1 Facilities and Administrative (Indirect) Costs at The Ohio State University Administrative Research Council April 15, 2008 Tom Ewing, Associate University

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Facilities and AdministrativeFacilities and Administrative(Indirect) Costs(Indirect) Costs

at The Ohio State Universityat The Ohio State University

Administrative Research CouncilApril 15, 2008

Tom Ewing, Associate University ControllerPhil Schirtzinger, Sr. Cost Allocation Analyst

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Overview of Today’s Presentation

• What are indirect (F&A) costs?

• What is an F&A cost rate?

• How are F&A rates calculated?

• The proposal and negotiation process

• Trends in F&A rates, total annual cost recoveries, and distribution of cost recoveries

• What are we doing to maintain or increase the University’s F&A rate?

The Ohio State University - Office of the Controller April 15, 2008

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What are Indirect (F&A) Costs?

• The federal government funds most sponsored research (and certain other instructional and public service programs) on a cost reimbursement basis.

• Institutions bill federal sponsor agencies for the direct and indirect costs

of a project.

• Direct costs are those costs that can be directly attributed to an activity (or “function”) of the institution.

• Indirect costs are all other costs that are, at least in part, attributable to an activity. The federal government refers to these costs as “facilities and administrative” or F&A costs.

• OMB Circular A-21, Cost Principles for Educational Institutions, which is issued by the U.S. Office of Management and Budget, is the federal government’s “rule book” for college/university cost accounting.


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What is an Indirect (F&A) Cost Rate?


Total AllocatedF&A Costs

Modified TotalDirect Costs

=Indirect (F&A)

Cost Rate

An indirect (F&A) cost rate is a way of expressing the relationshipbetween the direct and indirect costs of the various functions of aninstitution. Although institutions calculate F&A rates for all major functions,the primary focus for OSU (in terms of overall financial impact) is on theorganized research rate.

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F&A Rate is Mechanism for Billing Sponsors for Indirect Costs of Organized Research


On behalf of the University, the OSU Research Foundation bills federal sponsors for F&A costs, using pre-determined rates negotiated with the federal government. The F&A rate is applied to the modified total direct costs incurred on a research grant.

OSU Research FoundationProject 69999999January 2008

Direct Costs:Wages and Benefits $ 500Supplies 300Travel 200 Subtotal-MTDC $ 1,000Add: F&A Costs (50%) 500Total Billed to Sponsor $ 1,500

6The Ohio State University - Office of the Controller April 15, 2008

How are F&A Rates Calculated?

Total current funds expenditures

Less: Unallowable Costs

Less: Equipment purchases and othercapitalizable items charged to Current Funds

Add: Depreciation on plant and equipment,and interest expense on plant debt

Total allowable costs


How are F&A Rates Calculated? (continued)

Direct Costs (costs directly attributable to the

institution’s major functions)

Total allowable costs

Instruction

Organized Research

Other Sponsored Activities

Other Institutional Activities

Indirect Costs (costs not directly attributable to the

institution’s major functions)

Facilities Costs:DepreciationInterestPlant Operation/MaintenanceLibrary

Administrative Costs:General AdministrationDepartmental AdministrationSponsored Program AdministrationStudent Services and Administration


How are F&A Rates Calculated? (continued)

Direct Costsalso referred to as

“modified total direct costs” or MTDC

InstructionOrganizedResearch

OtherSponsored Activities

Other Institutional Activities

Facilities Costsallocated primarily on

functional use of University space; library allocated based on use

Allocated toInstruction

AdministrativeCosts

allocated based on MTDC; sponsored program

administration allocated to sponsored programs

Allocated toOrg Research

Allocated toOSA

Allocated toOIA

Allocated toInstruction

Allocated toOIA

Allocated toOrg Research

Allocated toOSA

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The Proposal and Negotiation Process


• Institutions are required to propose and negotiate an F&A cost reimbursement rate agreement with the federal government.

• Each institution is assigned a cognizant federal agency (DHHS for OSU), which is responsible for negotiation and administration of rate agreements with that institution.

• OSU will prepare an F&A Proposal based on FY 2008. It should be submitted to DHHS by December 31, 2008 and negotiated by June 30, 2009.

• In rate negotiations, the federal government typically challenges cost calculations in the proposal. Final rate is usually below the proposed rate.

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Trends in F&A Rates at OSU


On-Campus Rates for Organized Research

FY04 FY05 FY06 FY07

FacilitiesComponent

AdministrativeComponent *

Total F&ARate

* Administrative rate is capped at 26%.

23.5%

26% 26% 26% 26%

23.5% 23.5% 24%

49.5% 49.5% 49.5% 50%

FY08

26%

24%

50%

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What’s a Point Worth to OSU?Trends in F&A Rates vs. Total Cost Recoveries


Total F&A recoveries are a function of both the F&A rate and the Organized Research base.

NOTE: If indirect costs do not grow as fast as (direct) organized research costs, calculated F&A rates will decline. OSU, however, has been able counter this effect through improvements in its cost accounting for the (uncapped) Facilities components of the rate.

* Projected

($ in Millions) FY04 FY05 FY06 FY07 FY08*

Total F&A Recoveries

$67.6 $71.5 $76.3 $75.8 $81

F&A Rate 49.5% 49.5% 49.5% 50% 50%

One Point Is Worth…

$1.37 $1.44 $1.54 $1.56 $1.62

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Distribution of F&A Cost Recoveries


• College base budgets now include revenue from F&A cost recoveries, as a result of Budget Restructuring.

• With the exception of the Library component, 100% of the annual changes in F&A cost recovery revenues are allocated directly to the colleges that generated them.

• F&A cost recoveries are excluded from the revenue which is taxed to cover central commitments.

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What are We Doing to Maintain or Increase the University’s F&A Rate?


• Building Componentization and Room-by-Room Cost Allocation (special studies allow OSU to depreciate buildings more quickly and to specifically identify the higher construction costs associated with research space).

• Increased Capitalization Thresholds from $500 to $3,000 on equipment, and from $25,000 to $100,000 on building repair/renovation projects (accelerates cost recovery by replacing multi-year depreciation with current-year charges to expense)

• Expanded Space Survey (to identify functional breakouts of all rooms on campus and tie OSURF projects and employees to specific rooms). Space drives most facilities cost allocations.

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Summary


• Indirect costs are costs that cannot be directly attributed to a major function of an institution. They are now known as facilities and administrative (or F&A) costs.

• A-21, the federal government’s rule book on cost reimbursement, sets forth a methodology for allocating F&A costs to all major functions of an institution.

• OSU’s F&A rate, which is a negotiated figure that reflects allocated F&A costs as a percentage of total direct costs, is currently 50% for on-campus organized research. The OSU Research Foundation is expected to bill sponsors for approximately $81 million in F&A costs during FY08.

• To maintain or increase the F&A rate, we will need to make continued improvements in our cost accounting for the (uncapped) facilities components of the rate.

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Questions?


• Tom Ewing, Associate University Controller [email protected]

• Phil Schirtzinger, Sr. Cost Allocation [email protected]

• Allan Freeman, Cost Allocation Analyst [email protected]

Please feel free to contact a member of our cost allocation team

mailto:[email protected]



Documents

1 Facilities and Administrative (Indirect) Costs at The Ohio State University Administrative Research Council April 15, 2008 Tom Ewing, Associate University