Facilities and Administrative Costs (Indirect or Overhead)

1. Facilities and Administrative Costs (Indirect or Overhead) Michael J. Warnock, Ph.D. Director, Office of Sponsored Program Administration

2. What’s in a name? • Facilities and Administrative Costs • F&A Costs • Indirect Costs • Overhead Costs • Administrative Costs • Direct Costs • Allocable Costs • Not a “tax” over and above the cost of project, but an integral part of the project cost

3. What are F&A Costs? • Costs associated with completing a project that are not directly charged to the project • Includes: • Space where work is done • Utilities where work is done • Equipment used to support work done • Administration and oversight of work done • Use of library facilities • General supplies/materials to support work • Cost recovery mechanism based on historical expenditures

4. Why not charge F&A costs as a direct charge? • Increased administrative burden (cost) to: • Determine what charge at what rate for each project • Accounting for actual and reconciling differences • Allocations between projects (e.g., costs for a lab used in several projects would need to be allocated and records kept to differentiate between the uses by each project)

5. Selected Items Excluded From F&A • Animal care costs • Service operations • Certain building costs • Certain utility costs

6. Is F&A Important to Me? • Where does my paycheck come from? • How are my support staff paid? • What was the source of funding for the building I work in? • What is the source of funds for the utilities in my building? • How are costs for shared purposes tied to the benefiting functions (including mine--cost and benefit)? • How is research infrastructure paid for? • These are real dollars

7. Scope of F&A Rates • Research • On-campus • Off-campus • Instruction • On-campus • Off-campus • Other Sponsored Activity (any other project sponsored by an external entity that is not research or instruction) • On-campus • Off-campus

8. Determination of F&A Rate • Summary of financial information—i.e., how funds were spent in base year • Classification of cost to cost pools • Adjustments to identify modified total direct costs (MTDC) • Review and adjustments to cost classification • Allocations of indirect costs • Calculation of F&A rates

9. Summary of Financial Information • Functional classifications in PeopleSoft • PCS (Project Classification System) codes • PCS tree for Chartfields • DeptID (some exceptions) is the key for PCS codes

10. Classification of Cost to Cost Pools • Based on Chartfield PCS code • Depends on accurate decision making with regard to which Chartfield is used for expenditure • Expenditures for multiple purposes must be split between appropriate Chartfields

11. Summary of Financial Information

12. Adjustments to Identify MTDC • Move certain costs out of individual Chartfields to other categories • Capitalized building expenses • Capital equipment costs • Scholarships • Unallowable costs (including A-21 Exclusions) • Etc. • These reclassifications are proscribed by OMB Circular A-21

13. A-21 Exclusions • Certain costs may not normally be charged to the federal government either as direct charges or through the F&A rate (see separate handout) • Under certain conditions, some of these may be chargeable as direct costs to the federal government (must be specifically approved by sponsor) • There are generally no prohibitions on charging these as direct costs to non-federal projects (be careful of federal flow through—it counts as federal)

14. Adjustments to Identify MTDC

15. Review and Adjustment • Cleanup process • Review expenditures on Chartfield to identify where expenditures may have been made from Chartfield with one PCS code that should have been another • Initial identification by review of expenses, confirmation by consultation with Chartfield approver

16. Review and Adjustment

17. Allocations of Indirect Costs • Differing allocation methods for different classes of indirect cost pools • Administrative pools • Library pool • Facilities pools • Allocation of indirect pools are to direct functions

18. Administrative Allocations • Allocation is based on expenditures within covered direct cost pools • General administration • Allocated to all institutional direct functions • Departmental administration • Allocated among direct functions within administrative unit • Student services administration • Allocated entirely to instruction function • Sponsored projects administration • Allocated among sponsored project direct cost functions

19. Allocation of Library Cost • Based on user population • Allocations differ for each population • Can be based on employee/user populations or special study • Ours done on employee/user FTEs • Faculty • Staff • Students • Other users

20. Facilities Allocation • Based on space allocations • Space allocations can be based on salary allocation to direct costs or on space study • We use a space study because it more closely ties costs to usage (especially for O&M and equipment)

21. Calculation of F&A Rates • Divide amount of indirect cost allocated to direct cost pool by MTDC amount of direct cost pool • (A/B)*100% = C where • A = allocated indirect cost • B = MTDC of direct costs • C = indirect cost rate for that indirect function • Thus, if general administrative costs are $50,000 and direct instruction costs are $1,000,000, then instruction F&A rate for GA is 5%

22. After Calculation, Then What? • Administrative Cap • Utility Cost Adjustment • Rate Proposal • Negotiation • Agreement

23. Administrative Cap • Administrative indirect costs for research cost pool are capped at 26% • That means any administrative (collectively) costs above 26% are unrecoverable • Administrative cap does not apply to non-research cost pools (we apply it, A-21 does not)

24. Utility Cost Adjustment • A-21 recognizes that research uses a greater proportion of utilities than other direct cost functions • UCA was designed to reimburse these costs • UCA applies only to certain institutions • UM campuses are not among those institutions • OMB was supposed to have issued new rules for the UCA in July 2002--not yet done

25. Rate Proposal • Lots of data • Calculated rates for each indirect cost pool supporting each direct cost pool • Additional (beyond the F&A data) institutional data • Lots of tables • Lots of paper

26. Negotiation • Government wants to pay as little as possible • University wants reimbursement (we have already spent this money) for as much of the cost as possible • Research rate is the focus because that is most of what federal government funds at the negotiated rate • Negotiated rate never exceeds proposed rate—the amount that it is less is largely based on strength of proposal • Differentials between proposed rate (cost) and negotiated rate are 2.9%

27. Agreement • Specifies rates for each direct cost pool except OIA • Specifies MTDC base components by what is excluded from the base • Specifies effective dates of rates • Specifies type of rate (normally “predetermined”)--we were provisional since July • References requirements of A-21

28. A-21 Referenced in Agreement • What does this mean for us? • Cost Accounting Standards • No special accounting practices for sponsored projects (can’t charge them costs not charged elsewhere) • F&A rates apply to all projects funded from outside the institution • Costs charged to a project must be during the term of the agreement and for the benefit of the project • Others, but these are the big ones

29. Where does that leave us? • The F&A rate is a cost recovery process—if we do not recover F&A from projects, the difference to cover the costs is made up from elsewhere • The cap on the administrative rate means any administrative costs exceeding 26% are unrecoverable • Since we exceed the cap, administrative cap also means the only variables are facilities and library costs

30. Cost Recovery Assessment

31. Strategies for Strength • Reduce non-mandatory reclassifications • Have more accurate Asset Management (buildings and equipment) records • Develop a higher degree of confidence in relationship between activity (and funds to support it) data and space assignment data • Spend funds according to the PCS code assigned to the Chartfield • Conduct a library special study • All else being equal, use institutional funds for facilities and project funds for salaries • Next year (FY 2005) is the next base year

32. Space is Critical to Success • The space data drive almost all the facilities costs • Recoverable building depreciation is based on space allocations • Recoverable equipment depreciation is based on assignment of equipment to rooms and space allocations of those rooms • Recoverable O&M is based on space allocations

33. What are MU’s F&A rates? • Research-on campus 47% • Research-off campus 26% • Instruction-on campus 51% • Instruction-off campus 26% • Other Sponsored Activity-on campus 25% • Other Sponsored Activity-off campus 19.5%

34. What about state projects? • Research-on campus 47 36.6% • Research-off campus 26 20.2% • Instruction-on campus 51 39.7% • Instruction-off campus 26 20.2% • Other Sponsored Activity-on campus 25 19.5% • Other Sponsored Activity-off campus 19.5 15.2%

35. What are the components of MU’s research rate? • General Administration-4.5% • Departmental Administration-19.5% • Sponsored Projects Administration-2.0% • Building Depreciation-3% • Equipment Depreciation-2.2% • Operations and Maintenance-13.9% • Library-1.9%

36. What happens when F&A costs are not recovered? • Costs must be picked up from another source • RIF is reduced • Compliance problems • Reduced future rate (but with constant or increasing costs)

37. Who is affected when F&A is not recovered? • General Administration-4.5% (9.6%) • Departmental Administration-19.5% (41.4%) • Sponsored Projects Administration-2% (4.3%) • Building Depreciation-3% (6.4%) • Equipment Depreciation-2.2% (4.7%) • Operations and Maintenance-13.9% (29.6%) • Library-1.9% (4%)

38. Research Rate Components

39. Who pays when F&A is not recovered? • General Administration 7.2% • Departmental Administration 31.1% • Sponsored Projects Administration 3.2% • Building Depreciation 4.8% • Equipment Depreciation 3.5% • Operations and Maintenance 22.2% • Library 3% • RIF 25%

40. How do our rates compare? • University of Illinois 53% • Purdue University 52% • Indiana University 50.5 • University of Texas 50%* • University of Minnesota 48.5% • University of Oklahoma 48% • University of Colorado 48% • University of Iowa 47.5% • University of Kentucky 47% • Iowa State University 46%* • Kansas State University 46% • University of Kansas 44% • *provisional rate under negotiation

41. Questions/More Information? • Mike Warnock, OSPA, 882-4329, warnockm@missouri.edu