Universities face cap on indirect costs for Pentagon-funded research

A new cap imposed by Congress on the costs that universities can charge for performing basic Department of Defense research threatens to upset the long-standing system by which research institutions have financed new laboratories and other infrastructure required by the work, say higher education officials.

Appropriations legislation signed into law in November caps the DOD’s reimbursement of the indirect costs universities incur on basic research grants at 35% of a grant’s total value. As a result, institutions whose indirect costs, also known as facilities and administrative (F&A) costs, are above the cap will have to swallow the disallowed portion of the costs on new Pentagon awards for basic research going forward.

“We’re discouraging investment in new facilities,” lamented Arthur Bienenstock, a physicist and special assistant for research policy at Stanford University. “It’s a dangerous precedent.”

The cap is the latest flare-up in long-simmering tensions between Congress and academia over indirect costs, which some lawmakers view as handouts to finance frills and luxuries. Memories of alleged billings for a yacht and a $1600 shower curtain linger from Stanford’s 1990 “overhead scandal”—although the university’s eventual vindication wasn’t so well publicized.

Wide range of costs

Institutions insist that their indirect costs, which range from heating and lighting bills and the construction of new laboratory buildings to keeping tabs on foreign students and ensuring the ethical treatment of human subjects in research, are real costs, and point out that they are approved and regularly audited by federal agencies.

What most troubles Bienenstock, a former associate director of the White House Office of Science and Technology Policy (OSTP), is the disincentive that cost caps pose for the construction of needed laboratory facilities. Unlike universities in most countries, where governments directly finance new academic buildings, US universities—whether public or private—depend on F&A reimbursements to pay for new lab space. And the most expensive of these facilities to build are those where toxic biological or chemical materials will be handled, Bienenstock said. “That’s where you will get hit the hardest when you start down the path of limiting indirect cost reimbursements,” he warned.

In committing to build new facilities, institutions assume all of the risks, in the expectation that they will recover their costs over time through the F&A reimbursements. But to do so, they must fill the new research facilities with additional federally supported research. Some major research universities are coping with the hangover from a building boom that was stimulated by the five-year doubling of the budget of the National Institutes of Health. Based on the faulty expectation that NIH’s budget would continue to grow at a healthy clip, some added too much to their lab space.

Rates are negotiated

Universities are reimbursed by research-sponsoring agencies for their F&A costs based on an established rate that is applied to each grant. Adjusted every few years through negotiations with one of two “cognizant” federal agencies, the F&A rate applies to all federal grants, regardless of agency source. Rates are expressed as a ratio of the direct costs of the research and are added on to the direct costs, which include salaries and benefits, laboratory supplies, computer time, and travel expenses. The rates vary from one institution to another and depend on location, age, and condition of facilities; financing methods; research mix; and other factors.

But with the DOD appropriations provision, F&A charges that exceed 53.8% of the direct costs won’t be reimbursed. Many institutions have rates that fall below the cap and won’t be affected. Those include the Pennsylvania State University, which, at $149 million, was the biggest recipient of DOD research support in fiscal year 2006, according to the most recent NSF figures, and number-three University of Texas at Austin, which received $92 million. But several top performers of Pentagon-funded research have considerably higher charges. MIT, the fourth largest recipient in FY 2006, has an F&A rate of 67%, which means that for each $100 worth of research performed under a grant, the sponsoring agency provides an additional $67 to cover the university’s F&A costs.

The University of Southern California, the sixth largest recipient in FY 2006, has an F&A rate of 63%. Randy Hall, vice provost for research at USC, said the university hadn’t yet calculated the financial impacts of the cap on the roughly $60 million annually in research grants it receives from the Pentagon. But in what he cautioned was an oversimplified calculation, Hall figured that an institution with a 60% F&A rate will lose $600 of the $6,000 it would otherwise have received for its indirect costs on a hypothetical $10 000 research grant. The calculation is made more complex by the fact that certain direct research costs, including tuition remission, scholarships and fellowships, equipment and capital expenditures, and the value of subcontracts over $25 000, must be subtracted before the F&A rate is applied. But the cap won’t dissuade USC from continuing to work with the agency, he said. Nonetheless, he added, “it is not a wise policy and will be a deterrent” for institutions to compete for grants.

Still awaiting specifics

At press time, universities were awaiting word from the DOD on the specifics of the cap’s implementation. Tony DeCrappeo, president of the Council on Governmental Relations (COGR), which provides federal relations services to universities, said it’s unclear whether the cap will be applied only to the $1.6 billion basic research account, known within the Pentagon as “6.1,” or might include some portion of the $5 billion applied research, or “6.2,” category as well. Also to be determined is whether the cap will apply to the $536 million in biomedical research that’s funded by the Army Medical Command. Whatever the case, universities are hopeful that the cap will be shortlived; the provision will need to be renewed each year by Congress to remain in effect.

COGR, the Association of American Universities, and the National Association of State Universities and Land-Grant Colleges were joined by the DOD in objecting to the arbitrary nature of the cap, which does not apply to grants awarded by the National Institutes of Health, NSF, or any other federal agency. In urging lawmakers to reject the cap, Defense officials wrote that there was “no rational basis to question the legitimacy of the indirect costs charged to DoD basic research.”

Their pleas turned out to be partially successful, as House and Senate conferees watered down a far more stringent 20% cap that was included in the House version of the spending bill written by appropriations subcommittee chairman John Murtha (D-PA).

Rising administrative burden

Ironically, the additional accounting and record-keeping measures that will be necessary to ensure compliance with the new cap will add further to universities’ administrative costs, which have been capped at 26% since 1991—a legacy of the Stanford flap. Universities contend that their actual administrative costs have exceeded that cap for many years—COGR estimates they now average 30%—and say that they’ve had to shoulder the full costs of a plethora of federal regulatory and record-keeping requirements that have been imposed in recent years, in areas such as export controls, conflict-of-interest reviews, foreign-student visas, hazardous materials, and protection of human subjects of research.

Their inability to fully recover F&A costs means that US academic institutions will be subsidizing federal research by more than $3 billion this year, according to COGR. That’s grown from the $700 million to $1.5 billion estimated in a 2000 study by RAND Corp that was endorsed by the OSTP. RAND did not include the impact of the cap on administrative costs.

Indeed, universities themselves have become the second largest source of support for on-campus research, providing 20%, or $9.3 billion, of all funding in FY 2006, according to NSF figures (see accompanying table). That compares to an 11% share in the early 1970s, says COGR. Universities now contribute more direct and indirect research funding than state governments, industry, and foundations combined.