Chapter 1: Introduction
Chapter 2: Standards for Financial Management
Chapter 3: Determining Cost Allowability
General Criteria for the Allowability of Costs
- Tests for Reasonableness
- Tests for Allocability
Chapter 4: Allowable vs. Unallowable Costs
Unallowable Activities
Chapter 5: Identifying Direct vs. Indirect Costs
Direct Costs
- Direct Activities
Indirect Costs
- Indirect Activities
- Core Administrative Support
- Program Specific Support
Chapter 6: Implementing Cost Accounting Standards
Payroll
- Faculty and Professional
- Administrative and Clerical
- Effort Reporting
Non-Payroll
Project Cost Overruns
Recharge Costing Process
Chapter 7: The Indirect Cost Proposal Process
Background
Functions of an University
Direct & Indirect Costs
Allocation of Costs
- Indirect Cost Pools
- Allocation of Indirect Costs
Recovery of Research Costs
- Proposal Submission
- Application of the Negotiated Indirect Cost Rate
Examples of Cost Items:
- Example 1 Lost/Late Charges for Radiation Badges
- Example 2 Research Journal Subscriptions
- Example 3 Graham Crackers & Promotional Items
- Example 4 Cellular Phones
- Example 5 Vivarium Access Cards
- Example 6 Copier Access Cards
- Example 7 Lab Phone vs. Professor's Office Phone
In recent years, Congress has become increasingly concerned with the costing practices and rising indirect cost rates at colleges and universities. To address these concerns, the Office of Management and Budget (OMB) has made several revisions to Circular A-21 (Cost Principles for Educational Institutions for Grants, Contracts, and Other Agreements).
Circular A-21 sets forth the principles for determining what costs are allowable as chargeable to federally sponsored projects. These principles apply not only to the direct charges, but also to all charges included in the calculation of the indirect cost rate which include the costs of facilities, departmental and central administrative units, operations and maintenance, libraries, etc. As such, these principles affect virtually every unit on campus.
In addition to OMB, the Cost Accounting Standards Board (CASB), which has jurisdiction over contracts with the Federal government, has issued Cost Accounting Standards (CAS) for colleges and universities. OMB has revised Circular A-21 to incorporate CAS, thereby applying the standards to grants.
Currently, there are 22 cost accounting standards that have been established for private commercial firms contracting with the Federal government. Only four of these standards, which deal with the consistent treatment of costs, have been issued by CASB in 1995 as applicable to educational institutions. The four CAS standards are:
As a recipient of federal contracts and grants in excess of $500,000, UCLA is required to file a Cost Accounting Standards Disclosure Statement (DS-2) which delineates the accounting policies, procedures and practices for assigning costs to federal sponsored programs; and attest to the consistent treatment of those practices. In addition, costs included in the indirect cost proposal and costs charged directly to contracts and grants must comply with Circular A-21.
After the initial DS-2 is filed, any changes in accounting policies having a material effect on charges to federal funds will require the completion of a cost-benefit analysis, the approval of the Department of Health and Human Services, and the filing of an amended DS-2.
In 1995, UCLA hired KPMG Peat Marwick (KPMG) to review departmental charging practices to provide an assessment of UCLA's charging practices as they relate to CAS 501 and 502. Among other things, KPMG recommended that campus awareness of CAS be promoted through focused training.
The purpose of this document and related training materials
is to review federal regulations covering financial management and cost
accounting, provide departments with guidelines to ensure costing consistency
across departments, and outline the costing policies at UCLA as described in our
DS-2. OMB circulars and other information regarding research costing are
available in the Research Administration Office home page at http://www.ucop.edu/raohome/.
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Chapter 2: Standards for Financial Management
Adherence to the federal cost principles and requirements outlined in Circular A-21 are critical to the allowability of departmental charges to federal awards. Circular A-110 (Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations) provides standards for obtaining consistency and uniformity among Federal agencies in the administration of grants and agreements.
The Financial Management Standards section of Circular A-110 requires that financial management systems assign the financial costs (and any income) to the program activities and develop unit costs wherever possible. An acceptable financial management system meets minimum standards if it:
The Cost Sharing section of Circular A-110 permits all contributions which further the program objectives to be used for meeting cost sharing or matching requirements when the costs are:
Unrecovered indirect costs may only be used to
meet cost sharing or matching requirements with the approval of the sponsoring
agency. There are specific requirements as to the valuation of donated property,
equipment and volunteer services. If you are using any of these to meet your
cost sharing or matching requirements, consult the actual circular.
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Chapter 3: Determining Cost Allowability
As previously mentioned, Circular A-21 provides standards to determine which costs may be charged to sponsored projects when the funding source includes moneys from the Federal government. These standards shall be used in determining the allowable costs of work performed by colleges and universities under sponsored agreements. Circular A-21 should also be used as a guide in the pricing of fixed-price contracts where costs are the basis for the price.
The following terms have been defined to make it clear how they are interpreted by Circular A-21:
General Criteria for the Allowability of Costs
The total costs of a sponsored project are the direct costs plus the indirect costs minus any applicable credits that result from the projects activities. There are several factors which must be considered in determining if a given cost can be charged either directly or indirectly to a sponsored project.
The primary issue is determining cost allowability which can be accomplished by applying the "prudent person" test to determine if the subject cost is both reasonable and allocableto the cost objective. To understand this concept, ask yourself the following questions when unsure if a cost should be charged to a sponsored project in accordance with Circular A-21 requirements. If the answer to any of the following questions is"no," the cost should not be charged to the project:
Tests for Reasonableness
Tests for Allocability
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Chapter 4: Allowable vs. Unallowable Costs
The following cost categories are provided as a guide to help determine whether a specific cost is allowable as a direct or indirect charge to sponsored agreements. For a more extensive clarification of these items or of those not listed here, please refer to Section J of Circular A-21.
If there appears to be a disagreement between this circular and a specific agreement, you should follow the agreement. Any costs allocable to activities sponsored by industry, foreign governments or other sponsors may not be shifted to federally sponsored agreements.
Sound judgment in incurring a cost chargeable to a federal award must be exercised. Costs must be necessary for the performance of the sponsored agreement. A particular cost may be allowable on one project, where it is needed for performance, but be unallowable on another project where no similar performance requirement exists.
Relative benefit must be approximated through the use of reasonable methods. Costs should be allocated to the users in proportion to the benefits received. For example, the cost of repair on a piece of equipment that is being used by three different projects should be divided among the three projects.
Costs applicable to one award or activity may not be charged
or shifted to another award or activity. It is not allowable to move
expenditures from Project A to Project B in order to eliminate an over
expenditure on
Project A.
Advertising and public relations costs are generally only allowable if they are necessary to meet the specific requirements of the sponsored agreement.
Alcoholic beverages are unallowable.
Alumni activities or similar costs are unallowable (see Unallowable Activities section below).
Commencement and convocation costs are unallowable, except in specified circumstances (see Unallowable Activities section below).
Compensation for personal services include all amounts that are earned by the employee during the specified period. If the amount is not paid within the period, there must be an obligation for the institution to pay the amount (e.g. accrued vacation time). Such amounts include salaries, wages, and fringe benefits. The following conditions must be met in order for compensation to be allowable:
Direct and indirect cost activities may be confirmed by responsible persons with suitable means of verifying work performed. Confirmation by the employee is not a requirement for either direct or indirect cost activities if other responsible persons make appropriate confirmations.
Direct and indirect charges may be made initially to sponsored agreements on the basis of estimates calculated before services are performed. When such estimates are used, significant changes in the corresponding work activity must be identified and entered into the payroll distribution system.
Short-term (such as one or two months) fluctuations between workload categories need not be considered as long as the distribution of salaries and wages is reasonable over the longer term, such as an academic period.
For systems which meet these standards, the institution will not be required to provide additional support or documentation for the effort charged to sponsored agreements.
Contingency provisions made for possible future events are unallowable (e.g., you cannot charge a provision for future earthquake damage, since that event has not yet happened).
Defense and prosecution of criminal and civil proceedings, claims, appeals and patent infringement are generally unallowable, except in certain specific situations with the approval of the Federal funding agency.
Donations and contributions are unallowable either as a direct or indirect cost (except for depreciation or use allowances on donated assets). However, the value of donated services and property may be used to meet cost sharing or matching requirements. Donations or contributions made by the institution are unallowable.
Employee morale, health, and welfare costs are allowable if they are in accordance with the institution's established practice or custom for the improvement of working conditions, employer-employee relations, employee morale, and employee performance. They must be allocated fairly.
Entertainment costs, including amusement, diversion, and social activities and any costs directly associated with such activities; such as tickets to shows or sports events, meals, lodging, rentals, and gratuities; are unallowable.
Equipment and other capital expenditures for special purpose items are generally allowable as direct charges, as long as any items having a unit cost in excess of $1,000 are approved in advance by the sponsoring agency. Equipment and capital expenditures for general purposes are unallowable as direct charges, unless approved by the sponsoring agency.
Executive lobbying costs are unallowable if incurred while attempting to influence Federal executive branch employees to give consideration, or to act regarding a sponsored agreement or a regulatory matter on any basis other than the merits of the matter (see Unallowable Activities section below).
Fines and penalties are unallowable, except when incurred as a result of complying with specific provisions of a sponsored agreement, or following written instructions from the sponsoring agency authorizing in advance such payments.
Fringe Benefits for items such as annual leave, sick leave, military leave, social security, employee insurance, workmen's compensation insurance, tuition remission for employees or their families are allowable, as long as these costs are allocated in proportion to the relative amount of time or effort actually devoted by the employees and granted in accordance with established institutional policies.
Tuition remission and other forms of compensation paid as, or in lieu of, wages to students performing necessary work are allowable provided that (1) there is a bonafide employer-employee relationship between the student and the institution for the work performed, (2) the tuition or other payments are reasonable compensation for the work performed and are conditioned explicitly upon the performance of necessary work, and (3) it is the institution's practice to similarly compensate students in non-sponsored as well as sponsored activities.
Fundraising, including financial campaigns, endowment drives, and solicitations of gifts and bequests are unallowable (see Unallowable Activities section below)
Goods or services for personal use of the institution's employees are unallowable.
Housing and personal living expenses for the institution's officers are unallowable.
Institution-furnished automobile costs incurred for an employee's personal use (including transportation to and from work) are unallowable.
Insurance and indemnification required or approved, and maintained, pursuant to the sponsored agreement, are allowable. Costs of other insurance maintained by the institution in connection with the general conduct of its activities, are allowable subject to certain specified limitations.
Insurance against defects costs incurred to correct defects in the institution's materials or workmanship are unallowable.
Interest and investment management costs are unallowable except for costs related to the physical custody and control of moneys and securities, and interest paid to an external party for certain assets used in support of sponsored agreements.
Labor relations costs incurred in maintaining satisfactory relations between the institution and its employees; including costs of labor management committees, employees' publications, and other related activities; are allowable.
Lobbying costs are unallowable (see Unallowable Activities section below).
Losses on sponsored agreements or contracts are unallowable.
Memberships, subscriptions and professional activity costs are generally allowable if they are institutional memberships and are not social or civic organizations. Costs of meetings and conferences, when the primary purpose is the dissemination of technical information, are allowable. This includes costs of meals, transportation, rental of facilities, and other items incidental to such meetings or conferences.
Pre-agreement costs incurred prior to the effective date of the sponsored agreement are unallowable unless approved by the sponsoring agency.
Professional services costs are allowable if they are reasonable and not contingent upon recovery of the costs from the Federal government. Costs for legal services are generally unallowable.
Profits and losses on the disposition of plant equipment or other capital assets, including sale or exchange of either short-term or long-term investments, are unallowable.
Proposal costs are the costs of preparing bids or proposals on potential government and non-government sponsored agreements, including the development of data necessary to support the institution's bids or proposals. Costs of the current accounting period for both successful and unsuccessful proposals normally should be treated as indirect costs.
Recruiting costs of 'help wanted' advertising, travel costs of applicants for interviews for prospective employment, and relocation costs incurred incident to recruitment of new employees, etc. are allowable if they are part of a well managed recruitment program.
Rental cost of buildings and equipment are generally allowable, as long as specific criteria are adhered to.
Royalties and other costs for use of patents, necessary for the proper performance of the sponsored agreement, are allowable subject to certain conditions.
Sabbatical leave costs for performance of graduate work or sabbatical study, travel, or research are allowable if the institution has a uniform policy for both instructional and research leave.
Scholarships and student aid costs are allowable only when the purpose of the sponsored agreement is to provide training to selected participants and the charge is approved by the sponsoring agency.
Selling and marketing costs for institutional products or services are generally unallowable.
Severance pay is compensation in addition to regular salary and wages which is paid by an institution to employees whose services are being terminated. Costs of severance pay are allowable only to the extent that such payments are required by law, by employer-employee agreement, by established policy that constitutes in effect an implied agreement on the institution's part, or by circumstances of the particular employment. Costs incurred in excess of the institution's normal severance pay policy applicable to all employees are unallowable.
Student activity costs incurred for intramural activities, student publications, student clubs, and other student activities, are unallowable, unless specifically provided for in the sponsored agreements (see Unallowable Activities section below).
Travel costs are allowable when incurred for transportation, lodging, subsistence, and related items by employees on official business of the institution. The method for determining the costs may be on actual, per diem or mileage basis as long as the institution has travel policies and practices which are consistently applied to all travel activities and result in reasonable charges.
Commercial air travel costs in excess of the lowest available discount airfare are unallowable except when such arrangements would:
Unallowable Activities
Certain unallowable costs represent activities that encompass expenses such as salaries, benefits and supplies. These unallowable activities include:
Circular A-21 lists these activities as unallowable to federally sponsored programs either as direct or indirect costs. Therefore, departments must establish separate, non-federally sponsored account/funds (or account/cost) centers to account for the costs associated with these activities.
Alumni activities, fundraising and lobbying costs may be accumulated in one account/fund (or account/cost center) that is used exclusively for these three activities. Student relations costs must be accumulated in a separate account/fund (or account/cost center) that is used exclusively for this one activity.
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Chapter 5: Identifying Direct vs. Indirect Costs
After a cost has been determined to be allowable, you must then determine whether it qualifies as a direct charge to a sponsored project. All other allowable costs are then considered indirect charges which will be accumulated in the institution's indirect cost proposal.
Direct Costs
Direct costs are those costs that can either be identified with a particular activity or that can be directly assigned among various activities relatively easily and with a high degree of accuracy.
Generally, the determining factor in distinguishing direct from indirect costs is associating the cost with the sponsored work. For example, salary and benefits for a principal investigator's time spent directly on the project would normally be considered a direct cost; whereas time spent by a departmental administrative office to process financial transactions would be an indirect cost, even though both are salary and benefit charges. Typical costs charged directly to a sponsored agreement are:
The cost of materials supplied from stock, services rendered by specialized facilities, or other institutional service operations may be included as direct costs if they meet the criteria previously listed.
Direct Activities
Direct activities of the university include instruction and departmental research, organized research, other sponsored activities, and other institutional activities. Direct activities should be recorded in unique funds and linked to an appropriate departmental account based on the function of the activity.
Costs related to indirect activities should not be charged to an account/fund which is included in a direct cost pool base in the calculation of the indirect cost proposal. If you have a question as to the classification of an account/fund or the following definitions, you should contact the Indirect Cost Specialist in Extramural Fund Management at extension 42652:
Indirect Costs
Indirect costs are those incurred for the benefit of numerous activities, but which cannot be identified directly to such activities relatively easily and with reasonable accuracy. Typical costs charged indirectly to sponsored agreements through the indirect cost rate include:
Indirect Activities
Indirect activities are the departmental operations and administrative support activities that cannot be directly related to a specific project. To the extent possible, activities and related expenditures associated with these functions should be accounted for in distinct account/funds.
Core Administrative Support
The following activities represent traditional administrative and clerical activities that are considered indirect and should not be charged to sponsored projects since they cannot be directly identified with a specific project relatively easily:
It should be noted that the development of proposals and associated preparation activities, including typing, copying, and mailing are treated as indirect costs and should be considered part of departmental administration.
Program Specific Support
Extensive administrative program support, significantly greater than the routine level provided by academic department administrative and clerical staff, may be charged directly to a sponsored project if approved by the funding agency and adequate documentation is available to support the direct charge. Direct charging of administrative and clerical salaries may be appropriate for the following projects:
These examples are not exhaustive nor are they intended to imply that direct charging of these costs would always be appropriate. Where direct charges are made, care must be exercised that all costs incurred for the same purpose and in like circumstances are consistently treated as direct costs for all activities.
For example, if the costs associated with organizing a conference is charged directly to a sponsored program, then the costs associated with organizing conferences for instruction should be charged to an account/fund which will be included in the Instruction cost pool base in the indirect cost proposal.
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Chapter 6: Implementing Cost Accounting Standards
The previous sections described the various federal regulations which cover the financial administration of research awards. This section discusses some specific methods of implementing the Cost Accounting Standards at UCLA.
Payroll
Faculty and Professional
Salaries and wages of faculty and professional employees paid at the University's approved rates should be charged in proportion to the level of effort for each activity (e.g., instruction, organized or university research, other sponsored activities, patient care, etc.). Direct charges to a sponsored project are allowable to the extent they reflect the level of effort expended on the project and documented on the university effort reporting system.
Effort in support of general departmental activities (e.g., office of the dean/departmental chair, other departmental committees, etc.) should be charged to an account/ fund which will be included in departmental administration in the indirect cost proposal. Fringe benefits in accordance with established University policies are allowable and are charged to projects in proportion to salary distribution.
Regardless of the method used to apportion salaries, it is recognized that, in an academic setting, teaching, research, and service administration are often inextricably intermingled. A precise assessment of factors that contribute to costs is not always feasible, nor is it expected. Therefore, allocation based on reasonable estimates is acceptable.
The University has elected to use the Personal Activity Reporting (PAR) system as its method to document effort performed on federal projects. Refer to the Effort Reporting section below for details.
Administrative and Clerical
Salaries and wages of administrative and clerical staff should generally be treated as indirect costs and included in departmental administration. If approved by the funding agency, direct charging of these costs may be appropriate when the nature of the work performed on a particular project requires an extensive amount of administrative or clerical support which is significantly greater than the routine level of such services provided by the academic departments. The costs must be attributable to the project and the circumstances must be justified to the satisfaction of the awarding agency (see Program Specific section above).
Effort Reporting
Effort reporting is required by Circular A-21 and is designed to substantiate effort spent by all employees whose salaries are charged directly to federal funds. The PAR system provides the basis for certifying salaries charged to accounts in accordance with the relative activity applied to various programs and projects. The system reports reflect activity applicable to each sponsored agreement and to each account/fund in instruction, general operations, and other indirect activities including department administration.
The reports reflect after-the-fact reporting of the percentage distribution of employee activity. Charges may be made initially on the basis of estimates made before the services are performed, provided that such charges are promptly adjusted if significant differences are found.
All personnel whose salaries are paid in full or in part from federal funds must complete a PAR form. PAR's are mailed to departments 15 days after each calendar quarter. The employee, or responsible academic official having first-hand knowledge of the work performed, must certify the PAR form.
The employee or responsible official certifying the form must first review all payroll percentages on the top half of the form to determine if they are correct. Any changes should be noted in the upper right section of the form. Note that the certification is for each sponsored project. The distribution of effort must, by definition, equal 100%, even if the person is not a full time employee. It is a distribution of the time for which they are being compensated. The costs charged to each fund may not exceed the effort reported by 5 percentage points or more. However, the effort certified for each sponsored project may exceed the amount charged to that project. This donated effort, also called cost sharing, does not require further justification.
After completing the top portion of the form, the percentages for sponsored and other institutional activities should be totaled and listed at the bottom. Any adjustments necessary to ensure that payroll charges are within the guidelines listed above should then be completed.
Non-Payroll
The cost items in this section are some of the more common departmental costs at UCLA. The review of these costs items is provided as general guidance only. If you have any questions about the allowability of any cost on your project, please refer to Circular A-21 or contact Extramural Fund Management at extension 42840.
Telephones-may be charged directly to projects where it is specifically required for a particular project and it has been approved in the budget.
Postage-may be charged directly to a project where there are extraordinary mailing costs due to the nature of the project such as the need to mail large surveys, reprints, etc. and it has been approved in the budget. Costs for mailing proposals should normally not be charged directly.
Reproduction-may be charged directly where there is a need for significant copying performed for a particular project and it has been approved in the budget.
Leases and Rentals-lease costs or lease/rental cost of equipment can be charged directly to a sponsored project if approved by the sponsoring agency.
Utilities-should not be charged directly, except where an individual project requires an extraordinary amount of power, such as operation of a tokamak.
Facilities Repairs and Maintenance-should normally not be charged directly, except where a specific project causes the need for specific repairs.
Office Supplies-should be provided by the department and should normally not be charged directly. However, where supplies that would normally be categorized as office supplies are needed for the project and identified in the proposal budget, they should be charged directly as project supplies.
Equipment-should normally be charged directly where the equipment is specific to a project, or a few projects, and is not used for any other purpose. General purpose equipment should not be charged directly.
Membership and Subscriptions-should not be charged directly to a project, unless the item is identifiable to a specific project and it has been included in the approved proposal budget.
Business Meetings and Conferences-Costs of meetings and conferences, whose primary purpose is the dissemination of technical information, can be directly charged to a sponsored project where specifically provided for in the project agreement.
Travel-which is incurred solely to further the work or disseminate information on a project should be charged directly to that project. Where multiple projects are involved, the costs should be allocated in proportion to the benefits received by each project.
Project Cost Overruns
Any excess costs over income on a sponsored agreement should be tracked and accumulated in the sponsored project account/fund. At the end of the project period, or during the life of the award, Extramural Fund Management will journal the overrun to the unrestricted account/fund identified by the department and charge the project overruns object code (8199).
Recharge Costing Process
A recharge is the assessment and collection of a charge for products or services exchanged between departmental units. Recharges are direct costs to a sponsored project as long as the department charging the project has followed these guidelines as well as those in the UCLA Administrative Policy Guide. Any on-going departmental recharge activities must be formally submitted to the POSSSE Committee for review and approval.
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Chapter 7: The Indirect Cost Proposal Process
Background
In the late 1940's the United States government began to engage university faculty to carry out contract research. In the process the issue of institutional (later termed indirect) costs was addressed. Over the next twenty years some agencies developed formal criteria to justify reimbursement of these costs while others simply set indirect cost recovery at 8%. In 1966 the government announced that it would reimburse universities fully for the indirect costs of federally funded research. Since then Circular A-21 has guided the reimbursement for these costs.
Functions of an University
Circular A-21 classifies the functions of an institution of higher education into these four categories:
Direct & Indirect Costs
Each of the above functions creates both direct and indirect costs:
Direct costs can be identified and charged to a specific project, function or activity with a reasonable degree of accuracy and without excessive accounting. For a research project, these costs include salaries, equipment, supplies and travel.
Indirect costs cannot be so easily charged to projects, functions or activities, but are necessary to conduct research. They include building maintenance, utilities, library services, accounting, and other central and departmental administrative services. In addition, Circular A-21 requires that certain cost such as administrative and clerical salaries should normally be treated as indirect costs.
Allocation of Costs
Calculating the indirect cost rate ultimately requires that expenditures for a selected fiscal year be allocated to each of the four university functions (INSTR, RSCH, OSA, OIA).
The first step deducts from current funds expenditures certain unallowable expenses (e.g., patient care, equipment purchases, fundraising, entertainment and financial aid). A review of the remaining expenditures in each account/fund determines whether they are direct or indirect.
Direct costs are then allocated to one of the four university functions to establish the modified total direct costs (MTDC) of each function. MTDC is defined as total allowable costs minus amounts spent for equipment, alterations and renovations of space, patient care and subcontracts over $25,000. Costs identified as indirect are classified into one of six indirect cost pools.
Indirect Cost Pools
Indirect current funds expenditures are classified into the following cost pools:
The last two indirect cost pools derive from the Capital Asset ledgers and are not considered current funds expenditures:
Allocation of Indirect Costs
The overall objective of the allocation process is to distribute these indirect cost pools among the four university functions (INSTR, RSCH, OSA, OIA) in proportions consistent with the use of university resources. Circular A-21 lists the guidelines for this allocation. For example:
The BU pool is allocated based on a survey that determines, on a room-by-room basis, how much space each university function and indirect cost pool uses. The survey might show that the Chemistry building is used 50% for INSTR, 40% for RSCH and 10% for DA. Thus, for a $100,000 building, the 2% allowance or $2,000 would be allocated 50% to INSTR, 40% to RSCH and 10% to DA. For single-use buildings, the 2% allowance is allocated to the function or pool that the building benefits. Therefore, OIA receives the entire allocation for the Residence Halls' building use allowance.
The GA pool is allocated to each university function based on the relative dollar value of each function's MTDC. If the MTDC of the INSTR function represents 50% of the combined MTDC's of INSTR, RSCH, OSA and OIA; then 50% of the GA pool is allocated to the INSTR function.
The following percentage expresses the relationship between the direct costs of a university function and the associated indirect costs:
Indirect
Costs
-------------------- = Indirect Cost
Rate
MTDC
The allocation process yields this ratio for each function (INSTR, OSA and OIA). Often referred to as the calculated rate, the research indirect cost rate is relevant to this discussion:
Indirect
CostsResearch
--------------------------- = Indirect Cost
Rate
MTDCResearch
Recovery of Research Costs
Payments for federally sponsored research contain a set amount for the direct costs of the research and an additional amount for reimbursement of indirect costs. Universities recover their indirect costs by applying their indirect cost rate to the MTDC a of project.
Proposal Submission
After the calculation of the research indirect cost rate, UCLA submits a proposal to the Department of Health and Human Services, the cognizant agency for most universities.
Calculated vs. Negotiated Rate-In almost every case, the university agrees to concede without cause several rate points from the calculated indirect cost rate. This lower rate is known as the negotiated rate. It can cover periods from one to several years. UCLA's current negotiated rate is 52.5%, reduced from a calculated rate of 63%.
Application of the Negotiated Indirect Cost Rate
The following example illustrates the application of the indirect cost rate to a typical sponsored research project:
Direct Costs:
| Salaries | $ | 40,000 |
| Materials | $ | 12,000 |
| Equipment | $ | 15,000 |
| Sub-Contract | $ | 30,000 |
| Other | $ | 3,000 |
| Total Direct Costs | $ | 100,000 |
| Less: | ||
| Equipment | $ | 15,000 |
| Sub-Contract in Excess of $25,000 | $ | 5,000 |
| Modified Total Direct Costs | $ | 80,000 |
| Negotiated Indirect Cost Rate | X 52.5% | |
| Indirect Costs | $ | 42,000 |
| Total Costs | $ | 142,200 |
| Effective Rate | $ | 42% |
Because, as described earlier, the indirect cost rate is applied to modified and not to total direct costs, the effective rate is lower than the negotiated rate. Thus, UCLA does not receive $52,500 for every $100,000 in direct research costs.
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Examples of Cost Items
Several departments submitted questions regarding the accounting treatment of certain cost items. These examples are included below to highlight the questions and issues that should be addressed when determining whether an expenditure is charged as a direct cost of a project.
These issues are demonstrated by using the Determining Cost Allowability & Classification flowchart included in this Appendix. Using the flowchart with these and other real-life examples will help determine the proper treatment of each expenditure item. For each example, the most relevant questions from the flowchart are discussed.
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Example 1: Lost/Late Charges for Radiation Badges
Lab personnel exposed to radioactive substances must wear radiation badges and rings. If turned in late or lost, the department is charged $35/badge and $5/ring. These costs are not included in the approved proposal budget.
Would this cost exist without the award? Most likely yes, since other awards and activities would necessitate radiation badges. Does cost meet the A-21 direct cost definition? No, this cost cannot be identified with a specific project or easily assigned to several benefiting projects with a high degree of accuracy.
This cost should not be charged directly to a project.
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Example 2: Research Journal Subscriptions
The department or PI's subscribe to various research journals. These costs are not included in the approved proposal budget.
Would this cost exist without the award? Probably yes, since PI's would want to keep abreast of current developments in their disciplines. Does cost meet the A-21 direct cost definition? Although the journals can be used as additional research materials for certain projects, the subscription costs would have to be easily assigned to the various benefiting projects with a high degree of accuracy.
This expenditure should not be charged directly to a project. If the approved proposal budget included the subscription charge, it may be charged directly to that project.
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Example 3: Graham Crackers & Promotional Items
Researchers often use items such as graham crackers as incentive for children participating as research subjects. Promotional items such as mugs are sometimes used to attract research subjects. These items are necessary ensure participation by research subjects.
Does this cost meet A-21 direct cost definition? Yes, these items can be identified as benefiting a specific project. Does cost meet A-21 § F.6.b restriction? Yes, these items are essentially laboratory supplies.
These items should be charged directly to a project.
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A PI wants to charge her cellular phone to a project. The project is off-campus and the PI uses to the phone while traveling to and from the off-campus location.
Is the cost reasonable? The average taxpayer would not approve of tax dollars paying for such items. Recent experience at other universities has shown that government auditors would consider it a luxury.
The cost should not be charged directly to a project; although, individual calls could be charged directly if they are necessary under the circumstances and can be identified as benefiting a specific project.
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Example 5: Vivarium Access Cards
Entry into the vivarium requires an access card which is sold for $5.
Would this cost exist without the award? If the card is purchased for an individual who is working on only one project involving animal subjects, then there would be no other reason to buy the card. Does the cost meet the A-21 direct cost definition? If the individual is working on several projects involving animal subjects, then it may be difficult to allocate the cost among the projects with a high degree of accuracy.
This cost should normally be treated as indirect unless the individual for whom the card is purchased is working on only one project or it can be easily allocated among several benefiting projects.
[Table of Contents] [Policies & Procedures] [EFM]
Example 6: Copier Access Cards
The PI's in the department receive an access card that will operate a copier once a fund number is entered. At month's end, each fund is charged for the copies identified to each fund.
Does the cost meet the A-21 § F.6.b restrictions on direct costs? No, this section states that items such as office supplies, postage, local telephone costs and memberships shall normally be treated as indirect costs.
This cost should not be charged directly to a project.
[Table of Contents] [Policies & Procedures] [EFM]
Example 7: Lab Phone vs. Professor's Office Phone
A PI has a phone installed in one of her labs. The cost of the phone line and local and long-distance calls are included in the approved proposal budget.
Would this cost exist without the award? Probably not, since there would be no need for a phone in the lab. Does cost meet the A-21 direct cost definition? Yes, if the lab is used for more than one project, the costs must be easily allocated among the benefiting projects with a high degree of accuracy. Does cost meet the A-21 § F.6.b restrictions for direct charging? This section specifically lists local telephone costs as normally an indirect cost.
Although § F.6.b indicates that this cost shall normally be treated as indirect, the fact that the local phone costs were included in the approved proposal budget provides additional justification for charging this expenditure directly to the project.
Faculty members are provided with a phone in their offices.
Would the cost exist without the award? Yes, professors would still require an office phone to perform their duties.
A faculty member's office phone should not be charged directly to a project.