Indirect Costs

About Indirect costs

• What do indirect costs pay for?
• What happens if a sponsor reimburses indirect costs at less than the negotiated rate?
• What if I want to apply for a grant that has less than the negotiated rate?
• GIM 22, Attachment A – A Primer on Facilities and Administrative Costs
  

Indirect cost reference sites

• A table of indirect cost rates (GIM 13, attachment A)
• How to calculate a grant that uses two different indirect cost rates (GIM 13, attachment B)

What do indirect costs pay for?

Indirect costs partially reimburse the UW for operations and infrastructure costs of  having grants at the University of Washington.  Reviewing, starting, managing, and closing out grants creates extra work for department, school and university-level units and administrators. 

At the university level, two offices specifically deal with this extra work: The Office of Sponsored Programs, and Grant and Contract Accounting.  The salaries, management, and operating costs for these offices are paid by indirect costs.  Other UW offices whose work is directly related to grant projects are Human Subjects and Animal Review.  Some of the UW’s effort and commitment is less direct: activity on grants budgets increases the work load for purchasing, payroll and other general accounting offices; more personnel increase the need for on-campus security; more projects increase the need for risk management resources.

The UW also pays for grants’ on-campus space. Extra administrative resources are required for both on and off-campus space and real estate management (both in the department and in the university-wide offices).  The on-campus space must be maintained by the facilities office, monitored for mandatory environmental health and safety, cleaned by the janitorial crew, and repaired over time as needed.  The space uses heat, light, water and other utilities.  The indirect costs pay for the extra services, repair and utilities that grants require.

Grants require more personnel.  This creates extra work for those in the university human resource and benefits offices.  This also means more emails, more phones, and more people accessing the internet.  Computing and communications are required to provide more bandwidth, more support staff, more servers, and equipment to support more phone resources just to name a few costs.  These costs must be covered by indirect costs.

Grants use existing equipment in labs for computing and operations.  This equipment is typically purchased by a department or by the UW, who maintains basic equipment and eventually pays for replacement.  It is rare that such equipment is purchased and used by one specific grant so it typically cannot be a direct cost budget line item.  Indirect costs pay for the extra use and more frequent replacement necessitated by grant use.

Within departments and schools, the same increases are seen: there is more work for the department administrator and therefore extra department staff must be hired and trained; even if the grant has personnel to manage their budgets there is more work for department payroll; more phone lines are paid for; more computers and servers are required; the departmental furniture will have more wear and tear; and multiple other costs are the direct result of supporting grants.

What happens if indirect costs are less than the negotiated rate?

We must first understand that the largest portion of indirect costs is always given to the University for building maintenance and facilities budgets.  The University estimates that upper campus administration’s costs are 24% of the modified direct costs, and the cost for facilities is around 20%; schools are given the remainder. Schools may in turn allocate a portion of these indirects to departments.

When a grant is housed off-campus, the indirect costs are half of what they would normally be.  This is partially because the grant does not pay for facilities costs and partially because the schools and departments involved have fewer costs.  In the case of off-campus awards, upper campus takes a lower proportion of the indirects.

Many foundations cap indirect costs at a rate far below the approved rate: normally at 15% or 10% and sometimes even at 0%.  When indirect costs are lower than normal, the loss of revenue is taken at the school and department level, and both units are required to absorb these costs.

Some training grants are capped at 8% indirect costs.  The reason for this is that the training grants are meant to be extensions of the regular curricula.  Many of the extra costs incurred by this grant are costs that should be covered by state budgets and tuition costs.   In this case, all the indirect costs are used to cover the extra upper-campus costs since they do not receive money from tuition revenues or the state for their extra work. Once again, the department receives no money from indirect costs from these grants.

What if I want to apply for a grant that has less than the negotiated rate?

If the funding agency does not provide an indirects policy statement on their website, the University’s Office of Sponsored Programs will require the Department Chair and Dean to approve a Request for Waiver of Indirects form. This confirms that the tangible loss of operations revenue is approved by both department and school.

Before applying for a grant with a low indirect cost rate, meet with your departmental administrator and chair.  They will be able to determine if the department will support a grant that does not cover its own extra costs.

Just because the department will receive no indirect costs does not mean that the grant will not be approved.  Sometimes the costs will be minimal.  Some grants have such small direct costs that the loss of their revenue will not affect the department.  Some larger foundation grants have the ability to charge costs that are unallowable on federal grants and they can make up for the lost indirect costs. 

Whether a department can cover a grant with low indirect costs depends mostly on the type of grant.  Different kinds of grant activities will have different costs associated with them.   Two grants with the same direct and indirect revenue may incur vastly different costs for the department.

Before you start planning a grant, you will have to determine:

• What infrastructure and administrative costs will the department have to cover?  Can the department budget absorb these costs?  Can these costs be charged to the grant?  (This must be resolved with the departmental chair and administrator.)
• What costs will the rest of campus have to cover?  How much per year will they lose?  How many years?  (This should be approved by OSP before the application is prepared.)

For further details and reference please see GIM 22, Attachment A – A Primer on Facilities and Administrative Costs:
 http://www.washington.edu/research/osp/gim/gim22a.html