An Overview of Indirect Costs at Cal Poly
Facilities and Administrative Charges (F&A), commonly referred to as indirect costs (IDC) or overhead, are the least understood component of sponsored programs. Indirect costs are often viewed negatively by sponsors and faculty alike. While corporations recognize these as necessary costs to perform business, they too work diligently to contain indirect costs in order to remain competitive within their industry.
For Cal Poly however, indirect costs play an especially important role in achieving the university’s research objectives. These indirect charges are costs that cannot practically, or in a cost-effective manner, be directly tied to a single project. Often-used illustrations of F&A costs are electricity, water, sewer, general equipment/building depreciation and administrative support. Rarely explained are the administrative support costs, which include salaries and benefits for departmental, college, and university personnel involved in the central administration of the institution. Every institution accepting federal funds negotiates an F&A rate through their cognizant federal agency, in most cases for a five-year period. This negotiation process typically results in rates lower than actual costs in some areas. For example, the federal government imposes a cap on the administrative component limiting it to the maximum of 26 percent of the total direct project costs when true costs are actually higher.
Another common misconception relates to the distribution of recovered indirect cost funds. These funds are recovered only after sponsored project funds are expended. On an annual basis a recommendation for distribution of recovered indirect costs is made to the President by the Dean of Research and Graduate Programs. Typically, the President endorses these recommendations. Typically twenty-five percent of earned indirect is returned to the unit/department when over $100,000 of research expenditures have been made during the year and full overhead has been recovered on those projects. This distribution gives the receiving unit/department discretionary funds to offset costs related to the conduct or enhancement of research and research-related requirements. Funds that are not distributed to a specific unit/department are pooled in an account that is used for support of major research needs and initiatives on campus.
It is the flexibility of recovered indirect funds that is so important to the research enterprise. Therefore, it is imperative that the University attempt to recover the maximum indirect allowed. Any waiver or reduction of indirect impacts the colleges and departments the most.
The current rates are:
- For all government-funded projects (federal, state, and local), federal flow-through, and subcontracts from prime contractors with federal funding, as well as contracts with private, for-profit entities:
- 38% of Modified Total Direct Costs (MTDC), which includes the project’s direct costs and the first $25K of subcontract costs, but excludes equipment, tuition remission, and rental of off-campus facilities.
- 14% of MTDC for off-campus projects. Off-campus is defined as projects, which are either performed in another institution’s facilities, a company’s facility, or performed abroad. Working at home or at an off-campus Cal Poly location, or in the field does not constitute an off-campus project.
- 8% of Total Direct Costs (TDC) for student-centered projects, defined as projects where students may be reimbursed for their work, but, generally, faculty who supervise the projects contribute their time.
If the project includes subcontracts to other entities, the appropriate rate is applied only to the first $25,000 of subcontracted costs. For those sponsors or programs with a fixed rate which is published and consistently applied to all grant recipients (e.g., 8% TDC on training grants), the University will normally accept that published rate and absorb the costs, showing the un-recovered indirect as cost sharing.
For sponsors that have a formal policy against payment of indirect costs or they restrict the reimbursement of IDC to less than Cal Poly’s federally negotiated rate (such as USDA or many Foundations) Cal Poly's policy is to honor the sponsors' rate. The policy must be published and applicable to all grant applicants.
Negotiation of indirect cost rates that deviate from the above are the responsibility of the Grants Development Office, not the Principal Investigator/ Project Director.