University Research
Policies for the Reimbursement of Indirect Costs Need to Be Updated Gao ID: GAO-10-937 September 8, 2010In fiscal year 2007, the majority of the Department of Defense's (DOD) basic research obligations were provided to higher education institutions. DOD reimburses these institutions for both direct and indirect costs for research. Two federal agencies, DOD and the Department of Health and Human Services (HHS), negotiate indirect cost rates used to reimburse higher education institutions for indirect costs on federally funded research awards, including DOD awards. GAO was asked to examine the following issues related to higher education institutions performing basic research for DOD: (1) the variation in proposed and negotiated indirect cost rates and factors that may contribute to variations; (2) how and to what extent the administrative cap and the DOD basic research cap limit reimbursement of indirect costs; and (3) the methods DOD uses for overseeing compliance with indirect cost reimbursement for grants. GAO surveyed a generalizable sample of higher education institutions performing basic research for DOD; reviewed agency guidance and policies; and interviewed officials from federal agencies, independent public accounting firms, and higher education institutions.
GAO identified wide variation in indirect cost rates at schools receiving DOD funding in fiscal year 2007, which may be related to a number of factors. For example, the average difference between a school's proposed and its negotiated rate was much larger for schools with HHS as the cognizant rate-setting agency than for those with DOD, in part due to the agencies' differing approaches to negotiation. GAO also found that schools receiving a 1.3 percent add-on to their rate to assist with the cost of utilities both proposed and negotiated higher rates than those without the adjustment. Contrary to guidance to periodically review school eligibility, the fixed list of schools eligible to receive this add-on has not been revisited since established in 1998. The cap on the administrative portion of the indirect cost rate limited fiscal year 2007 reimbursement for about 83 percent of schools. The cap was established nearly 20 years ago with the intent of limiting federal reimbursement for schools' administrative costs, and OMB has not reexamined this cap since its implementation. We estimate the DOD basic research cap might have limited fiscal year 2008 reimbursement for some awards at about 22 percent of schools, but the limitation depends on the types of costs included in each individual award and is difficult to determine up front on a schoolwide basis until total costs for each award are tallied. GAO identified weaknesses in the three methods DOD says it uses to oversee that indirect costs for research grants are reimbursed appropriately: the single audit, the closeout process, and audits by DOD's Defense Contract Audit Agency or by cognizant agencies for audit. At least one of the three methods was used at most of the schools we reviewed, but four schools were not covered by any of the methods, indicating a gap in coverage. In our discussions with cognizant agencies for audit, we learned that recent audits of research awards to schools at HHS have led to some significant findings of improper billings of indirect costs. Inconsistencies in rate-setting and reimbursement processes lead to perceived and actual differences in the treatment of schools. Moreover, because of the weaknesses in its oversight methods, DOD lacks assurance that it is reimbursing indirect costs appropriately. GAO is making recommendations to address consistency in rate-setting and to improve oversight of indirect cost reimbursement. The agencies generally agreed with these recommendations.
RecommendationsOur 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.
Director: John K. Needham Team: Government Accountability Office: Acquisition and Sourcing Management Phone: (202) 512-5274GAO-10-937, University Research: Policies for Reimbursement of Indirect Costs Need to Be Updated
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
September 2010:
University Research:
Policies for the Reimbursement of Indirect Costs Need to Be Updated:
GAO-10-937:
GAO Highlights:
Highlights of GAO-10-937, a report to congressional committees.
Why GAO Did This Study:
In fiscal year 2007, the majority of the Department of Defense‘s (DOD)
basic research obligations were provided to higher education
institutions. DOD reimburses these institutions for both direct and
indirect costs for research. Two federal agencies, DOD and the
Department of Health and Human Services (HHS), negotiate indirect cost
rates used to reimburse higher education institutions for indirect
costs on federally funded research awards, including DOD awards.
GAO was asked to examine the following issues related to higher
education institutions performing basic research for DOD: (1) the
variation in proposed and negotiated indirect cost rates and factors
that may contribute to variations; (2) how and to what extent the
administrative cap and the DOD basic research cap limit reimbursement
of indirect costs; and (3) the methods DOD uses for overseeing
compliance with indirect cost reimbursement for grants. GAO surveyed a
generalizable sample of higher education institutions performing basic
research for DOD; reviewed agency guidance and policies; and
interviewed officials from federal agencies, independent public
accounting firms, and higher education institutions.
What GAO Found:
GAO identified wide variation in indirect cost rates at schools
receiving DOD funding in fiscal year 2007, which may be related to a
number of factors. For example, the average difference between a school‘
s proposed and its negotiated rate was much larger for schools with
HHS as the cognizant rate-setting agency than for those with DOD (see
figure below), in part due to the agencies‘ differing approaches to
negotiation. GAO also found that schools receiving a 1.3 percent add-
on to their rate to assist with the cost of utilities both proposed
and negotiated higher rates than those without the adjustment.
Contrary to guidance to periodically review school eligibility, the
fixed list of schools eligible to receive this add-on has not been
revisited since established in 1998.
Figure: Estimated Mean Proposed and Negotiated Rates at the Two
Cognizant Rate-Setting Agencies:
[Refer to PDF for image: line graph]
DOD:
Proposed rate: 51.7%;
Negotiated rate: 51.6%.
HHS:
Proposed rate: 53.4%;
Negotiated rate: 49.1%.
Source: GAO analysis of survey data.
[End of figure]
The cap on the administrative portion of the indirect cost rate
limited fiscal year 2007 reimbursement for about 83 percent of
schools. The cap was established nearly 20 years ago with the intent
of limiting federal reimbursement for schools‘ administrative costs,
and OMB has not reexamined this cap since its implementation. We
estimate the DOD basic research cap might have limited fiscal year
2008 reimbursement for some awards at about 22 percent of schools, but
the limitation depends on the types of costs included in each
individual award and is difficult to determine up front on a
schoolwide basis until total costs for each award are tallied.
GAO identified weaknesses in the three methods DOD says it uses to
oversee that indirect costs for research grants are reimbursed
appropriately: the single audit, the closeout process, and audits by
DOD‘s Defense Contract Audit Agency or by cognizant agencies for
audit. At least one of the three methods was used at most of the
schools we reviewed, but four schools were not covered by any of the
methods, indicating a gap in coverage. In our discussions with
cognizant agencies for audit, we learned that recent audits of
research awards to schools at HHS have led to some significant
findings of improper billings of indirect costs. Inconsistencies in
rate-setting and reimbursement processes lead to perceived and actual
differences in the treatment of schools. Moreover, because of the
weaknesses in its oversight methods, DOD lacks assurance that it is
reimbursing indirect costs appropriately.
What GAO Recommends:
GAO is making recommendations to address consistency in rate-setting
and to improve oversight of indirect cost reimbursement. The agencies
generally agreed with these recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-937] or key
components. For more information, contact John Needham at (202) 512-
4841 or NeedhamJK1@gao.gov.
[End of section]
Contents:
Letter:
Background:
Variations in Indirect Cost Rates Are Driven by Multiple Factors:
Administrative Cap Generally Limits Reimbursement, but the Effects of
DOD Basic Research Cap Are Unclear:
The Three Methods DOD Uses to Oversee Reimbursement of Indirect Costs
to Schools Have Weaknesses:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Agency Comments:
Appendix III: Detailed Analysis of Factors:
Appendix IV: Survey Data for Standard Form Schools:
Appendix V: Survey Data for Simplified Method Schools:
Tables:
Table 1: Types of Rates Used for Indirect Cost Rate Agreements for
Schools:
Table 2: Characteristics of the Administrative Cap and the DOD Basic
Research Cap:
Table 3: Fiscal Year 2008 Coverage of the Schools We Reviewed by DOD
Methods for Overseeing Reimbursement of Indirect Costs:
Table 4: Circular A-133 Compliance Supplement: Audit Objectives of
Indirect Costs:
Table 5: Breakdown of Schools Receiving More Than Half of 2007 DOD
Funding Obligations for Basic Research and Whether or Not They Were
Included in the 2008 Annual Single Audit:
Table 6: Fiscal Year 2008 DCAA Audits and Evaluations of 32 Schools
Receiving More Than 50 Percent of DOD Basic Research Funding in Fiscal
Year 2007:
Table 7: Audits of DOD Awards Conducted by Cognizant Agencies for
Audit:
Table 8: Survey Population and Sampling Information:
Table 9: Estimated Means and Confidence Intervals of Proposed and
Negotiated Fiscal Year 2007 Indirect Cost Rates for On-Campus
Organized Research by Different Attributes of Schools:
Table 10: Estimated Means and Confidence Intervals for the Difference
between Proposed and Negotiated Fiscal Year 2007 Indirect Cost Rates
for On-Campus Organized Research by Different Attributes of Schools:
Figures:
Figure 1: DOD Funding of Basic Research in Fiscal Year 2007: $1.5
Billion:
Figure 2: Types of Research Costs:
Figure 3: Illustration of Total Direct Costs (TDC):
Figure 4: Illustration of MTDC Exclusions:
Figure 5: Indirect Cost Rate-Setting Process:
Figure 6: Indirect Costs Limited to 35 Percent of Total Award Costs:
Figure 7: Calculation for Indirect Cost Rate Threshold:
Figure 8: Estimated Proportion of Schools with Proposed or Negotiated
Rates in Selected Rate Ranges:
Figure 9: Estimated Mean Proposed and Negotiated Rates at the Two
Cognizant Rate-Setting Agencies:
Figure 10: Research and Development Program Sampling Information for
Schools' 2008 Single Audit (n=22):
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
September 8, 2010:
Congressional Committees:
In fiscal year 2007, the federal government obligated nearly $27
billion for basic research, the majority of which went to higher
education institutions in the form of research grants and contracts.
The federal government has recognized that university research
contributes to American competitiveness and leadership in science, in
effect creating shared goals between the federal government and
universities, and has committed to sponsoring a share of the research
costs. The government's contribution can be broken down into direct
costs (those costs specifically identified with individual research
projects) and indirect costs (those that are not directly attributable
to a specific project or function, such as the costs for
administrative staff), also referred to as facilities and
administrative costs when dealing with higher education institutions.
While direct costs are relatively easy to define and measure, indirect
costs can be more difficult to allocate to individual projects.
Further, there has been debate over what portion of indirect costs is
the responsibility of the government and what portion is the
responsibility of the research institution.
Over the years, Congress has enacted legislation and agencies have
issued guidance to clarify what indirect costs the government will
reimburse. For example, in the early 1990s, revisions to the Cost
Principles for Educational Institutions[Footnote 1] limited
reimbursement of the administrative portion of indirect costs for
higher education institutions to 26 percent of the modified total
direct cost base. More recently, Congress enacted legislation which
capped the reimbursement of indirect costs on Department of Defense
(DOD) basic research grants, contracts, and cooperative agreements to
35 percent of the total cost of the award.[Footnote 2] The House
Committee on Armed Services Report for the Duncan Hunter National
Defense Authorization Act for Fiscal Year 2009 (H.R. 110-652) directed
that we review the DOD processes and procedures related to indirect
costs for research.[Footnote 3] In response, we examined the following
issues related to higher education institutions performing basic
research for DOD: (1) the variation in proposed and negotiated
indirect cost rates and factors that may contribute to variations; (2)
how and to what extent the administrative cap and the DOD basic
research cap limit the government's reimbursement of indirect costs;
and (3) the methods DOD uses for overseeing compliance with indirect
cost reimbursement for grants and the extent to which each method was
used.
To determine the proposed and negotiated indirect cost rates at higher
education institutions performing DOD basic research,[Footnote 4] we
surveyed university administration officials at schools that DOD
reported had active grants, contracts, or cooperative agreements in
fiscal year 2007 that were coded as basic research.[Footnote 5] The
survey sample was comprised of (1) the 32 higher education
institutions that received more than half of the funding DOD obligated
for basic research, and (2) a random selection of 146 higher education
institutions with obligations of more than $100,000 in fiscal year
2007. Of the 178 sampled higher education institutions to whom we sent
the surveys, 144 responded for an 87 percent response rate. Of the 144
respondents, 114 used a standard format proposal for negotiating an
indirect cost rate, and 29 used a simplified format proposal, which
can be used by higher education institutions that received $10 million
or less in total direct costs for federally sponsored grants,
contracts, and cooperative agreements annually.[Footnote 6] For the
purposes of this report, we produce population estimates for the
higher education institutions within the United States that use the
standard format for proposal submission and that DOD identified as
performing more than $100,000 of basic research in fiscal year 2007.
Based on our survey, we estimate that this would correspond to about
263 schools.[Footnote 7] Characteristics and demographic information
for the higher education institutions that used a simplified form of
submitting indirect cost rate proposals can be found in appendix V. To
determine what factors may contribute to rate variations, we surveyed
university administration officials concerning various factors, such
as the school's cognizant rate-setting agency (which can be either the
Department of Health and Human Services (HHS) or DOD),[Footnote 8]
whether an institution received an adjustment for the cost of
utilities, and whether an institution is public or private (see
appendix III for a list of factors), interviewed DOD and HHS
officials, and interviewed representatives from higher education
associations. Detailed analysis of the factors that contribute to
variations in research rates can be found in appendix III, with the
analysis of key factors included in the objective 1 findings. To
determine how and to what extent the administrative and DOD basic
research caps limit reimbursement of indirect costs, we collected
information through our survey of university administration officials
at higher education institutions and reviewed the intent and
legislative history of the administrative and DOD basic research caps.
To identify and understand the methods DOD uses for overseeing
compliance with reimbursement of indirect costs, we interviewed DOD
officials. To determine the extent to which each of the methods
identified by DOD was used, we focused on the 32 higher education
institutions that received more than half of DOD's fiscal year 2007
basic research obligations. For these institutions, we reviewed
documentation such as DOD guidance on grant administration, financial
reporting forms for grants, data from independent public accounting
firms on the research and development awards sampled for the single
audit, and previous reports by GAO and others. We also interviewed
officials at DOD, the Office of Management and Budget (OMB), cognizant
agencies for audit such as HHS, the National Science Foundation (NSF),
and the Department of Education, as well as officials of independent
public accounting firms and higher education institutions to
understand their role in reviewing indirect cost reimbursement on DOD
basic research awards. See appendix I for additional details on our
objectives, scope, and methodology.
We conducted this performance audit from October 2009 to September
2010 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
In fiscal year 2007, the federal government obligated nearly $27
billion for basic research, with DOD obligations accounting for $1.5
billion of that total.[Footnote 9] As shown in figure 1, more than
half of DOD basic research funding was provided to schools in the form
of research grants and contracts.
Figure 1: DOD Funding of Basic Research in Fiscal Year 2007: $1.5
Billion:
[Refer to PDF for image: pie-chart]
Schools: 53%;
Intramural: 26%;
For profits: 14%;
Nonprofits: 5%;
Other: 2%.
Source: GAO analysis of National Science Foundation data.
Notes: Intramural research is research performed by federal agencies
and carried out directly by federal personnel.
"Other" includes Federally Funded Research and Development Centers and
foreign performers.
[End of figure]
OMB Circular A-21, Cost Principles for Educational Institutions,
establishes principles on how schools charge costs to federally funded
research. Circular A-21 requires all costs for reimbursement to be
allowable, allocable, and reasonable, and provides that the federal
government bear its fair share of total costs, determined in
accordance with generally accepted accounting principles, except where
restricted or prohibited by law.[Footnote 10] While the federal
government and schools share certain research goals, there is debate
on what constitutes the federal government's fair share of research
costs.
The federal government reimburses both direct and indirect costs
associated with federally funded research. Direct costs can be
specifically identified with individual research projects and are
relatively easy to define and measure. They include, for example, the
researcher's salary, subawards,[Footnote 11] equipment, and travel.
Indirect costs represent a school's general support expenses and
cannot be specifically identified with individual research projects or
institutional activities. They include, for example, building
utilities, administrative staff salaries, and library operations (see
figure 2).
Figure 2: Types of Research Costs:
[Refer to PDF for image: illustration]
Research costs:
Direct costs:
For example: Researcher salary, subawards, equipment, travel.
Indirect costs:
Facilities:
For example:
* Building use or depreciation;
* Equipment use or depreciation;
* Operations and maintenance.
Administrative:
For example:
* Clerical staff and supplies for academic departments;
* Financial management expenses;
* Central administrative management information systems.
Source: GAO analysis of OMB Circular A-21.
[End of figure]
As shown in figure 2, indirect costs are divided into two main
components, facilities costs and administrative costs.[Footnote 12]
Facilities costs include operations and maintenance expenses, building
use or depreciation costs, equipment use or depreciation costs, and
library expenses. Administrative costs include general administration
expenses, such as the costs associated with executive functions like
financial management; departmental administration expenses, including
clerical staff and supplies for academic departments; sponsored
projects administration expenses, that is the costs associated with
the office responsible for administering projects and awards funded by
external sources; and student administration and services expenses,
such as the administration of the student health clinic.
Indirect Cost Rate:
Circular A-21 outlines the process for establishing an indirect cost
rate for schools performing federally funded research. The indirect
cost rate is the mechanism for determining the proportion of indirect
costs that may be charged to federally funded research awards. The
rate is established based on a historical fiscal year of cost data
from a school, and is applied to individual research awards. The
indirect cost rate is applied to a modified set of direct costs
referred to as "modified total direct costs" (MTDC) (see figures 3 and
4).[Footnote 13] MTDC includes the salaries and wages of those
conducting the research, fringe benefits (e.g., pensions), materials
and supplies, travel, and the first $25,000 of each subaward. MTDC
excludes costs such as equipment costs, capital expenditures, tuition
remission,[Footnote 14] equipment or space rental costs, and the
portion of each subaward in excess of $25,000 (see figure 4).
Figure 3: Illustration of Total Direct Costs (TDC):
[Refer to PDF for image: illustration]
Total direct costs (TDC) =
Sum of direct costs specifically identified with particular projects
or activities:
Subawards;
Equipment;
researcher salary.
Source: GAO analysis of OMB Circular A-21.
[End of figure]
Figure 4: Illustration of MTDC Exclusions:
[Refer to PDF for image: illustration]
For MTDC, certain direct costs or portions of direct costs are
excluded from TDC. Examples of exclusions:
* Equipment;
* Portion of subawards in excess of $25,000.
MTDC = TDC - Exclusions.
Source: GAO analysis of OMB Circular A-21.
[End of figure]
The indirect cost rate[Footnote 15] is developed as follows:
* Each subcomponent of the facilities component of the indirect cost
rate (e.g., building use, depreciation, operations and maintenance) is
divided by MTDC and added together to derive the facilities component
of the rate.
* Similarly, each subcomponent of the administrative component of the
indirect cost rate (e.g., general administration, sponsored
administration) is divided by MTDC and then added together to derive
the administrative component of the rate.
* Then, the facilities component and the administrative component are
added together to equal the indirect cost rate.
Indirect Cost Rate-Setting Process:
A school's indirect cost rate is negotiated between the school and the
federal government. A school can establish three types of indirect
cost rates (see table 1).
Table 1: Types of Rates Used for Indirect Cost Rate Agreements for
Schools:
Rate types: Key features;
Predetermined:
* Negotiated and generally established for a 2-4 year period;
* Actual incurred costs are not determined at the end of the period;
Fixed with carry-forward:
* Negotiated and generally established for a 1-year period;
* Actual incurred costs are determined at the end of the period;
* Costs above or below fixed rate are added or subtracted from future
rate (this is known as carry-forward);
* School cannot change from this method without approval of cognizant
rate-setting agency;
Provisional:
* Allows a school to continue to have a federally approved indirect
cost rate when negotiated rates expire, but no new rates have been
agreed to;
* If the provisional rate is not converted to a predetermined or fixed
rate by the end of school's fiscal year, a final rate is established
and adjustments are made based on actual incurred costs.
Rate types: When used;
Predetermined:
* Used if future costs are fairly predictable;
Fixed with carry-forward:
* Used if future costs are less predictable;
Provisional:
* School and cognizant rate-setting agency unable to reach agreement
on rate before the current negotiated rate runs out.
Rate types: Benefits;
Predetermined:
* Simpler research award administration;
* Enables budget preparation;
* Expedited closeout;
Fixed with carry-forward:
* Carry-forward can be added to next subsequent rate negotiation if
necessary;
* Costs are adjusted based on actual fiscal year costs;
Provisional:
* Allows flexibility when a new negotiated rate is unable to be
established in a timely manner.
Source: GAO analysis of OMB Circular A-21.
[End of table]
Circular A-21 assigns rate-setting responsibility to either HHS or
DOD, as the cognizant rate-setting agency. The Division of Cost
Allocation (DCA) handles this responsibility within HHS and the
Indirect Cost Branch within the Office of Naval Research (ONR) does so
for DOD.[Footnote 16] Currently, HHS, with 50 rate negotiators in four
field offices and headquarters, is the cognizant rate-setting agency
for more than 1,000 schools, while DOD, with four negotiators and a
director in one location, is responsible for 44 schools.
As shown in figure 5, a school establishes its indirect cost rate by
submitting a proposal to its cognizant rate-setting agency using a
base year that represents a historical fiscal year of costs. HHS
reviews the proposal while DOD generally sends the proposal to the
Defense Contract Audit Agency (DCAA) to be audited.[Footnote 17] After
the proposal has been reviewed or audited, the cognizant rate-setting
agency and the school negotiate, and come to agreement on the rate.
The rate is then documented in a formal indirect cost rate agreement.
Figure 5: Indirect Cost Rate-Setting Process:
[Refer to PDF for image: illustration]
School collects costs from a base year and develops indirect cost rate
proposal;
Submits indirect cost rate proposal;
Federal cognizant rate-setting agency:
HHS: Proposals reviewed by staff;
DOD: Proposals audited by DCAA.
Prior to signing a negotiated rate agreement, a 26 percent cap is
applied to the administrative portion of the indirect cost rate for
higher education institutions only, per Circular A-21.
Negotiations occur.
Negotiated rate agreement signed.
Indirect cost rate agreement.
School has a negotiated indirect cost rate.
Source: GAO analysis; PhotoDisc (clip art).
[End of figure]
Indirect Cost Reimbursement Limitations:
Across the federal government, there are limitations, or caps, placed
on the reimbursement of indirect costs. Two related to DOD-funded
research at schools are known as the administrative cap and the DOD
basic research cap.
Administrative Cap:
In 1991, Circular A-21 incorporated an administrative cap limiting the
administrative costs for which a school may be reimbursed to 26
percent of the MTDC for research awards. This cap is applied during
the rate-setting process. This limitation only applies to higher
education institutions, as stated in OMB Circular No. A-21. Despite
the circular's administrative cap, DOD regulations, which implement a
statutory mandate, provide that for DOD contracts, versus grants or
cooperative agreements, schools have the option to negotiate a
separate rate that is not subject to the administrative cap.[Footnote
18]
DOD Basic Research Cap:
The Department of Defense Appropriations Act, 2008 incorporated a cap
limiting the indirect costs for which a research performer (including
a school) may be reimbursed to 35 percent of a DOD basic research
award's total costs. This cap, which applies to all nonfederal
research performers, that is, schools, nonprofits, and private sector
companies performing on contracts, grants, and cooperative agreements,
was also included in the fiscal year 2009 and fiscal year 2010 defense
appropriations acts. In contrast to the administrative cap, which is
applied to the negotiated rate applicable to all of a school's federal
research awards, the DOD basic research cap is applied to individual
DOD basic research awards, and while the school can monitor whether
the charges have exceeded the 35 percent limitation as it performs the
research, the school (or other performer) ultimately ensures
government reimbursement does not exceed the cap once all costs are
known.
The DOD basic research cap is calculated with different cost bases
than either the school's indirect cost rate or the administrative cap.
As previously discussed, a school's indirect cost rate is applied to a
modified set of total direct costs to arrive at the dollar amount of
indirect costs applicable to a specific research award. In contrast,
the 35 percent cap on DOD basic research awards limits indirect costs
as a proportion of total costs. Total costs include all allowable
direct and indirect costs on an individual award.
Because of the different cost basis, the 35 percent DOD basic research
cap does not mean that an institution with an indirect cost rate
higher than 35 percent will be limited by the cap. The threshold for a
school to be limited by the 35 percent DOD basic research cap is a
negotiated indirect cost rate of 53.8 percent.[Footnote 19] This is
demonstrated through the following example: if a school receives a DOD
basic research award for $100,000, the maximum amount of the award
that may be reimbursed as indirect costs is $35,000.
Figure 6: Indirect Costs Limited to 35 Percent of Total Award Costs:
[Refer to PDF for image: vertical bar graph]
$100,000 award:
Direct costs: $65,000;
Indirect costs: $35,000.
Source: GAO analysis.
[End of figure]
This threshold holds true in situations where no direct costs are
excluded from total direct costs. In this circumstance, total direct
costs are equivalent to modified total direct costs. This allows us to
use the formula for an indirect cost rate to calculate the threshold
(see figure 7 below).
Figure 7: Calculation for Indirect Cost Rate Threshold:
[Refer to PDF for image: illustration]
For a school with a $100,000 DOD basic research award:
Indirect costs divided by Total direct costs =
$35,000 divided by $65,000 = 53.8% =
Indirect cost rate threshold.
Source: GAO analysis.
[End of figure]
If a school has an indirect cost rate below this 53.8 percent
threshold, it will not be affected by the DOD basic research cap on
indirect costs at 35 percent of total award costs. If a school has an
indirect cost rate above this threshold, it may not be reimbursed for
all its indirect costs, depending on each award's costs.
Variations in Indirect Cost Rates Are Driven by Multiple Factors:
We identified multiple types of variation in indirect cost rates for
schools performing DOD basic research, driven by several different
factors (see appendix III for detailed information on the factors and
variations we identified). Across all schools, wide variation was
identified in proposed rates, negotiated rates, and in the difference
between the proposed and negotiated rates at schools receiving DOD
research funding in fiscal year 2007. The difference between the
proposed and negotiated rates was significantly larger for schools
that negotiate with HHS than for those that negotiate with DOD.
Differing policies and procedures employed by the two cognizant rate-
setting agencies, including, for example, different approaches and
differing use of rate types, may explain some of this variation.
Another source of variation was that schools eligible for a rate
increase of 1.3 percent to account for the cost of utilities, known as
the utility cost adjustment, both proposed and negotiated higher rates
than those not receiving the adjustment. The increase for the costs of
utilities is received by a fixed list of schools that are listed in
OMB Circular A-21. OMB has not reexamined the list of those receiving
the adjustment since 1998 and DOD and HHS officials responsible for
rate-setting were unclear on what the process should be for receiving
and approving applications for use of the utility cost adjustment.
Proposed and Negotiated Indirect Cost Rates Varied Widely among
Schools Performing DOD Research:
The proposed and negotiated indirect cost rates at schools performing
DOD research[Footnote 20] varied widely from one school to another.
[Footnote 21] Figure 8 summarizes the distribution of schools with
various levels of proposed and negotiated rates. For example, whereas
about 14 percent of schools proposed a rate of less than 45 percent,
about 17 percent of schools proposed a rate of 60 percent or higher.
Similarly, while about 24 percent of schools negotiated rates that
were less than 45 percent, about 7 percent of schools negotiated a
rate of 60 percent or higher. Variation between what was proposed and
what was negotiated can also be seen in this figure. For instance,
while about 17 percent of schools proposed a rate of 60 percent or
higher, only about 7 percent of schools negotiated a rate that high.
Figure 8: Estimated Proportion of Schools with Proposed or Negotiated
Rates in Selected Rate Ranges:
[Refer to PDF for image: horizontal bar graph]
Selected rate ranges:
Less than 45:
Proposed: 14%;
Negotiated: 24%.
45 to less than 50:
Proposed: 21%;
Negotiated: 33%.
50 to less than 55:
Proposed: 25%;
Negotiated: 25%.
55 to less than 60:
Proposed: 23%;
Negotiated: 11%.
60 or over:
Proposed: 17%;
Negotiated: 7%.
Source: GAO analysis of survey data.
Notes: Percentage estimates shown have 95 percent confidence intervals
of within +/-7 percentage points of the estimated percent. This figure
represents the fiscal year 2007 rates for all schools, including those
with HHS as their cognizant rate-setting agency as well as those with
DOD.
[End of figure]
The Difference between Proposed and Negotiated Rates was Larger for
Schools Negotiating with HHS Than Schools Negotiating with DOD:
The difference between a school's proposed and negotiated rates varied
significantly based on the cognizant rate-setting agency with which a
school negotiated. Specifically, the average difference between
proposed and negotiated fiscal year 2007 rates for schools with HHS's
Division of Cost Allocation as their cognizant rate-setting agency was
about 4.5 percentage points. In contrast, the average difference
between proposed and negotiated rates for schools with DOD's Office of
Naval Research as their cognizant rate-setting agency was less than 1
percentage point (see figure 9 below).[Footnote 22]
Figure 9: Estimated Mean Proposed and Negotiated Rates at the Two
Cognizant Rate-Setting Agencies:
[Refer to PDF for image: line graph]
DOD:
Proposed rate: 51.7%;
Negotiated rate: 51.6%.
HHS:
Proposed rate: 53.4%;
Negotiated rate: 49.1%.
Source: GAO analysis of survey data.
Note: The shaded bars represent the estimated differences between
proposed and negotiated rates for schools with each of the two
cognizant rate-setting agencies. For each agency, differences between
the proposed and negotiated rates that exceed 0.67 percent are
statistically significant. Therefore, at HHS, proposed rates differ
significantly from negotiated rates. This difference is not
significant at DOD.
[End of figure]
Schools' explanations for the difference between their proposed and
negotiated rates varied based on the schools' cognizant rate-setting
agencies. For example, we estimate that about 60 percent[Footnote 23]
of schools with HHS as their cognizant rate-setting agency identified
negotiation that was not clearly tied to specific aspects of their
rate proposal as a part of the explanation for the negotiated rate
reduction. For example, one school we surveyed stated that HHS
officials told them that 2 percentage points would be the most that
their rate could increase over the previous negotiated rate. The
National Director of HHS's Division of Cost Allocation confirmed that
a limitation on the increase in negotiated rates of 2 percentage
points had been the practice in one of the DCA field offices. Once
this matter was brought to the attention of the National Director of
HHS's Division of Cost Allocation, he ordered that the practice be
discontinued both to ensure consistent treatment across field offices
and because it was not a practice supported by policy or regulation.
For schools with DOD as their cognizant rate-setting agency, none of
the 15 sampled schools identified negotiation that was not clearly
tied to specific aspects of their rate proposal as a part of their
explanation of the difference between their proposed and negotiated
rates. When DOD was the cognizant rate-setting agency, school
officials generally indicated the difference between the rate proposed
and negotiated resulted from disagreements with DOD over specific
costs or methodologies used in their rate proposal. For example, some
schools said that DOD officials made changes to the school's proposed
classification and allocation of space to research. In addition to the
findings from the survey, interviews with school officials revealed
that schools perceived that the reasons for rate reductions varied
depending on which agency the school negotiated with. For example, in
discussions with a group of senior-level university research
administrators, HHS negotiations were described as arbitrary, whereas
administrators negotiating with DOD stated that they clearly
understood why reductions were being negotiated. However, HHS
officials stated that their negotiations are not arbitrary. Prior to
the negotiation, HHS provides schools written documentation of its
position that was developed based on its review of facts included in
the school's indirect cost rate proposal.
Differing Policies and Procedures Employed by the Cognizant Rate-
Setting Agencies Are Factors That Contribute to Differing Rate
Reductions for Each Agency:
The differences between the proposed and negotiated rates based on
cognizant rate-setting agencies and schools' perceptions of the
reasons for the rate reductions may be related to differences between
the processes employed by the two rate-setting agencies. For example,
the two cognizant rate-setting agencies express differing approaches
to executing responsibilities under Circular A-21 in terms of rate-
setting goals. OMB Circular A-21 states that the cognizant rate-
setting agencies are responsible for negotiating and approving
indirect cost rates for schools on behalf of all federal agencies. DOD
policy on rate-setting for indirect costs states that DOD is to
implement relevant regulations (including OMB Circular A-21) in a
manner that "ensure[s] uniform and consistent treatment of indirect
cost issues at all DOD cognizant institutions" and DOD officials have
stated that a broader goal is to ensure that DOD is able to obtain
high-quality research by reimbursing all allowable, allocable, and
reasonable costs. In contrast, HHS's approach, as identified in its
rate-setting mission, includes two components - being "fair,
reasonable and equitable when communicating and negotiating with the
grantee community" and having "a fiduciary responsibility to protect
the public funds."
HHS and DOD use different processes for evaluating a school's rate
proposal. DOD officials told us it generally performs audits of its
indirect cost proposals to validate costs enumerated in the proposal.
HHS does not generally perform an audit of indirect cost proposals,
but they review the cost proposal data.[Footnote 24] HHS officials
stated that the findings from the review are used as the basis for
their negotiation with a school.
The frequency with which the two cognizant rate-setting agencies
approve predetermined and fixed with carry-forward rate types also
varies. Although both cognizant agencies expressed a preference for
negotiating predetermined rates, in part due to the burden associated
with carry-forward adjustments, in our survey 5 out of the 15 DOD
schools negotiated fixed with carry-forward rates, while no more than
1 percent of schools with HHS as their rate-setting agency did.
The year on which a school based its proposal for 2007 rates also
varied by the cognizant rate-setting agency, with schools negotiating
with HHS using, on average, earlier base years than those negotiating
with DOD. In addition, while none of the 15 DOD schools we surveyed
used a base year prior to 2002 to negotiate 2007 rates, about 17
percent of HHS schools did. Further, schools that reported an early
base year (2001 or earlier) negotiated an average rate of 6.5
percentage points below their proposed rate, compared to a 3.6
percentage point rate reduction for schools with more recent base
years.[Footnote 25] The interaction between cognizant rate-setting
agency, base year, and the degree of rate reduction may relate to the
different policies the two agencies have related to extending rates.
[Footnote 26] DOD officials stated that DOD does not allow extensions,
whereas HHS policy allows for an extension of an existing rate
agreement in some circumstances. HHS granted extensions to some of the
schools included in our survey and, according to HHS officials, many
of the extensions were granted with associated reductions in the rate,
ranging from half a percentage point to 2.5 percentage points. This
may account for some of the rate reduction observed at these schools.
Our findings on different approaches used by the cognizant rate-
setting agencies are similar to our findings of nearly 20 years ago.
Specifically, in 1992, we reported that different approaches used by
the two cognizant rate-setting agencies resulted in variation in
negotiated rates. We found that DOD's approach generally provided for
full recovery of claimed allowed indirect costs, whereas HHS's
approach generally resulted in limiting the federal reimbursement of
indirect costs. At the time, we reported that the average rate
negotiated by DOD was about 59 percent, whereas the average rate
negotiated by HHS was about 50 percent. For our fiscal year 2007
survey data, proposed rates averaged 53.4 percent for schools assigned
to HHS and 51.7 percent for schools assigned to DOD. Negotiated rates
averaged 49.1 percent for HHS schools and 51.6 percent for DOD
schools. In both cases, the averages did not vary between the two
cognizant rate-setting agencies by a statistically significant
amount.[Footnote 27] However, the different approaches identified in
the 1992 report are consistent with the different processes we found
today.
The Utility Cost Adjustment Is Linked to Schools That Propose and
Receive Higher Rates, but Is Not Clearly Associated with Current
Utility Costs:
The utility cost adjustment--a 1.3 percentage point increase in the
negotiated indirect cost rate--is linked to institutions with higher
proposed and negotiated indirect cost rates. The utility cost
adjustment was implemented in 1998 to replace a system of special
utility cost studies. It was made available to 65 institutions
identified in Exhibit B of OMB Circular A-21,[Footnote 28] based on
whether they had submitted a special study in their most recent
indirect cost rate proposal. Schools on the list receive this
adjustment in addition to the utilities portion of indirect costs that
a school negotiates based on its proposal. In fiscal year 2007, the
average negotiated rate for schools that reported receiving the
utility cost adjustment was 54.7 percent and the average for those
reporting not receiving the utility cost adjustment was 47.6 percent.
[Footnote 29]
Although OMB Circular A-21 states that, beginning in July 2002,
federal agencies must reevaluate periodically the eligibility of
institutions to receive the utility cost adjustment, no changes have
been made to the list since the utility cost adjustment was
implemented in 1998. Also, OMB Circular A-21 states that federal
agencies may receive applications for use of the utility cost
adjustment from schools not on the list. An OMB official stated that
OMB considers the list of utility cost adjustment recipients to be
final for the time being, and the eligibility list has remained
unchanged since 1998. The official also told us that OMB has not been
asked to reassess the utility cost adjustment by federal agencies. DOD
and HHS officials responsible for rate-setting reported that schools
have requested to be added to the eligibility list; however, these
officials also stated they were unclear on what the process should be
for receiving and approving applications for use of the utility cost
adjustment.
Administrative Cap Generally Limits Reimbursement, but the Effects of
DOD Basic Research Cap Are Unclear:
The limitation on government reimbursement of administrative costs
affects most schools. Based on our survey results, about 83 percent of
schools had fiscal year 2007 administrative costs above the
administrative cap, with a reported average administrative rate
component of 31 percent. The cap was established in 1991 with the
intent of limiting federal reimbursement for schools' indirect costs.
When the cap was originally proposed in 1986, it was established at 26
percent for that year for the administrative portion of indirect costs
because it was the 5-year average administrative cost reimbursement
rate for all major universities. OMB has not formally reexamined this
cap since its implementation in 1991. In survey responses and
interviews, school and association officials reported that growing
administrative costs were associated with modern research and
complying with federal regulations. Some government officials also
attributed the potential increase to federal regulations, particularly
those enacted since September 11, 2001.
The administrative cap limits reimbursement of indirect costs in
different ways than the DOD basic research cap. For example, whereas
the administrative cap is applied to a school's negotiated indirect
cost rate and limits reimbursement of administrative costs on all
federal awards to the school, the DOD basic research cap is applied at
the close of an award and limits reimbursement only on DOD-funded
basic research awards. We estimate the DOD basic research cap may
affect some awards at about 22 percent of schools, based on schools'
negotiated indirect cost rates for fiscal year 2008. It is difficult
to pinpoint the extent to which the DOD basic research cap limits
indirect cost reimbursement at a school in part because it operates
differently than the guidance for rate-setting and reimbursement
familiar to schools, as outlined in OMB Circular A-21. For example,
unlike for the administrative cap, the DOD basic research cap's impact
cannot be determined up front on an institution-wide basis because its
limitation on indirect costs depends on the types of costs included in
each individual award. In addition, the cap's impact cannot be fully
determined until total costs for an award are known, making it
difficult for schools to know up front whether their reimbursement
will be limited for a given award. These differences between the DOD
basic research cap and the rate-setting and reimbursement structure
familiar to schools under Circular A-21 may contribute to confusion
reported by schools about how the cap is applied to awards.
The Cap on Administrative Costs for Research Limits Reimbursement at
Most Schools:
The administrative cap limits reimbursement at most schools. An
estimated 83 percent of schools reported administrative costs that
were higher than the 26 percent administrative cap. During the rate-
setting process, schools generally provide cost information in their
proposal that identifies the administrative component of their
indirect cost rate based on their total administrative costs,
regardless of the 26 percent cap. These rate components averaged 31
percent in fiscal year 2007, which represents an average 5 percentage
point difference between these proposed administrative rate components
and the cap at 26 percent.[Footnote 30]
The fact that about 83 percent of schools had administrative costs in
fiscal year 2007 higher than the administrative cap indicates that the
cap controls government costs through limiting reimbursement. The cap
was enacted in 1991 to stop abuses related to indirect cost
reimbursement at schools. In addition, the federal government
acknowledged that indirect costs were rising rapidly, and
characterized the situation as problematic and therefore in 1986
proposed what it considered to be a reasonable ceiling on all
administrative costs for that year. To determine the ceiling, OMB used
the 5-year average administrative rate component for all major
universities. OMB first proposed establishing the cap at 26 percent
and subsequently reducing the reimbursement rate to 20 percent after a
year. This further reduction was not included in the final revision of
the circular, but reflects the initial goal of controlling government
costs even below the average reimbursement rate for administrative
costs.[Footnote 31] An OMB official stated the agency believes that
over time the administrative cap has forced the schools to be more
efficient with their administrative effort and to be more disciplined
in spending. OMB has not reopened the administrative cap issue since
its implementation because they have not seen evidence that this is a
priority issue.
According to school and association officials we spoke with,
administrative costs have been rising over time. They attribute these
changes, in part, to increased federal regulations, such as
regulations related to national security standards, human subjects and
animal care, as well as reporting and audit requirements, having large
impacts on their indirect costs. However, school and association
officials were unable to provide an estimate of the increased costs
associated with federal regulations. In response to these regulations,
schools we surveyed report taking a number of actions that have raised
administrative costs. These include the following:
* hiring new staff to, for instance, report data on grants and
subrecipient monitoring,
* opening new offices to monitor compliance with federal regulations,
* implementing new information technology systems,
* developing processes for improving security and safety, and:
* training staff on new systems and compliance efforts.
In order to respond to the government's research needs with respect to
complex research topics, such as nanotechnology, some schools we
surveyed report making investments in research capabilities which
could require hiring personnel to manage programs in new or upgraded
facilities. Schools claim these indirect costs may not be fully
reimbursed because of the administrative cap. Since the implementation
of the administrative cap, some schools tell us they have had to
identify additional sources of funding to conduct the research. When
asked how they bridge the gap between actual administrative costs and
the reimbursement from the federal government for administrative
costs, school officials offered examples including the use of funds
from university endowment and investments, and student tuition.
Some government officials have also observed increasing administrative
costs over time. For example, HHS officials who review indirect cost
rate proposals told us they have seen a trend of increasing
administrative costs reflected in schools' rate proposals. These
officials attributed the increased administrative costs to federal
regulations such as post-9/11 regulations related to security
standards and foreign students that have led schools to spend
resources on security clearances, student visas, and other screening
efforts. Despite reported increasing administrative costs and related
under-reimbursement, some DOD officials who are responsible for
awarding basic research told us that schools continue to compete for
federal research awards and produce the research that meets the
government's needs.
The Administrative Cap and the DOD Basic Research Cap Limit
Reimbursement for Schools in Different Ways:
The administrative cap and the DOD basic research cap limit government
reimbursement of indirect costs in distinct ways, as shown in table 2
below. Whereas the administrative cap limits reimbursement of
administrative costs specifically, the DOD basic research cap limits
reimbursement of all indirect costs for an applicable award.
Additionally, the design of each cap differs in terms of when the cap
is calculated, what entities and awards the cap applies to, and what
cost base is used to calculate the cap's impact.
Table 2: Characteristics of the Administrative Cap and the DOD Basic
Research Cap:
What it is:
Administrative cap: 26% limit on the administrative portion of the
negotiated rate;
DOD basic research cap: 35% limit on reimbursement of indirect costs
(both administrative and facility costs) as a portion of an award's
total costs.
When calculated:
Administrative cap: Prior to signing a negotiated rate agreement;
DOD basic research cap: During and at the end of an award.
To whom it applies:
Administrative cap: Schools;
DOD basic research cap: All nonfederal research performers (schools,
nonprofit, for profit).
Cost base:
Administrative cap: Modified total direct costs (MTDC);
DOD basic research cap: Total costs.
Affects:
Administrative cap: All research awards;
DOD basic research cap: DOD basic research awards only.
Source: GAO analysis of OMB Circular A-21 and federal statutes.
[End of table]
The differences in the way the caps limit reimbursement also means
each cap's impact may differ and cannot be compared to the other.
The Cap on Indirect Costs for DOD Basic Research May Limit
Reimbursement for Some Schools, but the Extent That Reimbursement Is
Limited Is Difficult to Determine:
Approximately 22 percent of schools had a fiscal year 2008 indirect
cost rate high enough for awards to be potentially limited by the 35
percent cap on indirect costs of DOD basic research awards.[Footnote
32] While the legislative intent for including this cap in certain
defense appropriations acts is sparse, House Report 110-279[Footnote
33] for the Department of Defense Appropriations Bill, 2008 indicated
that overhead costs had grown to unwarranted levels, and the House
Committee on Appropriations recommended that DOD limit the percentage
of overhead costs that would be reimbursed for basic research awards.
Because the cap could have affected only some of the fiscal year 2008
awards at about 22 percent of schools, the scope of its effect might
have been limited.[Footnote 34]
It is difficult to determine the extent to which the DOD basic
research cap will affect schools in part because its key features
differentiate it from the rate-setting and reimbursement structure
outlined in OMB Circular A-21, the guidance familiar to schools.
[Footnote 35] The DOD basic research cap limits reimbursement of
indirect costs as a proportion of total award costs, instead of MTDC,
which has two important outcomes on the way its impact is determined.
First, the final impact on reimbursement cannot be determined until
total costs are tallied. Second, the cap's limitation depends on the
types of costs included in each individual award, and therefore its
impact cannot be determined up front on a schoolwide basis. Moreover,
because the cap uses a base of total costs instead of MTDC, the cap is
not structured in the same way as an indirect cost rate. Consequently,
the cap at 35 percent of total award costs does not require schools to
negotiate an indirect cost rate below 35 percent. However, in our
survey we found that some schools mistakenly perceived they would be
affected by the cap if their negotiated indirect cost rate was above
35 percent. For example, two schools stated that the 35 percent rate
cap was lower than their indirect cost rates of approximately 50
percent, and therefore they believed the cap would decrease their
reimbursement. In another example, a school with a 45 percent indirect
cost rate stated the cap at 35 percent of indirect costs would result
in a 10 percent reduction in recovery of indirect costs on each of
their awards. These schools misunderstood how using a base of total
costs instead of MTDC makes the cap different than their indirect cost
rates. In fact, none of the schools in the examples stated above would
be affected by the cap, because their negotiated indirect cost rates
were below 53.8 percent, a mathematically determined threshold below
which no school is affected by the cap.
The 53.8 percent indirect cost rate at which awards may begin to be
affected by the DOD basic research cap is a minimum and does not mean
that all awards above this rate will be affected by the cap. Multiple
schools may have the same indirect cost rate above this threshold, but
each school may experience different effects from the cap, depending
on the proportion of direct costs that are excluded from the MTDC base
for each individual award. For example, we looked at a DOD award for
each of two schools in our survey that had indirect cost rates of 57
percent in fiscal year 2007. One of the awards was for research on
laser technology at a large private school. The other award was for
research on prostate cancer at a smaller private school. With an
indirect cost rate of 57 percent, if more than about 6 percent of the
total direct costs are excluded from MTDC, reimbursement on an award
is not limited by the DOD basic research cap. Only one of the two
sample awards would have been limited by the DOD basic research cap
because of the level of exclusions for the award. The affected award--
research on prostate cancer at the smaller school--had no total direct
costs excluded from its MTDC, making the proportion of indirect costs
to total costs above 35 percent. The award for laser technology
research at the larger school had more costs (9 percent) excluded from
its MTDC, and therefore the proportion of indirect costs to total
costs was below 35 percent. The higher the percentage of costs
excluded from an award's MTDC, the less likely the award would be
affected by the DOD basic research cap. Whether the DOD basic research
cap limits reimbursement depends on the level of an award's
exclusions; therefore, it is difficult for a school to pinpoint and
predict the effects of this cap on a schoolwide basis.
The Three Methods DOD Uses to Oversee Reimbursement of Indirect Costs
to Schools Have Weaknesses:
DOD identified three methods it uses to oversee indirect cost
reimbursement for research grants awarded to schools: the annual
single audit, the award closeout process, and agency audits, performed
by DCAA or by cognizant agencies for audit. However, we identified
weaknesses in DOD's use of each of these methods. DOD relies primarily
on the single audit, but some schools we reviewed were not
individually audited as a part of the single audit. The second method
identified by DOD, the closeout process, is conducted by DOD
administrative grants or contracting officers using various processes.
However, DOD officials told us they do not verify mathematically if
the correct indirect cost rate and dollar amount was charged at grant
closeouts. The third method, audits by DCAA or by cognizant agencies
for audit, covered only a limited number of the schools in fiscal year
2008, and cognizant agencies for audit had inconsistent approaches to
auditing the awards of other agencies, with only HHS conducting a
limited number of audits on DOD awards. At least one of the three
methods was used in fiscal year 2008 at 25 of the 32 schools we
reviewed. However, 4 schools were not covered by any of the three
methods, indicating a gap in coverage (see table 3).[Footnote 36]
Table 3: Fiscal Year 2008 Coverage of the Schools We Reviewed by DOD
Methods for Overseeing Reimbursement of Indirect Costs:
DOD method for overseeing reimbursement of indirect costs: Method 1:
Single audit; and; Method 3: DCAA or other agency audit;
Number of schools covered: 12.
DOD method for overseeing reimbursement of indirect costs: Method 1:
Single audit only;
Number of schools covered: 10.
DOD method for overseeing reimbursement of indirect costs: Method 3:
DCAA or other agency audit only;
Number of schools covered: 3.
DOD method for overseeing reimbursement of indirect costs: Method 2:
Award closeout check on indirect costs[A];
Number of schools covered: 0.
DOD method for overseeing reimbursement of indirect costs: No method
used;
Number of schools covered: 4[C].
DOD method for overseeing reimbursement of indirect costs: Not
counted[B];
Number of schools covered: 3.
DOD method for overseeing reimbursement of indirect costs: Total;
Number of schools covered: 32.
Source: GAO analysis of information from independent public accounting
firms, DOD, and cognizant agencies for audit.
[A] DOD components responsible for award closeout on school awards
through the postaward administration process told us they do not check
indirect costs during grant closeout.
[B] Three schools are not counted due to lack of single audit (Method
1) data provided to GAO. Neither the award closeout process or agency
audits were used to review reimbursement of indirect costs at these
schools in fiscal year 2008.
[C] DCAA officials confirmed that none of the 16 classified audits
were performed at the four schools where no method was used.
Therefore, these four schools did not receive coverage from these
methods of overseeing reimbursement of indirect costs.
[End of table]
In our discussions with cognizant agencies for audit, we learned that
HHS has increased the audits of research awards to schools in recent
years, which have led to some significant findings of improper
billings of indirect costs.
Some Schools Are Not Individually Audited under the Single Audit,
DOD's Primary Method for Overseeing Reimbursement of Indirect Costs:
DOD reports that its primary method for overseeing compliance with
indirect cost reimbursement on research grants is the annual single
audit under the Single Audit Act, as amended.[Footnote 37] The Single
Audit Act adopted a single audit concept to help meet the needs of
federal agencies for grantee oversight and accountability as well as
grantees' needs for single, uniformly structured audits. The act was
intended to promote sound financial management with respect to federal
awards administered by nonfederal entities. An audit performed in
accordance with the Single Audit Act is directed at operations of an
entire entity.[Footnote 38] While the auditors must conduct audit
procedures that address particular compliance requirements as they
apply to specific federal programs identified by the auditors as high
risk, the Single Audit Act does not require that auditors test all
federal programs administered by an entity for compliance with all
related requirements.[Footnote 39] For a large and complex
organization such as a state government or a university system, the
auditors examine selected federal programs administered by the entity
based on guidance in OMB's Circular No. A-133 Compliance Supplement.
[Footnote 40]
OMB's Compliance Supplement identifies the compliance requirements
relevant to audits that are applicable to the major programs,
including research and development, and provides suggested audit
procedures for testing compliance with those requirements, including
sampling.[Footnote 41] The Compliance Supplement includes a section on
testing for allowable costs, including allowable indirect costs, and
the auditor may sample a certain number of transactions (claims for
reimbursement) from federal awards. Table 4 below shows the indirect
cost audit objectives provided by the Compliance Supplement for use by
auditors for federal awards selected for audit.
Table 4: Circular A-133 Compliance Supplement: Audit Objectives of
Indirect Costs:
Under A-133 guidance for educational institutions that charge indirect
costs to federal awards based on federally approved rates, auditors do
the following under (2) Audit Objectives - Indirect Costs:
* Obtain an understanding of internal controls, assess risk, and test
internal controls as required by OMB Circular A-133 §___.500(c);
* Determine that the rate(s) used to charge indirect costs is
consistent with the appropriate cognizant federal agency rate
agreement;
* Determine that the federally approved rate in effect at the time of
the initial award is applied throughout the life of the award;
* Determine that the federally approved rate(s) were applied to the
appropriate distribution base;
* Determine that indirect costs billed to awards are the result of
applying the approved rate(s) to the appropriate base amount(s).
Source: OMB Circular A-133 Compliance Supplement, March 2009.
[End of table]
For single audit reporting purposes, the parameters of the reporting
can differ from one school or school system to another. As a result,
in some cases individual educational institutions are considered
separate entities and audited separately, while in other cases they
may be audited as a part of a university system, or even as a part of
an entire state government, which includes numerous institutions or
agencies within the reporting entity.
The fact that the single audit may not be sufficient to provide
assurance that an entity is in compliance with requirements for
indirect costs charged to research and development grants was
reflected in our findings. In 2008, no research and development awards
or transactions were selected for review at 7 of the 32 schools we
reviewed. For 6 of these schools no research and development awards or
transactions were selected because the schools were a part of larger
reporting entities and the auditors told us that the research and
development program from other schools within the larger reporting
entity were selected for audit in 2008.[Footnote 42] Each of the 6
schools was either a campus at a major public university and the
entity was defined at the university-wide level, or the entity was
defined at the statewide level and the school was included under the
umbrella of the state. However, in terms of receiving federal awards,
each school functioned independently by, for example, negotiating an
indirect cost rate agreement with the federal government that was only
applicable to that school. Further, based on data from the National
Science Foundation, each of these schools received more than $97
million in federal research and development funding in 2007, an amount
much greater than the $500,000 threshold over which an entity is
required to receive a single audit. For example, the University of
California (UC) was defined as one entity subject to the single audit,
although each of its 10 campuses and the Office of the President
separately negotiate an indirect cost rate agreement.[Footnote 43] In
2008, no research and development awards or transactions were sampled
for any of the 4 UC campuses included in our 32 schools, including UC
campuses at Berkeley, Los Angeles, Santa Barbara, and San Diego,
because the University of California is defined as one
entity.[Footnote 44] Similarly, in 2008 the University of Virginia was
defined as a part of the Commonwealth of Virginia for the purposes of
the single audit, although the university negotiates its own indirect
cost rate agreement with the federal government. Because the
university falls under the umbrella of the state as an entity, in 2008
no research and development awards or transactions were selected from
the university for the single audit.[Footnote 45] Table 5 breaks down
how many of the 32 schools that we reviewed had awards or transactions
selected as a part of the single audit in 2008, and how many did not.
Table 5: Breakdown of Schools Receiving More Than Half of 2007 DOD
Funding Obligations for Basic Research and Whether or Not They Were
Included in the 2008 Annual Single Audit:
R&D award selected for fiscal year 2008 single audit: At least one
research and development award or transaction was selected for review
in fiscal year 2008;
Number of schools: 22.
R&D award selected for fiscal year 2008 single audit: No awards or
transactions were selected for fiscal year 2008 A-133 audit[A];
Number of schools: 7.
R&D award selected for fiscal year 2008 single audit: No data
available or not provided by independent auditor[B];
Number of schools: 3.
R&D award selected for fiscal year 2008 single audit: Total;
Number of schools: 32.
Source: GAO analysis of data provided by independent public accounting
firms.
[A] For six of the seven schools in this category, the school's awards
or transactions were not selected for audit because of the way the
entity was defined for purposes of the single audit. For one of the
seven schools, no awards or transactions were selected for audit
within the research and development program because the research and
development program was not considered a major program, and therefore
was not included as a part of the 2008 single audit.
[B] For two of the three schools, the data we requested were not
available according to the independent public accounting firm for the
schools' single audits. For one school, the independent public
accounting firm chose not to provide any data for our data request.
[End of table]
Furthermore, as shown in figure 10, based on data provided by
independent public accounting firms, few awards were sampled as a part
of the annual single audit in 2008, and even fewer DOD awards were
included in the sample.[Footnote 46] Specifically, for the 22 of the
32 schools where research and development awards were sampled as a
part of the 2008 single audit, the average number of total awards
sampled was 21 awards, and the average number of DOD awards sampled
was 5. Also, the percentage of total federal award dollars sampled for
the annual single audit ranged from 0.5 to 36 percent, and the DOD
award dollars sampled represented between 0.1 and 65 percent of all
federal award dollars.
Figure 10: Research and Development Program Sampling Information for
Schools' 2008 Single Audit (n=22):
[Refer to PDF for image: inverted pyramid]
Audit Universe:
Average number of awards in the research and development program:
2,657;
Range: 84 – 5,024.
Audit Sample:
Average number of awards reviewed from the research and development
program: 21;
Range: 2 – 555.
DOD Awards in Audit Sample:
Average number of awards reviewed from the research and development
program 5;
Range: 0 – 32.
Source: GAO analysis of data provided by independent public accounting
firms.
[End of figure]
DOD Does Not Use the Grant Closeout Procedure to Determine Whether
Indirect Cost Charges Were Correct:
DOD also reported that it uses the award closeout procedure--part of
the postaward administration process conducted on an award after its
period of performance has ended--for overseeing indirect cost
reimbursement to schools. According to DOD, for grants to schools,
postaward administration responsibilities are generally delegated to
administrative grants or contracting officers at DOD's ONR.[Footnote
47] As a part of award closeout, an ONR administrative grants or
contracting officer reviews the costs incurred under a given award to
determine whether all costs are allowable, allocable, and reasonable.
[Footnote 48] According to DOD officials, an administrative grants or
contracting officer may also request an evaluation of a final voucher
be conducted.[Footnote 49] To facilitate a financial review, schools
fill out a final financial status report within 90 days of the end of
the period of performance, which is to be reviewed and approved by the
administrative grants or contracting officer. The Standard Form 425,
or the "Federal Financial Report", is used for the final financial
status report and includes a section for recording indirect costs
charged by the school on the award.[Footnote 50]
DOD officials at ONR asserted that they use the award closeout
procedure as a method for overseeing indirect cost reimbursements.
However, DOD administrative grants and contracting officers told us
that they do not regularly use the closeout procedure to determine
whether or not the dollar amounts of the indirect costs charged were
correct. For example, DOD administrative grants and contracting
officers at two ONR regional locations and two other DOD service
locations that provide contract administration services for school
awards informed us they did not regularly check indirect costs to
determine if they were accurately charged, even though we found that
they can use information related to indirect costs provided by
awardees in the indirect expense section of the Federal Financial
Report to do so. OMB officials told us that, at a minimum, awards
officers are to use information in the Federal Financial Report at
award closeout to determine whether or not the correct indirect costs
were charged to the government. However, the Federal Financial Report
Instructions by OMB on completing the Indirect Expense section of the
form says to complete this section only if required by the awarding
agency and in accordance with agency instruction. According to DOD
officials, this section may or may not be required by DOD awarding
agencies and it is not the current practice of DOD administrative
grants or contracting officers that we spoke with to use information
in the Indirect Expense section to mathematically calculate if
indirect costs were accurately charged.
While ONR administrative grants and contracting officers stated they
do not use information entered in the Federal Financial Report to
verify that indirect costs were charged accurately on a particular
award, ONR does use information in the form's Indirect Expense
section, and other information in the form, to determine whether or
not a school charged indirect costs at or below the DOD basic research
cap of 35 percent of total costs.[Footnote 51] For example, at the two
regional ONR offices we visited, the administrative grants and
contracting officers informed us that ONR developed a form that
incorporates data from the Federal Financial Report for use in
determining whether or not an awardee receiving DOD basic research
funds was below the cap of 35 percent of total costs. If the
percentage is over the 35 percent cap, then the awardee is responsible
for paying back to the awarding DOD agency the amount of the
reimbursement over the limit.
DCAA Audited a Limited Number of Schools We Reviewed and Cognizant
Agencies for Audit Have Differing Practices for Overseeing Indirect
Cost Reimbursement of Other Agencies' Awards:
The third method DOD identified to oversee reimbursement of indirect
costs on its research grants was audits conducted by DCAA or by
cognizant agencies for audit. DCAA and HHS in its role as a cognizant
agency for audit conducted audits of DOD awards at some of the 32
schools in fiscal year 2008, but DCAA's coverage of the schools was
limited and the practices of the various cognizant agencies for audit
differed.
DCAA performs audits of DOD awards, generally on contracts but also
grants. DCAA's audit types include pre-award audits (such as an audit
of a proposal), postaward evaluations or audits (such as an evaluation
of a final voucher, or an incurred cost audit of an institution), and
system audits (e.g., an audit of an institution's billing system or
accounting system). For audits related to reimbursement of indirect
costs, for example, a DOD administrative grants or contracting officer
may request that DCAA conduct an audit of a school's final incurred
cost submission or an evaluation of a final voucher on an individual
award.
In fiscal year 2008, DCAA performed a total of 88 audits or
evaluations at 10 of the 32 schools that accounted for more than half
of fiscal year 2007 DOD basic research funding.[Footnote 52]
Approximately one-third of the audits and evaluations performed were
conducted at 1 of the 10 schools (see table 6 below). We asked the
DCAA Chief in the Policy Programs Division whose areas of
responsibility include audits of schools to identify which types of
audit services would include a check on indirect costs. Based on the
official's descriptions of the audit services, about two-thirds of the
audits were of the type where indirect costs were a main purpose,
about a third of the audits were audit types where indirect costs were
not the subject of the audit but were tested as a part of the basis of
the audit opinion, and 3 of the 88 audits were types of audits that
typically do not test indirect costs. Of note, 38 of the 88 audits
were of the type conducted prior to an award, for example, an audit of
a proposal. In some cases, an audit that takes place prior to an award
may not oversee compliance with reimbursement of indirect costs since
the costs have not yet been incurred.
Table 6: Fiscal Year 2008 DCAA Audits and Evaluations of 32 Schools
Receiving More Than 50 Percent of DOD Basic Research Funding in Fiscal
Year 2007:
School[A]: 1;
Total audits: 29.
School[A]: 2;
Total audits: 17.
School[A]: 3;
Total audits: 14.
School[A]: 4;
Total audits: 10.
School[A]: 5;
Total audits: 8.
School[A]: 6;
Total audits: 3.
School[A]: 7;
Total audits: 3.
School[A]: 8;
Total audits: 2.
School[A]: 9;
Total audits: 1.
School[A]: 10;
Total audits: 1.
School[A]: 11-32;
Total audits: 0.
School[A]: Totals;
Total audits: 88.
Source: GAO analysis of DOD data.
[A] Each school in this column represents an individual school we
reviewed.
[End of table]
In addition to performing DCAA audits, DOD officials noted that DOD
awards to schools may be audited by other agencies, in particular when
another agency is designated the role of cognizant agency for audit
for that school. Award recipients expending more than $50 million in
federal funding are assigned a cognizant agency for audit in
accordance with OMB Circular No. A-133. Generally, the cognizant
agency for audit is the federal agency that provides the predominant
amount of direct funding to a recipient. Some of the responsibilities
of the cognizant agency for audit include coordinating audits by
federal agencies of the school, performing quality control reviews of
audits by nonfederal auditors, and coordinating a management decision
for audit findings that affect federal programs of more than one
agency.
We determined that there were four cognizant agencies for audit
(including DOD) for the top 32 schools we reviewed, and these agencies
differ in their practices for addressing other agencies' awards. Of
the four cognizant agencies for audit, Education and NSF told us they
have not audited the awards of other agencies. HHS has a reimbursable
audit program administered out of its Office of Audit Services. The
Office of Audit Services establishes memorandums of understanding with
other agencies, including DOD, stating they will perform audits on a
reimbursement basis. Through the program, HHS retains its right, as
the cognizant agency for audit, to perform audits of DOD awards at
DOD's request. In addition to conducting audits for the three schools
in our review for which it is cognizant, DOD reported that it, like
HHS, establishes memorandums of understanding with other agencies to
conduct audits of their awards. Circular A-133 requires, to the extent
practical, cognizant agencies for audit to coordinate audits or
reviews made by or for federal agencies in addition to the single
audit.
Consistent with their stated practices, for the three cognizant
agencies for audit besides DOD included in our review, only HHS
conducted audits of DOD awards in fiscal year 2008. Specifically, HHS
performed 12 audits of DOD awards at 6 of the 32 schools we reviewed.
These audits were generally closeout or incurred cost audits on
individual awards. Table 7 identifies the breakdown of cognizant
agencies for audit for the 32 schools and the audits conducted by each
of these cognizant agencies for audit.
Table 7: Audits of DOD Awards Conducted by Cognizant Agencies for
Audit:
Cognizant agency for audit: HHS;
Cognizant for n schools in list of 32[A]: 17;
Total number of schools where audits of DOD awards were conducted: 6;
Total number of audits of DOD awards conducted at listed schools[B]:
12.
Cognizant agency for audit: Education;
Cognizant for n schools in list of 32[A]: 11;
Total number of schools where audits of DOD awards were conducted: 0;
Total number of audits of DOD awards conducted at listed schools[B]: 0.
Cognizant agency for audit: NSF;
Cognizant for n schools in list of 32[A]: 1;
Total number of schools where audits of DOD awards were conducted: 0;
Total number of audits of DOD awards conducted at listed schools[B]: 0.
Source: GAO analysis of audit information provided by HHS, Education,
and NSF.
[A] DOD is the cognizant agency for audit for 3 of the 32 schools.
Audits conducted by DOD at schools for which DOD is the cognizant
agency for audit are included in the information in table 6 above.
[B] This table includes all audits of schools that the agencies
reported they conducted for fiscal year 2008, regardless of whether
the audit was of grants or contracts.
[End of table]
One Agency Reported Increasing Its Audit Activity in Recent Years to
Oversee Compliance with Reimbursement on Individual Awards:
HHS officials told us that in 2003, a lack of confidence in the single
audit and a significant increase in the amount of money awarded to
schools led the agency to seek other ways to oversee the reimbursement
of research costs. As a result they identified five areas where
additional audits were necessary including audits of administrative
and clerical salaries, an area that is associated with indirect costs.
HHS officials also told us that there have been significant findings
in the area of administrative and clerical salaries. For example, the
HHS Office of the Inspector General (OIG) conducted a review of
administrative and clerical costs at Duke University and found the
school claimed an estimated $1.7 million in unallowable charges by
improperly billing indirect costs as direct costs.[Footnote 53] The
HHS OIG found that these unallowable claims occurred because the
school had not established adequate controls to ensure consistent
compliance with the federal requirements applicable to charges for
administrative and clerical costs. HHS officials also told us they are
currently undertaking a review of administrative and clerical costs at
another school as a follow-on to significant problems found during a
closeout audit of one of the school's awards.
Conclusions:
Inconsistencies in the rate-setting and reimbursement processes lead
to perceived and actual differences in the treatment of schools
performing DOD basic research. The difference between the proposed and
negotiated indirect cost rate varied based on whether a school
negotiated with DOD or HHS and leads schools to perceive unequal
treatment, though negotiated indirect cost rates were not different.
Even though this is only a perceived difference there are actual
differences in how schools may be defined for rate-setting purposes
versus the oversight of cost reimbursement purposes. Schools are
treated differently in terms of the oversight on their reimbursement
of indirect costs because of the flexibility in how the definition of
a nonfederal entity is applied, in some cases, creating a situation
where a school that expends $500,000 or more in federal funds may not
be audited as a separate entity, but is included as part of a larger
entity. DOD does not effectively use the other methods to oversee
indirect costs when a school is not separately audited. As a result,
DOD lacks assurance that it is reimbursing indirect costs
appropriately. In addition, guidance for the indirect cost rate-
setting and reimbursement processes contains provisions that have been
in place for a long time, but are overdue to be reviewed and updated.
Because the utility cost adjustment eligibility is based on
information that is 12 years old and therefore does not necessarily
reflect schools' current costs, the OMB guidance runs the risk of
inadvertently providing benefits to some schools and not others.
Similarly, because the rate at which administrative cost reimbursement
is limited has not been reviewed since it was implemented
approximately 20 years ago, and administrative costs may have changed
over time, it is unclear whether the current limitation achieves the
desired balance between controlling government costs and sponsoring
government's fair share of research costs.
Recommendations for Executive Action:
To address different processes for negotiating rates by the two
cognizant rate-setting agencies for higher education institutions, we
recommend that the Director of OMB:
* Identify methods to ensure that the rate-setting process is applied
consistently at all schools, regardless of which agency has rate
cognizance. This would include identifying ways to ensure that
differences in cognizant rate-setting agencies' approaches, goals,
policies, and practices do not lead to unintended differences in
schools' rate reductions for indirect costs.
To ensure that indirect cost reimbursement practices are consistent
with the current state of indirect research costs at schools providing
federal basic research, we recommend that the Director of OMB:
* Clarify the roles and responsibilities of federal agencies
(including DOD, HHS, and OMB) in accepting applications and
reevaluating the eligibility of schools to receive the utility cost
adjustment.
* Reexamine and determine whether reimbursing administrative costs at
a maximum rate of 26 percent achieves the appropriate level of cost
control and achieves the government's objective that the federal
government bears its fair share of total costs.
To improve DOD's ability to oversee reimbursement of allowable
indirect costs to schools, we recommend that the Secretary of Defense
direct that the Under Secretary of Defense for Acquisition, Technology
and Logistics:
* Establish a process for administrative grants/contracting officers
to verify at grant closeout whether a school has requested
reimbursement at the accurate indirect cost rate and dollar amount,
which includes calculating whether the dollar amount reflects the
appropriate application of rates for that award.
* Assess the current level of audit coverage for monitoring DOD
indirect cost reimbursement for schools and determine what level is
sufficient and whether to expand use of closeout audits and other
audits to oversee compliance.
* Develop a policy for oversight of indirect costs that includes the
use of alternative oversight information (1) for those schools not
individually audited under the single audit, and (2) for those schools
where the audit coverage of research and development awards is not
sufficient for oversight of indirect costs.
Agency Comments and Our Evaluation:
We provided a draft of this report to DOD, HHS, OMB, Education, and
NSF for review and comment. In written comments, DOD generally agreed
with all three recommendations. Specifically, DOD concurred with two
of the recommendations and partially concurred with the third. DOD
cited short-term actions it planned to take to address some of the
recommendations. For example, to address our recommendation that DOD
establish a process for verifying whether a school has requested
reimbursement at the accurate indirect cost rate and amount, DOD
stated it would require university recipients of research grants to
complete the field for indirect expenses on the final submission of
the Federal Financial Report and have postaward administrators conduct
the recommended verification on a sample of awards each year, using a
risk-based assessment. While DOD concurred with our recommendation
that DOD assess the current level of audit coverage and determine what
level is sufficient, DOD did not identify any new actions it would
take to do so, relying instead on continued efforts. Given our
findings that there was limited audit coverage by DCAA and cognizant
audit agencies of DOD grants, the intent of our recommendation was for
DOD to identify additional actions. In response to our recommendation
that DOD develop a policy for oversight of indirect costs that
includes the use of alternative oversight information in certain
circumstances, DOD partially concurred, indicating it would look to
identify alternative approaches, to the extent DOD identifies
insufficiencies in its oversight. In this recommendation and the
others, DOD emphasized that seeking improvements so DOD can continue
to rely on the single audit to oversee compliance with reimbursement
of indirect cost reimbursement for grants is its preferred approach.
However, while the single audit is a valuable tool, it may not always
be the right tool for DOD to ensure compliance with indirect cost
reimbursement for research grants. In addition to written comments,
DOD provided technical comments, which we incorporated as appropriate.
The department's written comments are included in their entirety in
appendix II.
OMB provided oral comments, indicating they generally agreed with the
recommendations, and technical comments, which we incorporated into
the report as appropriate. Education also provided technical comments,
which were incorporated into the report as appropriate. HHS and NSF
had no comment.
We are sending copies of this report to the Secretary of Defense, the
Secretary of Health and Human Services, the Director of the Office of
Management and Budget, the Secretary of Education, the Director of the
National Science Foundation, and other interested parties. This report
will also be available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you have any questions concerning this report, please contact me at
(202) 512-4841 or by e-mail at needhamJK1@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Other staff making key contributions
to this report were Penny Berrier Augustine, Sharron Candon, Pamela
Davidson, Morgan Delaney Ramaker, Anne-Marie Fennell, Art James, Janet
McKelvey, Ruben Montes de Oca, Amy Moran Lowe, Susan Neill, Kenneth
Patton, Angela Pleasants, Scott Purdy, Mark Ramage, Sylvia Schatz, and
Suzanne Sterling.
Signed by:
John K. Needham:
Director:
Acquisition and Sourcing Management:
List of Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Daniel Inouye:
Chairman:
The Honorable Thad Cochran:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Howard P. "Buck" McKeon:
Ranking Member:
Committee on Armed Services:
House of Representatives:
The Honorable Norman D. Dicks:
Chairman:
The Honorable C.W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of this study were to examine the following issues
related to higher education institutions performing basic research for
the Department of Defense (DOD): (1) the variation in proposed and
negotiated indirect cost rates and factors that may contribute to
variations; (2) how and to what extent the administrative cap and the
DOD basic research cap limit reimbursement of indirect costs; and (3)
the methods DOD uses for overseeing compliance with indirect cost
reimbursement for grants and the extent to which each method was used.
To identify the proposed and negotiated indirect cost rates of schools
performing basic research for DOD and factors that may contribute to
variation in the rates, we collected and analyzed information from a
probability sample of schools that performed basic research for DOD in
fiscal year 2007, according to DOD-provided data. Detailed information
on the survey is available below. We also interviewed government
officials at DOD and other government agencies on regulations and
policies relating to the reimbursement of indirect costs for research.
This included cognizant rate-setting officials in DOD's Office of
Naval Research and the Department of Health and Human Services' (HHS)
Division of Cost Allocation; DOD officials in offices awarding and
overseeing basic research, such as the Air Force Office of Scientific
Research; the Army Research Office; the Office of the Director,
Defense Research and Engineering; the Defense Threat Reduction Agency;
and the Defense Advanced Research Projects Agency; and regulatory
officials overseeing indirect cost policy in the Office of Management
and Budget (OMB). Through interviews with these officials, we obtained
views and documentation on the indirect cost process and on factors
that they believed might contribute to variation in rates. In
addition, we spoke with representatives of the academic community to
obtain information on their perspectives on the indirect cost rate-
setting process and to better understand the information that would be
available through our survey. These representatives included
university faculty and research administrators, as well as
associations representing the research community, including the
Association of American Universities (AAU), the Council on Government
Relations (COGR), the Association of Public and Land-grant
Universities, and the Federal Demonstration Partnership. Through these
interviews, we obtained perspectives on factors that they believed
might contribute to variation in rates and information on the impacts
of federal regulation on the research community. Finally, we reviewed
reports and documentation pertaining to indirect cost regulation,
policies, and processes, most notably OMB Circular A-21, governing
school indirect cost reimbursement, but also including cognizant rate-
setting agency process documentation, past GAO reports, and reports on
indirect costs by other organizations, such as the RAND Corporation
and Arthur Andersen.
To determine how and to what extent the administrative cap and the DOD
basic research cap limit reimbursement of indirect costs at higher
education institutions performing DOD research, we collected and
analyzed information from a probability sample of schools that
performed DOD basic research in fiscal year 2007, according to DOD-
provided data (see detailed survey information below). We also
interviewed government officials at OMB and at the cognizant rate-
setting agencies on regulations and policies relating to the
application of caps to indirect cost rates. Through interviews with
these officials, we obtained views on how the caps were developed and
their perspectives on how the selected caps may affect research
institutions. In addition, we spoke with representatives of the
academic community to obtain information on their perspectives on the
selected caps and to better understand the information that would be
available through our survey. These representatives included
university faculty and research administrators, as well as
associations representing the research community. Through these
interviews, we obtained information on the impacts of selected caps on
the research community, as well as information about what information
would be available to evaluate these impacts. Finally, we reviewed
documentation pertaining to selected indirect cost caps, including OMB
Circular A-21, the Department of Defense Appropriations Act, 2008, and
legislative and regulatory histories related to the caps.
To determine the methods DOD uses to oversee indirect cost
reimbursement on grants, we interviewed DOD officials at the office of
the Director, Defense Research and Engineering and the Office of Naval
Research (ONR). To identify the extent to which each of the three
methods identified by DOD was used, we focused on the 32 schools
representing more than half of DOD's fiscal year 2007 basic research
obligations, based on DOD data. We obtained information about the
extent to which these methods are used from DOD, independent public
accounting firms conducting the annual single audit, higher education
institutions, cognizant agencies for audit, and previous reports by
GAO and others. We also interviewed officials at DOD, OMB, HHS, the
National Science Foundation and the Department of Education, as well
as independent public accounting firm representatives and higher
education representatives. To determine the extent to which the first
method, the single audit, was used, we collected and analyzed data
provided by independent public accounting firms, state auditors, and
DCAA on their sampling of research and development awards for the
fiscal year 2008 single audit.[Footnote 54] To determine the extent to
which the second method, the grant closeout process, was used by DOD,
we reviewed DOD documentation and examples related to the various
processes to closeout a DOD basic research grant. For example, we
reviewed examples of financial information on a standard form that
tracks the status of the grant, including direct and indirect costs.
We discussed with the DOD award officers what and how the process and
procedures and forms for grant closeout check indirect costs to
determine if these costs were accurately charged during the award. In
addition, we interviewed OMB officials to determine the purpose of the
Indirect Expense section of the form developed by OMB, the Federal
Financial Report (SF-425). To determine the extent to which the third
method, audits by DCAA and cognizant agencies for audit, was used, we
identified the agencies with audit cognizance for the 32 schools we
examined. We requested and obtained information from the four agencies
with cognizance for the 32 schools--NSF, Education, HHS, and DOD.
[Footnote 55] In addition, we collected information on the number and
type of audits of DOD awards conducted by DCAA and by HHS at schools
in fiscal year 2008 related to indirect costs.[Footnote 56] Through
interviews with officials from the four agencies, we obtained
information and documentation related to their audit cognizance
programs. We also learned about school audit programs at one of the
cognizant agencies for audit and heard their views on why they no
longer rely on the single audit to oversee the reimbursement of
indirect costs.
Survey Details:
To address our first and second objectives, we designed and conducted
a mail-based survey of a sample of schools in the U.S. that received
basic research awards from DOD that were active in fiscal year 2007.
[Footnote 57] The study population consisted of all U.S.-based schools
receiving more than $100,000 in DOD funds to do basic research in
fiscal year 2007. We developed our sample frame from DOD-provided
award-level data. After excluding schools with $100,000 or less in DOD
basic research dollars in fiscal year 2007, there were a total of 343
schools[Footnote 58] in our population.
From this population, we selected a random sample of 178 schools,
stratified by total award dollars. The first stratum was comprised of
the 32 institutions with the highest amount of DOD basic research
award dollars in fiscal year 2007, accounting for over 50 percent of
the DOD basic research dollars for that year. All of these 32 schools
were selected in our sample. From the remaining 311 schools in the
second stratum, we selected a random sample of 146 for our study. The
population, sample, and survey disposition by stratum is displayed in
the following table.
Table 8: Survey Population and Sampling Information:
Stratum: 1. Largest schools;
Total population: 32;
Sample: 32;
Nonrespondents: 1;
Out-of-scope: 0;
In-scope respondents: 31;
Response rate[A]: 97%.
Stratum: 2. Smaller schools;
Total population: 311;
Sample: 146;
Nonrespondents: 20;
Out-of-scope: 13;
In-scope respondents: 113;
Response rate[A]: 86%.
Stratum: Total;
Total population: 343;
Sample: 178;
Nonrespondents: 21;
Out-of-scope: 13;
In-scope respondents: 144;
Response rate[A]: 87%.
Source: GAO analysis of DOD data and survey data.
[A] This is based on the American Association of Public Opinion
Research RR3 response rate definition. In this case it is the
estimated (in-scope respondents)/(in-scope respondents + estimated in-
scope nonrespondents).
[End of table]
Several of the sample schools were determined to be "out-of-scope" for
the purposes of this study. In particular, we determined that 13 of
the institutions selected in stratum 2 either did not receive basic
research awards in fiscal year 2007 (e.g. the award really was to a
different institution) or the research institution was not a
university (e.g. the award was to a university-affiliated nonprofit
not subject to higher education indirect cost rules). These schools
were dropped from the analysis. Of the 178 selected institutions, we
obtained usable responses from 144 for an overall response rate of
about 87 percent.[Footnote 59] The survey data were collected from
July 2009 to October 2009.
The survey was designed to collect information about a school's
indirect cost rates and demographic information, as well as the
university administrator's opinions on factors influencing the rates.
Because we followed a probability procedure based on random
selections, our sample is only one of a large number of samples that
we might have drawn. We express our confidence in the precision of our
particular sample's results as a 95 percent confidence interval. This
is the interval that would contain the actual population value for 95
percent of the samples we could have drawn. Unless otherwise noted, in
this report estimates of indirect cost rates based on our survey have
95 percent confidence intervals within +/-2 percentage points of the
estimate itself. Estimates of the percentage of schools with
particular characteristics have 95 percent confidence intervals within
+/-7 percentage points of the estimate itself. Estimates of totals
based on this sample are presented along with their corresponding 95
percent confidence interval in the report.
At each school, we also selected a nongeneralizable sample of one DOD
research award with over $10,000 of activity in fiscal year 2007 and
requested award and reimbursement data pertaining to that year of the
award.
Where appropriate, we followed up on unclear answers by calling the
school-identified key contact at the sampled institutions for
clarification.
Each school in our sample can have multiple proposed and negotiated
indirect cost rates, for a number of categories of rate agreements
(e.g., on-campus organized research, off-campus organized research,
instruction, or other sponsored activities). Unless otherwise
specified in this report, estimates relating to proposed or negotiated
rates are limited to the rate that is associated with on-campus
organized research. We focused on this rate because it represents a
comprehensive measure of indirect costs for research to be reimbursed
by the federal government, including both facilities and
administrative costs.
In our questionnaire, we asked the university administrator to provide
the proposed indirect cost rate applicable to fiscal year 2007, along
with the elements of that proposed rate (the portions for facilities,
administration, and carry-forward). Throughout our report estimates
related to the proposed fiscal year 2007 indirect cost rates are not
based on the proposed rate provided by the school. Instead we
calculated each school's proposed rate based on the information in the
survey responses. Specifically, the GAO version of the proposed rate
is the sum of the fiscal year 2007 proposed facilities component of
indirect cost rate, the carry-forward, and the lesser of the proposed
administrative component or 26 percent. We used this as the proposed
rate for our analysis to ensure proposed rates were comparable across
schools.
In addition to sampling error, the practical difficulties of
conducting any survey may introduce nonsampling errors, such as
nonresponse bias or measurement errors. We took steps in developing
the questionnaire, collecting the data, and analyzing the data to
minimize such errors.
* To gain an initial understanding of the information reasonably
available from schools about their research costs, as well as their
thoughts on factors that may influence a school's indirect cost rate,
we reviewed regulatory documents pertaining to indirect cost rates,
particularly OMB Circular A-21, and interviewed officials from
government agencies, including rate-setting officials from HHS's
Division of Cost Allocation and DOD's Office of Naval Research. We
also spoke with university research administrators and representatives
of associations representing the interests of research institutions
and reviewed past GAO reports and analysis by other organizations to
identify possible influencing factors.
* We pretested our survey instrument with six schools to determine if
the questions were clear, if the survey questionnaire placed an undue
burden on schools, and to determine the sources of information schools
would use to answer the questions. The information learned through the
pretests was used to refine the survey.
* To ensure the best possible response rate, we contacted individuals
from each sampled school via telephone to identify the person most
qualified to answer our survey questions and to confirm the mail,
phone, and e-mail information for that individual.
* After revising the survey to incorporate pretest comments and
identifying the best survey contact, we mailed the survey to sampled
schools and followed up with nonrespondents by e-mail and telephone to
encourage their responses, and we followed up with survey respondents
to clarify unclear or unlikely responses.
We conducted this performance audit from October 2009 to September
2010 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Department of Defense:
Director Of Defense Research And Engineering:
3030 Defense Pentagon:
Washington, DC 20301-3030:
September 8, 2010:
Mr. John Needham:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Needham:
This is the Department of Defense (DoD) response to the GAO draft
report 10-937, "University Research: Policies for the Reimbursement of
Indirect Costs Need to be Updated," dated August 11, 2010 (GAO Code
120866).
The Department commends the GAO for the well written Background
section of the report, which is a good introduction to indirect costs
for readers who are less knowledgeable about the subject. Enclosed is
the DoD response to the report's recommendations.
Sincerely,
Signed by:
Zachary Lemnios:
Enclosure: As stated:
[End of letter]
GAO Draft Report Dated August 11, 2010:
GA0-10-937 (GAO Code 120866):
"University Research: Policies For The Reimbursement Of Indirect Costs
Need To Be Updated"
Department Of Defense Responses To The GAO Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the Under Secretary of Defense for Acquisition, Technology and
Logistics to establish a process for administrative grants contracting
officers to verify at grant closeout whether a school has requested
reimbursement at the accurate indirect cost rate and dollar amount,
which includes calculating whether the dollar amount reflects the
appropriate application of rates for that award. (See page 41/GAO
Draft Report.)
DoD Response: Concur. At least as a near-term measure, pending
outcomes of efforts to verify and ensure the sufficiency of audit
coverage that are described in the DoD response to recommendation 2,
we will establish policy for:
(1) DoD Components to require university recipients of research grant
and cooperative agreement awards to complete the optional field for
indirect expenses on the final Federal Financial Report (SF-425)
submitted at the end of the project period; and;
(2) Post-award administrators to carry out the recommended
verification at the time of closeout on a sample of awards selected
through a risk-based assessment each year. However, as Table 4 on page
30 of the draft GAO report indicates, the scope of the single audit is
designed to provide federal agencies assurance on recipient compliance
with federal requirements associated with indirect costs. If we
determine over the longer term that single audits are providing the
appropriate assurance that recipients' systems properly apply the
correct indirect cost rates, we may remove the requirement in the
interests of cost efficiency and streamlining of post-award
administration.
Recommendation 2: The GAO recommends that the Secretary of Defense
direct the Under Secretary of Defense for Acquisition, Technology and
Logistics to assess the current level of audit coverage for monitoring
DoD indirect cost reimbursement for schools and determine what level
is sufficient and whether to expand use of closeout audits and other
audits to oversee compliance. (See page 41/GAO Draft Report.)
DoD Response: Concur. The Office of Naval Research (ONR) will continue
to evaluate, as part of its post-award administration
responsibilities, the sufficiency of audit coverage for monitoring
indirect cost reimbursement under DoD basic research awards. They will
continue to coordinate with appropriate DoD Components, including the
Defense Contract Audit Agency (DCAA), and consult other federal
agencies that conduct audits of research awards to academic
institutions, to gain a sufficient understanding of the findings of
their audits to be able to use them as an input to future risk
assessments for planning sufficient audit coverage.
To the extent that ONR identifies a need for increased audit scrutiny
of research awards to academic institutions, they will consult with
DCAA to determine the best approach to accomplishing that. In
accordance with Government-wide policy, we will continue to rely on
single audits to the extent practicable. ONR and DCAA will take into
consideration the concerns about single audit coverage that the GAO
raised in the current draft report. They also will consider current
and anticipated improvements to single audits resulting from work of
interagency groups to implement recommendations from a review
conducted under the auspices of the predecessor to the current Council
of Inspectors General on Integrity and Efficiency (CIGIE). The
interagency groups have been working with OMB, the American Institute
of Certified Public Accountants (AICPA), and National Association of
the State Boards of Accountancy (NASBA). Improvements made so far,
including a new chapter on sampling in the 2009 AICPA audit guidance,
are recent enough that their impacts on single audits are not yet
fully known. With the assistance of the Office of the Inspector
General, DoD, the Department's lead for technical advice on single
audit policy, ONR and DCAA will continue to assess the impact of
recent sampling guidance for the sufficiency of audit coverage for
monitoring indirect cost reimbursement under DoD basic research awards.
If ONR identifies a need for increased closeout or other auditing to
be performed by DCAA or other cognizant audit agencies, to supplement
single audits, then that need will be considered in the next annual
process by which DoD audit requirements are identified; priorities are
assigned to them based on assessed risk and other factors; and
available audit resources then are allocated among DoD procurement and
assistance awards, including awards for research performed by academic
institutions. The objective is to maintain a proper balance between
risk and cost-effective accountability, and to help ensure the best
use of available audit resources in support of stewardship of federal
funding.
Recommendation 3: The GAO recommends that the Secretary of Defense
direct the Under Secretary of Defense for Acquisition, Technology and
Logistics to develop a policy for oversight of indirect costs that
includes the use of alternative oversight information (1) for those
schools not individually audited under the single audit, and (2) for
those schools where the audit coverage of research and development
awards is not sufficient for oversight of indirect costs. (See page
41/GAO Draft Report.)
DoD Response: Partially concur. To the extent that the evaluations
described in the response to recommendation 2 identify insufficiencies
in the oversight of indirect costs that cannot be addressed in a
timely manner through improvements to guidance for single audit
sampling for the R&D cluster, the DoD will look to alternative
approaches. Seeking improvements that enable us to rely on the single
audits should be the preferred approach, however, because it is most
consistent with the Government-wide policy on the use of those audits,
potentially extends the benefits of any improvements beyond DoD awards
to other federal research awards, and is a cost-effective way to
address accountability matters that are amenable to being addressed by
single audits. For example, our understanding from the draft report is
that most of the identified cases of "schools not individually audited
under the single audit" are the result of audits of individual
campuses of some multi-campus university systems that are being
performed on a rotating basis, rather than having all of the systems'
campuses audited every year. We understand the concern and note that
it raises a question that is Government-wide in nature, rather than
specific to DoD.
[End of section]
Appendix III: Detailed Analysis of Factors:
10-Year Trend in Negotiated Rates:
Analysis of average negotiated rates across a 10-year period indicates
that these rates have remained generally stable over time. The average
negotiated rate across schools increased by less than a percentage
point in total over the 10-year period, from 48.4 percent in 1999 to
49.3 percent in 2008.
Variations in HHS Cognizant Rate-Setting Agency Field Offices:
Schools perceive different HHS Division of Cost Allocation (DCA) field
offices as using differing and inconsistent practices for negotiating
rates. For example, university officials GAO interviewed described
negotiations with the New York office as less arbitrary, whereas they
described "unwritten rules" to limit reimbursement at the Dallas
office.[Footnote 60] While we did not examine the particular practices
at DCA field offices, our survey results indicate there was not a
significant difference in negotiated rate reductions across these
offices. Specifically, average rate reductions negotiated by each of
DCA's four field offices are all relatively close to one another, and
HHS described processes that it uses to ensure consistency across the
field offices.
Variation in schools' proposed and negotiated rates based on the DCA
field office with which a school negotiates may be driven more by
geographic factors than by the specific actions of the offices.
Schools proposed and negotiated significantly higher rates to the New
York field office (with an average proposed rate of 60.6 percent and
an average negotiated rate of 55.9 percent) than those rates proposed
to and negotiated by the other DCA field offices (average proposed
rates in the other three regions all fall between 51 and 52 percent
and average negotiated rates in the other three regions all fall
between 46 and 48 percent). This result is consistent with similar
findings for average rates based on the school's geographic region,
regardless of the cognizant rate-setting agency. Specifically, schools
in the Northeastern region negotiated an average rate of 56.4 percent,
with all other regions falling near 48 percent. According to the
Bureau of Labor Statistics the cost of goods and services, measured by
things such as housing, health care, fuel, and utilities, varies by
region, and the Northeast region is generally higher than other
regions.
Variation between Schools Receiving Different Amounts of DOD Funding:
On average, schools receiving the largest proportion of DOD basic
research money proposed and negotiated higher rates than those schools
with a smaller DOD basic research volume. For fiscal year 2007, more
than half of DOD's basic research funding was obligated to just 32
schools, all of which were included in GAO's survey sample. These
schools proposed an average rate of 57.3 percent and negotiated an
average rate of 53.0 percent. For the remaining schools in the
population, the average proposed rate was 52.5 percent and the average
negotiated rate was 48.8 percent. These differences may be related
more generally to the size or research-intensive nature of the schools.
Variation between Schools Receiving or Not Receiving a Separate DOD
Contract Rate:
Another factor that may be related to the amount of funding received
is whether a school negotiated a separate rate for DOD contracts that
allows for reimbursement of an administrative component without the
standard 26 percent cap. Schools negotiating such a rate, on average,
proposed higher indirect cost rates (i.e. for awards other than DOD
contracts) than those schools that did not--57.5 percent versus 52.6
percent. A similar relationship held true for negotiated rates, with
schools negotiating a separate DOD contract rate receiving an indirect
cost rate of 53.0 percent, compared to 48.9 percent for schools not
negotiating a separate rate. One of the main reasons schools provided
for not negotiating a separate DOD contract rate was that they did not
have enough research volume in DOD contracts to make it worthwhile.
Consequently, this difference in estimated rates may be driven by
higher overall rates at schools doing more research for DOD that are
more likely to find value in a separate DOD contract rate.
Variations between the Negotiated Rate and the Rate Applied to an
Individual Award:
Based on survey responses, there was generally not much variation
between the negotiated rate and the rate applied to a specific DOD
basic research award. As part of GAO's survey, data were collected on
a nongeneralizable selection of one DOD award from each of the schools
surveyed.[Footnote 61] Most schools reported that the rate applied to
the selected award was their negotiated fiscal year 2007 rate.
However, about one-third of schools reported that in 2007 a
reimbursement rate other than their negotiated fiscal year 2007 rate
was applied to the award on which GAO requested information. When
there was a variation the primary reason schools identified for the
difference was the OMB guidance that requires a school to use the
rates negotiated at the time of an award throughout the life of that
award, known as the "fixed for the life of the award provision." For
example, one such school reported a fiscal year 2007 negotiated rate
of 55.5 percent, but indicated that the selected award was reimbursed
at a rate of 54.0 percent, representing the school's negotiated rate
in fiscal year 2003 when the award was initiated.
Factors:
Tables 9 and 10 contain a list of the factors GAO analyzed to identify
which ones may contribute to variations in proposed indirect cost
rates, negotiated indirect cost rates, and the difference between
proposed and negotiated indirect cost rates. In addition to those
discussed in the body of the report, we found statistically
significant differences in relation to the following factors:
* Geographic region: Northeast region schools both proposed and
negotiated higher rates than other regions.
* HHS DCA field office: Schools negotiating with the DCA Northeastern
field office both proposed and negotiated higher rates than other DCA
regions.
* Stratum: The 32 schools with the largest DOD research volume both
proposed and negotiated higher rates than the schools with smaller
research volume.
* Type of institution: Private schools both proposed and negotiated
higher rates than public schools.
* Negotiation of separate indirect cost rate for DOD contracts:
Schools negotiating a separate rate for DOD contracts both proposed
and negotiated higher rates for non-DOD-contract awards than schools
that did not negotiate such a rate.
* Proposal cost type: The difference between the proposed and
negotiated rate was higher at schools using actual base year costs in
their proposal than at schools using projected costs.
Table 9: Estimated Means and Confidence Intervals of Proposed and
Negotiated Fiscal Year 2007 Indirect Cost Rates for On-Campus
Organized Research by Different Attributes of Schools:
Strata: Stratum 1;
Sample size: 31;
Mean proposed fiscal year 2007 indirect cost rate: 57.3;
95% confidence intervals: 56.9-57.7;
Sample size: 31;
Mean negotiated fiscal year 2007 indirect cost rate: 53.0;
95% confidence intervals: 52.6-53.4.
Strata: Stratum 2;
Sample size: 82;
Mean proposed fiscal year 2007 indirect cost rate: 52.5;
95% confidence intervals: 51.2-53.8;
Sample size: 82;
Mean negotiated fiscal year 2007 indirect cost rate: 48.8;
95% confidence intervals: 47.8-49.8.
Cognizant agency in fiscal year 2007: DOD ONR;
Sample size: 15;
Mean proposed fiscal year 2007 indirect cost rate: 51.7;
95% confidence intervals: 48.7-54.8;
Sample size: 15;
Mean negotiated fiscal year 2007 indirect cost rate: 51.6;
95% confidence intervals: 48.7-54.5.
Cognizant agency in fiscal year 2007: HHS DCA;
Sample size: 98;
Mean proposed fiscal year 2007 indirect cost rate: 53.4;
95% confidence intervals: 52.2-54.5;
Sample size: 98;
Mean negotiated fiscal year 2007 indirect cost rate: 49.1;
95% confidence intervals: 48.2-50.0.
HHS DCA field office: Dallas (Central);
Sample size: 31;
Mean proposed fiscal year 2007 indirect cost rate: 51.9;
95% confidence intervals: 50.6-53.3;
Sample size: 30;
Mean negotiated fiscal year 2007 indirect cost rate: 47.8;
95% confidence intervals: 46.9-48.7.
HHS DCA field office: NY (Northeastern);
Sample size: 17;
Mean proposed fiscal year 2007 indirect cost rate: 60.6;
95% confidence intervals: 57.9-63.3;
Sample size: 18;
Mean negotiated fiscal year 2007 indirect cost rate: 55.9;
95% confidence intervals: 54.0-57.8.
HHS DCA field office: SF (Western);
Sample size: 25;
Mean proposed fiscal year 2007 indirect cost rate: 51.8;
95% confidence intervals: 49.0-54.6;
Sample size: 25;
Mean negotiated fiscal year 2007 indirect cost rate: 47.6;
95% confidence intervals: 45.8-49.4.
HHS DCA field office: DC (Mid-Atlantic);
Sample size: 25;
Mean proposed fiscal year 2007 indirect cost rate: 51.5;
95% confidence intervals: 49.9-53.1;
Sample size: 25;
Mean negotiated fiscal year 2007 indirect cost rate: 46.7;
95% confidence intervals: 45.6-47.9.
Base year for fiscal year 2007 indirect cost rate proposal: Fiscal
years 1994 to 2001;
Sample size: 18;
Mean proposed fiscal year 2007 indirect cost rate: 56.3;
95% confidence intervals: 53.7-58.9;
Sample size: 18;
Mean negotiated fiscal year 2007 indirect cost rate: 49.7;
95% confidence intervals: 47.8-51.7.
Base year for fiscal year 2007 indirect cost rate proposal: Fiscal
years 2002 to 2007;
Sample size: 95;
Mean proposed fiscal year 2007 indirect cost rate: 52.6;
95% confidence intervals: 51.4-53.8;
Sample size: 95;
Mean negotiated fiscal year 2007 indirect cost rate: 49.3;
95% confidence intervals: 48.3-50.3.
Proposal cost type: Actual base year costs;
Sample size: 81;
Mean proposed fiscal year 2007 indirect cost rate: 53.1;
95% confidence intervals: 51.8-54.4;
Sample size: 82;
Mean negotiated fiscal year 2007 indirect cost rate: 48.9;
95% confidence intervals: 47.9-49.8.
Proposal cost type: Projected costs;
Sample size: 19;
Mean proposed fiscal year 2007 indirect cost rate: 52.8;
95% confidence intervals: 50.0-55.6;
Sample size: 18;
Mean negotiated fiscal year 2007 indirect cost rate: 51.6;
95% confidence intervals: 49.0-54.3.
Proposal cost type: Both;
Sample size: 4;
Mean proposed fiscal year 2007 indirect cost rate: [Empty][A];
95% confidence intervals: [Empty];
Sample size: 4;
Mean negotiated fiscal year 2007 indirect cost rate: [Empty];
95% confidence intervals: [Empty].
Proposal cost type: Other;
Sample size: 8;
Mean proposed fiscal year 2007 indirect cost rate: [Empty];
95% confidence intervals: [Empty];
Sample size: 8;
Mean negotiated fiscal year 2007 indirect cost rate: [Empty];
95% confidence intervals: [Empty].
Negotiation of separate DOD contract rate: Yes;
Sample size: 16;
Mean proposed fiscal year 2007 indirect cost rate: 57.5;
95% confidence intervals: 54.1-60.9;
Sample size: 16;
Mean negotiated fiscal year 2007 indirect cost rate: 53.0;
95% confidence intervals: 50.9-55.1.
Negotiation of separate DOD contract rate: No;
Sample size: 97;
Mean proposed fiscal year 2007 indirect cost rate: 52.6;
95% confidence intervals: 51.5-53.7;
Sample size: 97;
Mean negotiated fiscal year 2007 indirect cost rate: 48.9;
95% confidence intervals: 48.0-49.8.
Institution type: Public;
Sample size: 79;
Mean proposed fiscal year 2007 indirect cost rate: 50.7;
95% confidence intervals: 49.7-51.8;
Sample size: 78;
Mean negotiated fiscal year 2007 indirect cost rate: 47.1;
95% confidence intervals: 46.3-47.9.
Institution type: Private;
Sample size: 34;
Mean proposed fiscal year 2007 indirect cost rate: 59.1;
95% confidence intervals: 57.1-61.1;
Sample size: 35;
Mean negotiated fiscal year 2007 indirect cost rate: 54.7;
95% confidence intervals: 53.2-56.2.
Geographic region: Central;
Sample size: 34;
Mean proposed fiscal year 2007 indirect cost rate: 51.4;
95% confidence intervals: 50.0-52.7;
Sample size: 33;
Mean negotiated fiscal year 2007 indirect cost rate: 47.7;
95% confidence intervals: 46.8-48.7.
Geographic region: Northeastern;
Sample size: 18;
Mean proposed fiscal year 2007 indirect cost rate: 60.8;
95% confidence intervals: 58.2-63.3;
Sample size: 19;
Mean negotiated fiscal year 2007 indirect cost rate: 56.4;
95% confidence intervals: 54.5-58.2.
Geographic region: Western;
Sample size: 27;
Mean proposed fiscal year 2007 indirect cost rate: 52.2;
95% confidence intervals: 49.4-54.9;
Sample size: 27;
Mean negotiated fiscal year 2007 indirect cost rate: 48.0;
95% confidence intervals: 46.3-49.8.
Geographic region: Mid-Atlantic;
Sample size: 34;
Mean proposed fiscal year 2007 indirect cost rate: 51.4;
95% confidence intervals: 50.0-52.9;
Sample size: 34;
Mean negotiated fiscal year 2007 indirect cost rate: 47.7;
95% confidence intervals: 46.4-49.1.
Utility cost adjustment: Yes;
Sample size: 34;
Mean proposed fiscal year 2007 indirect cost rate: 58.6;
95% confidence intervals: 57.0-60.2;
Sample size: 34;
Mean negotiated fiscal year 2007 indirect cost rate: 54.7;
95% confidence intervals: 53.2-56.1.
Utility cost adjustment: No;
Sample size: 67;
Mean proposed fiscal year 2007 indirect cost rate: 51.6;
95% confidence intervals: 50.2-53.1;
Sample size: 67;
Mean negotiated fiscal year 2007 indirect cost rate: 47.6;
95% confidence intervals: 46.7-48.5.
Utility cost adjustment: Not sure;
Sample size: 12;
Mean proposed fiscal year 2007 indirect cost rate: 50.5;
95% confidence intervals: 47.7-53.3;
Sample size: 12;
Mean negotiated fiscal year 2007 indirect cost rate: 47.9;
95% confidence intervals: 44.9-50.9.
Source: GAO.
[A] Unreliable due to small sample size.
[End of table]
Table 10: Estimated Means and Confidence Intervals for the Difference
between Proposed and Negotiated Fiscal Year 2007 Indirect Cost Rates
for On-Campus Organized Research by Different Attributes of Schools:
Strata: Stratum 1;
Sample size: 31;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.3;
95% confidence intervals: 4.1-4.5.
Strata: Stratum 2;
Sample size: 81;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.0;
95% confidence intervals: 3.3-4.7.
Cognizant agency in fiscal year 2007: DOD ONR;
Sample size: 15;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 0.1;
95% confidence intervals: -0.6-0.8.
Cognizant agency in fiscal year 2007: HHS DCA;
Sample size: 97;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.5;
95% confidence intervals: 3.9-5.2.
HHS DCA field office: Dallas (Central);
Sample size: 30;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.4;
95% confidence intervals: 3.6-5.3.
HHS DCA field office: NY (Northeastern);
Sample size: 17;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.9;
95% confidence intervals: 3.0-6.8.
HHS DCA field office: SF (Western);
Sample size: 25;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.2;
95% confidence intervals: 2.5-6.0.
HHS DCA field office: DC (Mid-Atlantic);
Sample size: 25;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.8;
95% confidence intervals: 3.8-5.7.
Base year for fiscal year 2007 indirect cost rate proposal: Fiscal
years 1994 to 2001;
Sample size: 18;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 6.5;
95% confidence intervals: 4.8-8.2.
Base year for fiscal year 2007 indirect cost rate proposal: Fiscal
years 2002 to 2007;
Sample size: 94;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 3.6;
95% confidence intervals: 2.9-4.2.
Proposal cost type: Actual base year costs;
Sample size: 81;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.4;
95% confidence intervals: 3.6-5.1.
Proposal cost type: Projected costs;
Sample size: 18;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 1.8;
95% confidence intervals: 0.8-2.7.
Proposal cost type: Both;
Sample size: 4;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: [Empty][A];
95% confidence intervals: [Empty].
Proposal cost type: Other;
Sample size: 8;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: [Empty];
95% confidence intervals: [Empty].
Negotiation of separate DOD contract rate: Yes;
Sample size: 16;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.5;
95% confidence intervals: 1.9-7.1.
Negotiation of separate DOD contract rate: No;
Sample size: 96;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.0;
95% confidence intervals: 3.3-4.6.
Institution type: Public;
Sample size: 78;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 3.8;
95% confidence intervals: 3.1-4.4.
Institution type: Private;
Sample size: 34;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.6;
95% confidence intervals: 3.2-6.0.
Geographic region: Central;
Sample size: 33;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 3.9;
95% confidence intervals: 3.0-4.8.
Geographic region: Northeastern;
Sample size: 18;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.6;
95% confidence intervals: 2.8-6.4.
Geographic region: Western;
Sample size: 27;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.1;
95% confidence intervals: 2.4-5.8.
Geographic region: Mid-Atlantic;
Sample size: 34;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 3.7;
95% confidence intervals: 2.8-4.6.
Utility cost adjustment: Yes;
Sample size: 34;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 3.9;
95% confidence intervals: 3.3-4.5.
Utility cost adjustment: No;
Sample size: 66;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 4.4;
95% confidence intervals: 3.4-5.3.
Utility cost adjustment: Not sure;
Sample size: 12;
Mean of the difference between proposed fiscal year 2007 indirect cost
rate and negotiated fiscal year 2007 indirect cost rate: 2.6;
95% confidence intervals: 1.2-4.0.
Source: GAO.
[A] Unreliable due to small sample size.
[End of table]
[End of section]
Appendix IV: Survey Data for Standard Form Schools:
The following data represent the responses of schools that reported
using the standard form for their indirect cost rate proposal in
fiscal year 2007. These schools receive more than $10 million in
annual federal grants. In this report we produce population estimates
for the schools within the United States that use the standard format,
which we estimate would correspond to about 263 schools. [Footnote 62]
All estimates based on this survey are subject to sampling error. The
95 percent confidence interval for this estimate is from 244 to 283
schools. Percentage estimates presented in this appendix have 95
percent confidence intervals within +/-7 percentage points of the
estimate itself, unless otherwise noted.
In what format(s) did your institution submit its F&A cost rate
proposal to the federal government to determine the F&A[Footnote 63]
cost rates for FY2007? N=143:
Format of proposal: Standard form;
Estimated percentage: 77%.
Format of proposal: Simplified method;
Estimated percentage: 23%.
Format of proposal: Other or Not sure;
Estimated percentage: 0.
Between FY1998 and FY2007 (as defined by your institution), which
cognizant agency or agencies for the establishment of an F&A rate did
your institution have? N=114:
Cognizant rate-setting agency fiscal year 2007: DOD ONR;
Estimated percentage: 11%.
Cognizant rate-setting agency fiscal year 2007: HHS DCA;
Estimated percentage: 89%.
If you marked that your institution had DCA as a cognizant agency for
at least 1 year, which field office did your institution use? N=99:
HHS DCA region: Dallas (Central);
Estimated percentage[A]: 32%.
HHS DCA region: New York (Northeastern);
Estimated percentage[A]: 19%.
HHS DCA region: San Francisco (Western);
Estimated percentage[A]: 25%.
HHS DCA region: Washington, DC (Mid-Atlantic);
Estimated percentage[A]: 24%.
[A] The 95 percent confidence intervals for these percentages are
within +/-8 percentage points of the estimate itself.
Base year for F&A cost rate proposal N=114:
Base year: 1994;
Estimated percentage: 1%.
Base year: 1997;
Estimated percentage: 1%.
Base year: 1999;
Estimated percentage: 3%.
Base year: 2000;
Estimated percentage: less than 1%.
Base year: 2001;
Estimated percentage: 9%.
Base year: 2002;
Estimated percentage: 16%.
Base year: 2003;
Estimated percentage: 19%.
Base year: 2004;
Estimated percentage: 18%.
Base year: 2005;
Estimated percentage: 24%.
Base year: 2006;
Estimated percentage: 6%.
Base year: 2007;
Estimated percentage: 1%.
Are the costs included in this proposal actual base year costs or
FY2007 projected costs? N=113:
Type of costs used: Actual base year costs;
Estimated percentage: 75%.
Type of costs used: Projected costs;
Estimated percentage: 16%.
Type of costs used: Other;
Estimated percentage: 7%.
Type of costs used: Both;
Estimated percentage: 2%.
As part of a rate agreement applicable to FY2007, did your institution
negotiate an uncapped administrative rate for DOD contracts, per DFARS
231.303(1)? N=114:
Negotiated separate DOD contract rate: Yes;
Estimated percentage: 12%.
Negotiated separate DOD contract rate: No;
Estimated percentage: 88%.
Rate type(s) for your institution's F&A cost rate agreement(s)
applicable to FY2007. N= 113:
On-campus organized research rates: Fixed;
Estimated percentage: 4%.
On-campus organized research rates: Predetermined;
Estimated percentage: 93%.
On-campus organized research rates: Provisional;
Estimated percentage: 3%.
On-campus organized research rates: Final;
Estimated percentage: 1%.
Which one of the following reasons accounts for the largest portion of
your institution's F&A costs unreimbursed by the federal government
for the base year identified previously? N=107:
Reasons: Cost above regulatory cap;
Estimated percentage[A]: 57%.
Reasons: Cost not allocable or allowable;
Estimated percentage[A]: 8%.
Reasons: Cost associated with cost sharing;
Estimated percentage[A]: 28%.
Reasons: Fixed for the life of the award provision;
Estimated percentage[A]: 3%.
Reasons: Other;
Estimated percentage[A]: 5%.
[A] The 95 percent confidence intervals for these percentages are
within +/-8 percentage points of the estimate itself.
What is your institutional control or affiliation? N= 114:
Institutional affiliation: Public;
Estimated percentage: 70%.
Institutional affiliation: Private;
Estimated percentage: 30%.
Does your institution receive the 1.3% utility cost adjustment? N= 114:
Receives UCA: Yes;
Estimated percentage: 24%.
Receives UCA: No;
Estimated percentage: 64%.
Receives UCA: Not sure;
Estimated percentage: 12%.
Proposed FY2007 F&A Rate? N= 113:
Type of F&A rate for organized research: On-campus;
Estimated mean proposed fiscal year 2007 F&A rate: 53.2%;
95% confidence intervals: 52.1 - 54.3%.
What is your institution's negotiated FY2007 F&A rate? N= 113, 80, 13,
& 7:
Type of F&A rate for organized research: On-campus;
Estimated mean negotiated fiscal year 2007 F&A rate: 49.4%;
95% confidence intervals: 48.5 - 50.2%.
Type of F&A rate for organized research: Off-campus;
Estimated mean negotiated fiscal year 2007 F&A rate: 25.6%;
95% confidence intervals: 25.3 - 25.9%.
Type of F&A rate for organized research: On-campus separate DOD
contract rate;
Estimated mean negotiated fiscal year 2007 F&A rate: 56.7%;
95% confidence intervals: 54.3 - 59.1%.
Type of F&A rate for organized research: Off-campus separate DOD
contract rate;
Estimated mean negotiated fiscal year 2007 F&A rate: 29.1%;
95% confidence intervals: 28.3 - 29.8%.
Difference between the proposed and negotiated FY2007 F&A Rate? N= 112:
Type of F&A rate for organized research: On-campus;
Estimated mean difference between proposed and negotiated fiscal year
2007 F&A rate: 4.0%;
95% confidence intervals: 3.4 - 4.7%.
What F&A cost rates for organized research did your institution have
for FY1999 to FY2008 for federal grants and contracts?
Fiscal year: 1999;
On-campus: Sample size: 111;
On-campus: Estimated mean F&A rate: 48.4%;
On-campus: 95% confidence intervals: 47.4 - 49.5%;
Off-campus: Sample size: 106;
Off-campus: Estimated mean F&A rate: 25.2%;
Off-campus: 95% confidence intervals: 25.0 - 25.4%.
Fiscal year: 2000;
On-campus: Sample size: 113;
On-campus: Estimated mean F&A rate: 48.4%;
On-campus: 95% confidence intervals: 47.4 - 49.3%;
Off-campus: Sample size: 110;
Off-campus: Estimated mean F&A rate: 25.1%;
Off-campus: 95% confidence intervals: 24.8 - 25.3%.
Fiscal year: 2001;
On-campus: Sample size: 113;
On-campus: Estimated mean F&A rate: 48.1%;
On-campus: 95% confidence intervals: 47.2 - 49.1%;
Off-campus: Sample size: 110;
Off-campus: Estimated mean F&A rate: 25.3%;
Off-campus: 95% confidence intervals: 25.0 - 25.5%.
Fiscal year: 2002;
On-campus: Sample size: 113;
On-campus: Estimated mean F&A rate: 48.3%;
On-campus: 95% confidence intervals: 47.4 - 49.2%;
Off-campus: Sample size: 110;
Off-campus: Estimated mean F&A rate: 25.3%;
Off-campus: 95% confidence intervals: 25.1 - 25.5%.
Fiscal year: 2003;
On-campus: Sample size: 113;
On-campus: Estimated mean F&A rate: 48.5%;
On-campus: 95% confidence intervals: 47.7 - 49.4%;
Off-campus: Sample size: 110;
Off-campus: Estimated mean F&A rate: 25.4%;
Off-campus: 95% confidence intervals: 25.2 - 25.6%.
Fiscal year: 2004;
On-campus: Sample size: 114;
On-campus: Estimated mean F&A rate: 48.6%;
On-campus: 95% confidence intervals: 47.7 - 49.6%;
Off-campus: Sample size: 110;
Off-campus: Estimated mean F&A rate: 25.6%;
Off-campus: 95% confidence intervals: 25.4 - 25.8%.
Fiscal year: 2005;
On-campus: Sample size: 114;
On-campus: Estimated mean F&A rate: 48.8%;
On-campus: 95% confidence intervals: 47.9 - 49.6%;
Off-campus: Sample size: 110;
Off-campus: Estimated mean F&A rate: 25.6%;
Off-campus: 95% confidence intervals: 25.3 - 25.8%.
Fiscal year: 2006;
On-campus: Sample size: 114;
On-campus: Estimated mean F&A rate: 49.0%;
On-campus: 95% confidence intervals: 48.2 - 49.8%;
Off-campus: Sample size: 110;
Off-campus: Estimated mean F&A rate: 26.0%;
Off-campus: 95% confidence intervals: 25.6 - 26.3%.
Fiscal year: 2007;
On-campus: Sample size: 113;
On-campus: Estimated mean F&A rate: 49.3%;
On-campus: 95% confidence intervals: 48.4 - 50.2%;
Off-campus: Sample size: 111;
Off-campus: Estimated mean F&A rate: 25.8%;
Off-campus: 95% confidence intervals: 25.4 - 26.2%.
Fiscal year: 2008;
On-campus: Sample size: 112;
On-campus: Estimated mean F&A rate: 49.3%;
On-campus: 95% confidence intervals: 48.4 - 50.2%;
Off-campus: Sample size: 109;
Off-campus: Estimated mean F&A rate: 25.9%;
Off-campus: 95% confidence intervals: 25.5 - 26.2%.
Uncapped administrative rate for on-campus organized research, FY2007.
N= 114:
Description: Uncapped administrative component;
Estimated mean: 30.9%;
95% confidence intervals: 29.9 - 31.9.
[End of section]
Appendix V: Survey Data for Simplified Method Schools:
Some schools submit their indirect cost rate proposals to the federal
government using a simplified method instead of the standard form.
Each of these schools' total direct cost of work is no more than $10
million and they are therefore considered small enough to use a
simplified method of proposing a rate. Our survey sample included
schools that may have used either the standard form or the simplified
method for their rate proposal for fiscal year 2007. The following
data represent the responses of schools that reported using the
simplified method in fiscal year 2007. Because this survey was not
designed to produce reliable estimates for simplified method schools,
the 95 percent confidence intervals are wider than for other survey
estimates and are noted along with each table.
In what format(s) did your institution submit its F&A cost rate
proposal to the federal government to determine the F&A cost rates for
FY 2007? For those who answered simplified method, which base did your
institution use? N=29:
Format of proposal: Simplified method schools using salary & wage base;
Estimated percentage[A]: 79%.
Format of proposal: Simplified method schools using MTDC base;
Estimated percentage[A]: 21%.
[A] The 95 percent confidence intervals for these percentages are
within +/-14 percentage points of the estimate itself.
Between FY1998 and FY2007 (as defined by your institution), which
cognizant agency or agencies for the establishment of an F&A rate did
your institution have? N=28:
Cognizant rate-setting agency for fiscal year 2007: DOD ONR;
Estimated percentage[A]: 4%.
Cognizant rate-setting agency for fiscal year 2007: HHS DCA;
Estimated percentage[A]: 96%.
[A] The 95 percent confidence intervals for these percentages are
within +/-12 percentage points of the estimate itself.
If you marked that your institution had DCA as a cognizant agency for
at least 1 year, which field office did your institution use? N=27:
HHS DCA region: Dallas (Central);
Estimated percentage[A]: 41%.
HHS DCA region: New York (Northeastern);
Estimated percentage[A]: 15%.
HHS DCA region: San Francisco (Western);
Estimated percentage[A]: 15%.
HHS DCA region: Washington, DC (Mid-Atlantic);
Estimated percentage[A]: 30%.
[A] The 95 percent confidence intervals for these percentages are
within +/-15 percentage points of the estimate itself.
Base year for F&A cost rate proposal N=26:
Base year: 1995;
Estimated percentage[A]: 4%.
Base year: 1999;
Estimated percentage[A]: 4%.
Base year: 2000;
Estimated percentage[A]: 4%.
Base year: 2001;
Estimated percentage[A]: 4%.
Base year: 2002;
Estimated percentage[A]: 8%.
Base year: 2003;
Estimated percentage[A]: 19%.
Base year: 2004;
Estimated percentage[A]: 4%.
Base year: 2005;
Estimated percentage[A]: 42%.
Base year: 2006;
Estimated percentage[A]: 12%.
[A] The 95 percent confidence intervals for these percentages are
within +/-15 percentage points of the estimate itself.
Are the costs included in this proposal actual base year costs or
FY2007 projected costs? N=26:
Type of costs used: Actual base year costs;
Estimated percentage[A]: 96%.
Type of costs used: Projected costs;
Estimated percentage[A]: 4%.
[A] The 95 percent confidence intervals for these percentages are
within +/-12 percentage points of the estimate itself.
What is your institutional control or affiliation? N= 29:
Institutional affiliation: Public;
Estimated percentage[A]: 52%.
Institutional affiliation: Private;
Estimated percentage[A]: 48%.
[A] The 95 percent confidence intervals for these percentages are
within +/-14 percentage points of the estimate itself.
[End of section]
Footnotes:
[1] OMB Circular No. A-21, Cost Principles for Educational
Institutions, G.8.b (5/10/04) (incorporated in 2 C.F.R. 220 (Jan. 1,
2010)).
[2] For the purposes of this report, we refer to the 26 percent cap as
the administrative cap and the 35 percent cap as the DOD basic
research cap.
[3] In response, we provided an oral briefing to the Defense
committees in October 2009 and agreed to further examine the
objectives of this report.
[4] Each school in our sample can have multiple proposed and
negotiated indirect cost rates. Unless otherwise specified in the
report, findings relating to proposed and negotiated rates are limited
to a school's on-campus organized research rate. We focused on the on-
campus organized research rate because it represents a comprehensive
measure of indirect costs for research to be reimbursed by the federal
government.
[5] For the purposes of this report, the term "schools" refers to
higher education institutions. Based on the data provided by DOD, 83.2
percent of funds DOD obligated to schools for basic research in 2007
was in the form of grants or other financial assistance awards.
[6] One respondent did not negotiate a rate agreement with the federal
government, but did receive a DOD research award.
[7] All estimates based on this survey are subject to sampling error.
The 95 percent confidence interval for this estimate is from 244 to
283 schools. Appendix I contains additional information about the
survey and precision of estimates.
[8] Rate-setting cognizance is determined by which of the two agencies
(HHS or DOD) provides more funds to the institution for the most
recent 3 years and defaults to HHS when neither agency provides
federal funding to the educational institution.
[9] Source: GAO analysis of fiscal year 2007 data from NSF.
[10] A cost is allowable if it is reasonable, allocable to the
agreement, it is treated consistently with generally accepted
accounting principles appropriate to the circumstances, and conforms
to principles in OMB Circular A-21 and the sponsoring agreement. A
cost may be considered reasonable if the nature of the goods or
services acquired or applied, and the amount involved, reflect the
action that a prudent person would have taken under the circumstances
prevailing at the time the decision to incur the cost was made. A cost
is allocable to a particular cost objective (i.e., a specific
function, project, sponsored agreement, department, or the like) if
the goods or services involved are chargeable or assignable to such
cost objective in accordance with relative benefits received or other
equitable relationship. OMB Circular No. A-21, attachment, section C.
[11] A subaward is an award provided by a recipient of a federal award
to another researcher, for the performance of substantive work under
the federal award.
[12] In 1996 OMB substituted the term "indirect costs" for higher
education institutions in Circular No. A-21 with the term "facilities
and administrative (F&A) costs."
[13] Schools use a standard format, also known as the long form, for
submitting their indirect cost rate proposals to their cognizant rate-
setting agency. However, schools whose total direct costs on federal
awards do not exceed $10 million in a fiscal year may use a simplified
method for determining the indirect cost rate applicable to all
federal awards. Whereas schools above the $10 million threshold must
use a modified total direct cost base, schools using the simplified
method may use either salaries and wages as their distribution base,
that is, the denominator in the indirect cost rate calculation, or
MTDC. As already noted, this report focuses on those schools that used
the standard format for proposal submission.
[14] Tuition remission is compensation provided to graduate research
assistants in lieu of salary.
[15] This describes the process for developing the on-campus organized
research rate.
[16] Cognizance is determined by which of the two agencies (HHS or
DOD) provides more funds to the institution for the most recent 3
years. Once rate-setting cognizance is established, the determination
lasts for a 5-year period. In cases where neither HHS nor DOD provide
federal funding to an educational institution, assignment defaults to
HHS.
[17] DCAA reports to the Office of the Under Secretary of Defense
(Comptroller) and plays a critical role in DOD's oversight of award
recipients.
[18] Defense Federal Acquisition Regulation Supplement (DFARS)
231.303(1) states that for DOD contract awards, no limitation
(including the 26 percent cap) may be placed on the reimbursement of a
higher education institution's otherwise allowable indirect costs
unless that same limitation is applied uniformly to all other
organizations performing similar work under DOD contracts.
[19] The arithmetic behind the 53.8 indirect cost rate threshold has
also been computed by DOD and is understood in the research community.
[20] Unless otherwise noted, all survey analyses are generalizable to
the universe of about 263 schools using the standard form within the
U.S. that DOD identified as receiving more than $100,000 in DOD basic
research funding in fiscal year 2007.
[21] Schools receiving DOD research funds may negotiate indirect cost
rates with either DOD or HHS, depending on the assigned cognizant rate-
setting agency.
[22] These estimated negotiated rate reductions have 95 percent
confidence intervals of within +/-0.7 percentage points of the
estimated rate itself.
[23] The 95 percent confidence interval for this estimate is within +/-
9 percentage points of the estimate itself.
[24] HHS officials told us that an HHS review differs from an audit of
an indirect cost rate proposal in that the review does not adhere to
generally accepted auditing standards, and that HHS reviewers have the
authority to negotiate the rate, whereas auditors make recommendations
to a negotiator.
[25] Several reasons exist that schools might use older base year
data, including the negotiation of a rate covering multiple years, the
unavailability of current data at the time a school is to submit its
proposal, or the granting of an extension by the cognizant rate-
setting agency.
[26] HHS defines a rate extension as applying or adjusting current
organized research indirect cost rates beyond the fiscal years covered
by the current rate agreement.
[27] The 95 percent confidence interval for the mean proposed rate is
from 52.1 to 54.3 percent, and the confidence interval for the mean
negotiated rate is from 48.5 to 50.2 percent. Unless otherwise noted,
95 percent confidence intervals for estimated mean indirect cost rates
are within +/-2 percentage points of the estimated rate.
[28] Exhibit B of OMB Circular A-21 ends with #66, but only 65 schools
are listed, because #59 is missing from the list. According to OMB,
this is a typo.
[29] The difference in negotiated rates between the two groups is 7.1
percent, with a 95 percent confidence interval from 5.4 to 8.8
percent. This difference exceeded the 1.3 percent of the utility cost
adjustment. Examining the reasons why the difference was this large
was beyond the scope of this engagement.
[30] A small portion of schools--12 percent--take advantage of a
defense regulation allowing them to negotiate a separate indirect cost
rate for DOD contracts that does not limit reimbursement of
administrative costs. These schools' separate DOD contract rates had a
mean of 57 percent, whereas their negotiated rates with the cap would
have been a mean of 54 percent, allowing the schools to recover
additional reimbursement. Many schools that chose not to negotiate
this separate rate reported that doing so was easier for award
management or they expected minimal impact on their cost recovery from
the separate rate. Notably, 15 percent of schools were unaware of the
availability of this separate rate for DOD contracts.
[31] 51 Federal Register 5286, proposed revision of Circular A-21,
Cost Principles for Educational Institutions, Feb. 12, 1986.
[32] This estimate represents the portion of schools whose fiscal year
2008 indirect cost rate for on-campus organized research was above the
rate threshold of 53.8 percent. Only schools with indirect cost rates
above this threshold may have awards that would be affected by the DOD
basic research cap.
[33] House Report No. 110-279, at p. 7, for the Department of Defense
Appropriations Bill, 2008.
[34] However, as noted in table 2, the DOD basic research cap also
applies to all awards, including those to the nonprofit and for profit
sectors. It was beyond the scope of this project to determine the
cap's impact on research institutions in these sectors.
[35] The negotiated indirect cost rate is applied to a restricted set
of direct costs referred to as the MTDC. The administrative cap is a
limitation on the administrative component of that rate, allowing it
to use the same base of MTDC. According to agency officials, the
administrative cap is therefore applied prior to signing a negotiated
rate agreement.
[36] In 2008, DCAA reported that it conducted 16 classified audits at
schools. These audits were excluded from this analysis because of the
nature of the audits.
[37] The Single Audit Act requires states, local governments, and
nonprofit organizations, including schools, expending over $500,000 in
federal awards in a year to obtain an audit in accordance with
requirements set forth in the act.
[38] At the option of the nonfederal entity, the audit may include a
series of audits that cover organizational units that comprise the
entity under certain conditions.
[39] The single audit is generally conducted by an independent public
accounting firm or a federal or state auditor.
[40] The auditor identifies programs to include in tests of compliance
with federal requirements based on risk criteria, including minimum
dollar thresholds, set out in the Single Audit Act and OMB Circular
No. A-133. Guidance on identifying compliance requirements for most
large federal programs is set out in the Compliance Supplement to OMB
Circular No. A-133. OMB has 14 requirements that generally are to be
tested for each major federal program to opine on compliance and
report on significant deficiencies in internal controls over
compliance with each applicable compliance requirement.
[41] OMB Circular A-133; Subpart E - Auditors; §___.520 - Major
program determination; the auditor shall use a risk-based approach to
determine which Federal programs are major programs. A four-step
process is delineated in §___.520. If the program expenditures
normally exceed the A-133 threshold the program must be periodically
included as a major program. "Major program" means that it has been
selected for compliance testing in a particular audit period, so a
program can be major one year but not the next. DOD's research and
development programs can be included as a major federal award program
under the A-133 Research and Development Cluster.
[42] For one of the seven schools, according to the auditor, the
research and development program was not considered a major program,
and therefore no research and development awards were included as a
part of the 2008 single audit.
[43] UC includes the President's Office and 10 campuses--Berkeley,
Davis, Irvine, Los Angeles, Merced, Riverside, San Diego, San
Francisco, Santa Barbara, and Santa Cruz.
[44] The independent auditor for the UC system determines at which
campuses it tests awards or transactions using a risk-based approach,
and reported it rotates the UC campuses at which research and
development awards or transactions are selected each year.
[45] The independent auditor reported the university is included in
the audit on a 2-year cycle.
[46] DOD awards may include awards for all types of research and
development (R&D). We could not identify which R&D awards were for
basic research.
[47] After a DOD agency awards a grant or contract to a school, it
decides whether to retain postaward administration duties, including
contract closeout, or whether to delegate those responsibilities to
another agency within DOD.
[48] DOD's Grant and Agreement Regulations (DoDGAR), DOD 3210.6-R#,
Subpart D outlines the closeout requirements for grants and OMB
Circular A-110, Subpart D "After the Award-Requirements" provides
additional closeout guidance.
[49] The coverage of DOD reimbursement of indirect research costs
through an evaluation of a final voucher is discussed later in the
report.
[50] The Federal Financial Report was developed for use throughout the
federal government for recipients of federal awards or cooperative
agreements to report the financial status of their awards. For the
purpose of establishing a standard format, however, OMB has
consolidated the two most common financial reports, the Financial
Status Report (SF-269/SF-269A) and the Federal Cash Transaction Report
(SF-272/SF-272A), into a single form. OMB required that federal
agencies transition to the Federal Financial Report by September 30,
2009.
[51] The DOD basic research cap is applied differently than the
administrative cap or the indirect cost rate. The DOD basic research
cap is calculated when the school reports its total costs for the
award. In contrast, the administrative cap is applied before a school
signs a negotiated indirect cost rate agreement.
[52] DOD was the cognizant rate-setting agency for 7 of the 10
schools, and the cognizant agency for audit for 3 of the 10 schools
where DCAA performed audits in fiscal year 2008. The audit information
reported does not include 16 classified audits. We report the total
number of audits conducted at a school regardless of whether the audit
includes basic research funding, and regardless of whether the audit
was of a grant or a contract.
[53] HHS Office of Inspector General, Review of Administrative and
Clerical Costs at Duke University for the Period October 1, 2002,
Through September 30, 2004, A-04-05-01014 (Washington, D.C.: Jan.
2009).
[54] To assess the reliability of these data, we identified procedures
or controls in place by the auditors, looked for obvious
inconsistencies in the data, and verified the accuracy of the data
with the auditors when necessary. From these efforts, we believe the
information we obtained is sufficiently reliable for this report.
[55] Since DCAA is the audit entity for DOD, references to DOD as
cognizant agency for audit include DCAA.
[56] To assess the reliability of data we received from DCAA and HHS,
we looked for obvious inconsistencies in the data and interviewed
knowledgeable agency officials about the data. From these efforts, we
believe the information we obtained is sufficiently reliable for this
report.
[57] According to DOD officials, the awards in the data provided by
DOD were coded as basic research based on the perceived nature of the
work.
[58] The unique identifier used in the DOD-provided data was the
"fice_code", an Education identifier for higher education
institutions. Because this was the only unique institution identifier
on the file and because it was the best available identifier that
corresponded to a "university" or "school," we use it to identify our
population of schools.
[59] One institution provided responses that were deemed "not usable"
because their responses were inconsistent with verifiable information
about the school. Consequently, this school was treated as a
nonrespondent in our analysis.
[60] The National Director of HHS's Division of Cost Allocation
confirmed that a limitation on the increase in negotiated rates of 2
percentage points had been the practice in one of the DCA field
offices. Once this matter was brought to the attention of the National
Director of HHS's Division of Cost Allocation, he ordered that the
practice be discontinued both to ensure consistent treatment across
field offices and because it was not a practice supported by policy or
regulation.
[61] One award of over $10,000 in fiscal year 2007 activity was
selected for each of the schools surveyed. Information was requested
on the award, the indirect cost rate applied to it, its costs, and its
fiscal year 2007 reimbursement to provide perspective on whether the
negotiated rate was applied to an individual award. However, because
sampled schools received different numbers of DOD basic research
awards in fiscal year 2007, ranging from 1 to 133, these awards do not
represent a generalizable sample of all DOD basic research awards.
[62] The study population consisted of all U.S.-based schools that
received more than $100,000 in DOD funds to perform basic research in
fiscal year 2007.
[63] In the survey, GAO used the term "Facilities and Administrative
Costs," or F&A Costs, because it is the term used in OMB Circular A-
21. For the purposes of the report we used the term indirect costs.
[End of section]
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