Federal Research

For every dollar spent on federally funded university research, the government pays another 50 cents for overhead, or indirect costs. Because of inadequate federal guidance and oversight and weak internal controls at the universities, the government has been charged millions of dollars for unallowable and questionable overhead costs, including entertainment, foreign travel, and utility bills. Although the universities and government have sought to address problems with overhead billing, their actions could escalate indirect costs even further. For example, the universities will likely try to bill the government for any costs associated with (1) improving their accounting systems and internal controls and (2) responding to new government requirements. In GAO's view, the depth and persistence of the problems and the upward trend in indirect charges over the years make this an opportune time to consider basic changes to the reimbursement system. This report discusses advantages and disadvantages of several alternative approaches to restructuring the reimbursement system. GAO believes that regardless of any long-term solution chosen, it is inefficient to have both the Department of Health and Human Services (HHS) and the Defense Department (DOD) running the program, particularly when they are using fundamentally different approaches. HHS negotiates indirect cost rates that limit the federal reimbursement, resulting in an average indirect cost rate of about 50 percent, whereas DOD provides for full recovery of the universities' claimed allowable indirect costs, resulting in a cost rate of 59 percent.

GAO found that: (1) due to inadequate federal guidance, oversight, and weak internal controls at the universities, the government has been charged millions of dollars for unallowable, questionable, or improperly allocated indirect costs; (2) recent disclosures of inappropriate charges have spurred corrective actions, the Office of Management and Budget (OMB) has revised OMB Circular A-21, and universities have initiated their own indirect cost reviews to address identified problems; (3) such actions were appropriate to deal with the immediate problems, but they could contribute to an increase in indirect costs because universities are likely to pass on to the government a portion of the costs incurred to improve their accounting systems and internal controls; (4) the depth and persistence of the problems make this an opportune time to consider fundamental changes to the existing reimbursement system; and (5) a multiagency task force is addressing the need for such changes.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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