Facilities and Administrative Rates- What does this really mean?

1. Facilities and Administrative Rates- What does this really mean? Louis Guin, Manager, Bearing Point Anne Feuerborn, Manager, Arizona State University April 27, 2008

2. Overview • A-21 as guidance • What is F&A and why is it important? • What are direct costs and total costs? • Total Cost vs. Modified Total Cost • F&A rate example • Application of the F&A rate

3. OMB Circular A-21 • Guide to help universities properly cost projects and calculate F&A costs • Circular issued by the Office of Management and Budget that contains federal cost principles. • Sets basis for cost allowability • Defines Direct and F&A costs • Defines methodologies for allocating F&A to direct functions

4. What is F&A? • Per A-21: • Costs which benefit common or joint objectives • Costs which cannot be identified to a specific activity such as instruction or research project • Facilities and Administrative are also called: • F&A • Indirect Cost • Overhead expenses

5. Examples of F&A Costs • Facilities • Lights, water, gas • Annual cost of a building (depreciation), and its maintenance • Annual cost of equipment (depreciation) • Administrative • Departmental support staff • Office of Sponsored Projects • Payroll department, Human Resources

6. Why do we calculate F&A rates? • To identify the portion of F&A costs applicable to major functions of the university • Instruction • Organized Research • Other Sponsored Activities • Other Institutional Activities • To recover F&A expenditures allocable to sponsored activities

7. Why is F&A important to you? • A-21 establishes that the federal government will pay its fair share of total costs • Reimbursement of the university’s investment in sponsored work is what allows the university to keep investing in its resources! • If sponsors do not pay their fair share of F&A, who will?

8. What is an F&A Rate? • A percentage • Ratio between indirect and direct costs • Simply stated if the F&A rate is 50%: • For every $1.00 spent on research • 50 cents of cost is incurred by the university • Why don’t we charge the sponsor 50 cents directly? • F&A, because it is not directly associated with a project, is difficult to estimate project-by-project

9. Who needs an F&A rate? • Institutions that wish to be reimbursed for Facilities and Administrative costs • Two methods of calculating an F&A rate • Long Form- Required for institutions expending more than $10 million on Federal grants and contracts annually. Calculated rate will be higher using this method • Short Form- Simpler allocation methodologies used by institutions that have smaller research expenditures

10. Where there is indirect… there is direct • Direct costs, per A-21 are: • Costs that can be identified specifically to a particular sponsored project, or activity, with a high degree of accuracy • Examples • Salaries of a Principal Investigator and GRA’s • Lab Supplies • Project related travel • Equipment directly purchased by the project

11. Total Costs vs. Modified Total Cost • Total costs are: • Direct + Indirect • Modified Total Costs: • Direct + Indirect – Items not charged with F&A • Modified Total DIRECT costs • Direct – Items not charged with F&A • Most common basis for application of F&A rate

12. Items not charged with F&A – Section J of A-21 • Common Examples: • Capital Equipment purchase • Participant Support Costs • Scholarship/Fellowship • Subcontracts >$25,000 • Facilities Rental • Why? Distorts the F&A rate, causes over-recovery of F&A

13. MTDC Example • Simple example of one project’s MTDC: • Total Direct Costs in our budget: $130,000 • Salaries/benefits: $95,000 • Supplies: $5,000 • Scholarships: $20,000 • Capital Equipment: $10,000 • Modified Total Direct Costs: • = $130,000 - $10,000 - $20,000 • = $100,000 MTDC

14. Elements of the rate • Base - “Directs” • Main activities of the university- the business which is conducted • Ex. Organized Research, Instruction, Other Sponsored (grant-funded Public Service) • Rate components - “Indirects” • Facilities components • Administrative components • These are items from which the Direct costs benefit!

15. What does the rate itself mean? • The rate is applied to the cost of a sponsored project, and is the amount of “overhead” which is recovered • Example: • $100,000 of salaries and supplies for research • 55% Research F&A rate • University recovers $55,000 for F&A costs

16. Rate Development Steps • Step 1: Create cost pools • Split costs in indirect and direct • Determine specific type of pool • Step 2: Determine allocation basis • Associating indirects with each base • Step 3: Calculate the rate • Add indirects associated with base • Divide indirects by the base

17. Rate development step 1: Cost Pools • Costs need to be “pooled” into: • Direct bases • Facilities and Administrative pools

18. Types of Direct Bases • Instruction • Includes Departmental (non-sponsored) research • Organized Research • Sponsored, or University funded initiatives • Other Sponsored Projects • Public Service • Anything that does not fit instruction or research definition • Other Institutional Activities- Auxiliaries

19. F&A components- Facilities • Building (Shell, HVAC, Walls, Floors, Cabinets etc) Depreciation • Equipment (Moveable equipment) Dept. • Interest (Cost of financing a structure) • Operations and Maintenance (Utilities, Custodial, Environmental Safety) • Library

20. Building and Equipment depreciation • Expenses for the portion of costs related to the institution’s buildings, capital improvements to land and buildings, and equipment which are computed in accordance with J.12.

21. Interest • Interest is allowable on similar newly acquired assets, but is subject to a number of conditions involving cost, federal occupancy, equity contribution, relocation of federal programs etc.

22. Operations and Maintenance • Expenses incurred for administration, supervision, operation, maintenance, preservation and protection of the institution’s physical plant • The Utility Cost Adjustment is part of O&M. UCA is a 1.3 point allowance for institutions who once employed a utility cost study

23. Library • Expenses incurred for the operation of the library including the costs of books and library materials purchased for the library less applicable credits

24. F&A Components- Administration • General Administration (President, payroll, HR, Provost) • Departmental Admin (College Admin, Department support staff and supplies) • Sponsored Projects (Pre and post award) • Student Services (usually only benefits instruction base)

25. General Administration • Expenses incurred for the general executive and administrative offices and other expense of a general nature which do not relate solely to any major function of the institution

26. Departmental Administration • Expenses incurred for administrative and supporting services that benefit common or joint departmental activities or objectives

27. Sponsored Projects Administration • Expenses are limited to those incurred by a separate organization established primarily to administer sponsored projects. Includes grant and contract administration, special security, purchasing, personnel, etc.

28. Student Services Administration • Expenses incurred for the administration of student affairs and for services to students including dean’s of students, admissions, registrar, counseling and placement, student advisors, student health and infirmary services, catalogs and commencements and convocations.

29. Rate Development Step 2: Allocation • What does it mean to allocate a cost? • Choose a basis (prescribed by A-21) to distribute the F&A costs to the cost objectives they benefit • In other words, the indirect costs will be matched to the direct costs that they benefit

30. Rate Development Step 2: Allocation • F&A Pools are allocated to Direct Bases in the following order: • Depreciation • Interest • O&M • G&A • DA • SPA • Library

31. Allocation of Facilities Components • Facilities components allocate either by: • Full Time Equivalent (FTE) • Assignable Square Footage (ASF) • Most Facilities costs allocate on the basis of ASF • Library and Land Improvement (Building component) allocate based on FTE

32. A simple F&A- Facilities component • Facilities expense per year: $1,000,000 • University space profile of 10,000 asf is: • 5,000 ASF Instruction, or 50% Instruction • 3,000 ASF Research or 30% Research • 2,000 ASF Administration , or 20% Admin • 1,000 ASF Operations and Maintenance 10% O&M • Facilities cost for Research: • $1,000,000 x .30= $300,000

33. Allocation of Admin Components • Administration components allocate on the basis of Modified Total Costs • Student Services is the exception: most universities allocate only to instruction

34. A simple F&A- Admin component • Administrative expense per year: $500,000 • University MTDC is: $2,000,000 • Instruction is $1,000,000 or 50% MTDC • Research is $1,000,000 or 50% MTDC • Administrative cost for Research: • $500,000 x .50= $250,000

35. Rate Development Step 3: The Rate • Take facilities and administrative costs allocated to Organized Research, divided by the Organized Research direct cost base.

36. A simple F&A- Research Rate totals • Facilities Cost: $300,000 • Admin Cost: $250,000 • Base Amount for Research: $1,000,000 • Research Rate= $550,000/$1,000,000 • = 55% F&A rate for Research

37. Basis for various rate calculations • Functions: • Instruction • Research • Public Service • Location of the function: • On Campus • Off Campus (usually only administrative costs, capped at 26%)

38. F&A Rates Example • Organized Research On Campus: 50% • Organized Research Off Campus: 26% • Instruction On Campus 55% • Instruction Off Campus 26% • Other Sponsored Activities On Campus 36% • Other Sponsored Activities Off Campus 26%

39. Rate Application Shortfalls • Barriers to charging the full F&A rate • F&A Waivers • Institution grants privileged exceptions • Institution wants to foment a relationship with a new sponsor • Sponsor limitations • Ex. USDA 8% • Ex. Department of Education 8% • Ex. Foundations (common with humanities programs)

40. Rate Application- TDC vs. MTDC • TDC vs. MTDC • TDC base contains more costs, thus potential for more recovery • MTDC • F&A rate approved by cognizant agency is based on MTDC • Most Federal sponsors specifically require use of MTDC • TDC • Used when a sponsor has a rate limitation • Usually only Non-Federal Sponsors • Unless otherwise stated in a rate agreement, your institution may choose to charge the reduced rate on a TDC basis.

41. Risks in the Rate Application • Indirect vs. Direct: • Cost Accounting Standards (CAS) • CAS states that costs be treated consistently • A-21 mentions notable exceptions where indirects can be charged directly • Many universities have a mechanism to allow for the direct charging of administrators, supplies, memberships, and postage. • Risk of “double charging”

42. Questions? • Thanks for attending! • Contact info: • Anne Feuerborn anne.feuerborn@asu.edu • Louis Guin louis.guin@bearingpoint.com