Indirect Costs (Facilities & Administrative Costs)
Indirect costs, now officially known as facilities and administrative costs, are those costs that are incurred by the University for common or joint objectives and which, therefore, cannot be easily or specifically identified with a particular project or objective. Examples of these costs include operation and maintenance, central administrative operations, and depreciation of buildings and equipment. These costs are all necessary and their obvious benefits flow to departments and individual sponsored projects but, because they cannot be allocated with ease or a high degree of accuracy, they are more efficiently charged as a rate based upon incurred costs on awards.
An example of the type of expenses that qualify as indirect costs is office supplies. Office supplies are used in both the administrative operations of the University and on externally funded projects. When office supply expense is incurred, it is usually impossible to determine with any degree of accuracy where these supplies will be used. Further, because of the relatively low cost of most typical office supply transactions, the effort it would take to track this expense and to allocate it among the many cost centers represented by sponsored project awards is not practical. The government has determined that this expense, along with many others, should be charged to the University's administrative cost centers as an administrative expense rather than allocating it as a direct cost to each sponsored project, except in unusual cases. The total of this expense, plus many others like it, contribute to the total amount claimed by the University in its "cost pools" (accounts used to accumulate indirect cost expenses), as illustrated later.
At Worcester Polytechnic Institute (WPI), an indirect cost calculation is normally prepared every two years to determine what the actual indirect cost rate will be. This calculation is then submitted to the Office of Naval Research (ONR) for its approval. Once a final rate is determined, ONR creates a document called a Negotiation Agreement in which it specifies what rate WPI is permitted to charge to its fully-funded Federal awards. WPI is now permitted to charge indirect costs as a percentage of modified total direct costs (MTDC) as its base, having migrated from its previous salaries and wage (S&W) base as of July 1, 2004. The MTDC base is what is multiplied by WPI's indirect cost rate to determine the amount of indirect costs to be charged. It should be noted that, because the Federal government has "capped" certain expenses that comprise the indirect cost base, the University does not recover the full amount indirect costs incurred. This limitation makes it even more important to recover indirect costs at the federally approved rate on sponsored projects.
How Indirect Costs Are Calculated
If the total direct costs of research at an institution covered by Office of Management and Budget (OMB) Circular A-21, Cost Principles for Educational Institutions do not exceed $10 million in a fiscal year, the Simplified Method (sometimes called the short-form method) may be used to calculate the institution's indirect cost rate. The calculation of indirect costs looks something like this:
Indirect Cost Rate =Indirect Costs of the University / MTDC Base of Direct Functions
The numerator in this calculation includes the following institutional expense categories, accumulated as "pools" of expenses:
General Administration and General Expenses - These expenses relate to the general administration and executive offices of the University. Student related costs, such as student administration, student activities, student aid, and scholarships, are excluded from this category.
Operations and Maintenance Expenses - This category includes all appropriate costs associated with WPI's physical plant and depreciation/use allowances of its assets.
Library Costs - The expenses in this category are those incurred for the University's library operations.
Departmental Administration - This expense is calculated as 20% of the salaries and expenses of academic and administrative department heads.
The denominator in this calculation includes the total of all the direct functions minus equipment, capital expenditures, patient care costs, tuition remission, rental costs, scholarships and fellowships, and the excess of any subcontract over $25,000.
The resulting indirect cost rate is a "research" rate, which should be applied to the modified total direct cost base of all research proposal and award budgets on which it is allowed. Reductions in the approved indirect cost rate should occur only when mandated by specific program restrictions or when approved in advance by the Provost.
Indirect costs is an issue that is widely misunderstood and often thought of as a tax on research when, in reality, it is simply a way that the University attempts to recover those costs that cannot readily be included in proposal and award budgets. Questions regarding the calculation of indirect costs or how they are charged to sponsored projects should be addressed to Research Accounting.
Maintained by webmaster@wpi.eduLast modified: September 17, 2007 08:44:44