpartisan Congressional Budget Office released their CBO Annual Deficits 2016-2027updated budget forecast estimating the annual U.S. deficit for FY 2017 would be higher than previously projected at $693 billion. Moreover, as the chart depicts, given new federal policies and rising interest rates on the $20 trillion national debt annual deficits are expected to rise in the future.  Such budget pressures and inconsistencies in indirect costs will undoubtedly keep federal funding recipients under the microscope until a more uniform and efficient grant system is constructed- even for important research in health care, food & agriculture and national security.

Some ideas for needed reforms include:

  • All federal grant programs should be awarded based on:
    • Local and/or State funding provided for the project,
    • Private investments provided for the project,
    • Regional benefits, and
    • Lower indirect costs.
  • Enact policies to reduce administrative requirements of research awards,
  • Reduce the myriad of federal regulatory requirements that govern the use of grant funding.

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