Special
Feature/Commentary Can
Indirect
Cost
Funding
Michael
P. Sheetz
The fractionof NIH funds going to indirect costs has increased over the last 15 years and this has cut into the direct funds availablefor research. Because of the confusion over indirect costs and the large percentage of NIH monies dedicated to them, today’s indirect cost system has been called an accident waiting to happen. Significant reforms are now under consideration that could have far-reaching effects on the way we do science. Those reforms could dramatically alter the bureaucratic workload of doing research and the structure of laboratories in the future. It is important for the scientific community to be informed about the system and the possible changes. We need to look beyond the yachts and flowers to understand what are the major needs for indirectcosts,the inflators, and how reforms might affectscientificresearch.
is Indirect
What
Cost?
Although everyone realizes that bench scientists are supported by many services, we easily forget or make light of that contribution and its cost. NIH has provided funds for the support of needed services and the maintenance of labs.In addition, those costs, which cannot specifically be identified with any one project such as the library costs, has been at least partially supported. Everyone agrees that this is reasonable because of the benefits to society that have come from biomedical research. The problems arise in defining the items to be charged to indirect cost and even in the basic principles that should guide indirect cost policy. Recently, a group of scientists and administrators has met to define a set of principles for indirect costs and they have agreed on several principles for defining indirect costs. The government agencies, particularly the Office of Management and Budget, is considering major modifications,improvements to the system that wifiprobably take those principles as a base.
Operationally,
indirect
cost has been defined
by circular
A-21, which isshort as such documents go but alsovery vague. It allows a wide variety of differentitems to be charged to the indirect cost base, which makes the comparison of indirect costs between institutions nearly impossible. For example, yachts, flowers,and many other items were not specifically prohibited by A-21. Some of the glaring anomalies have been fixed by fiat from the Office of Management and Budget in
a revision to A-21 earlier this year. Perhaps more important is that the circular allows different universities to charge different items to their indirect cost base such as secretaries tuition. In addition, although there are many differences tween the support services needed for a mouse genetics and a biochemistry lab, NIH has allowed one indirect
rate to be negotiated
cost
for the whole university.
How are Indirect The indirect
and belab
between
there are two cognizant indirect
agencies
(NIH
cost rates with universities
Why
university
and ONR)
Reform
the
System?
The current budget crises and political pressures have focussed attention on the Indirect Cost portion of the NIH budget which most do not understand. Everyone is uneasy because politicalpressures may force Congress to make arbitrary changes in the ground rulesthatwould have dramatic negative
effects on university
cash flow. On the positive side, if reforms
are well conceived and implemented, they could simplify the system and promote cost-saving measures. What
Reforms
are Being
Considered?
A number of changes are being considered to improve the efficiency and equitability of the system. Of the two major categories of indirect cost, administrative costs and facilities, the administrative costs have received the greatest scrutiny although the inflation has been in the facilities category. Changes to the system have to be carefullyconsidered to be sure they will not impair scientific productivity through excessive paperwork (e.g., the excessive animal experimentation paperwork designed to discourage experiments with animals) or result in long-term damage to the infrastructure.
#{149} Standardization
of Indirect Cost Items
A number institutions
of items are part of the indirect cost pool in some and the direct cost pool in others.Aside from being logical, standardization would make it easier to make comparisons and foster cost-saving measures to lower rates.
#{149} Movement of Items from Indirect to Direct Costs Several items like secretaries and radiation waste disposal are often assigned to indirect costs. Logically those costs should be born by the grants that fund the research needing those items. The major advantage in moving those items to a direct category is that investigators would see that radioactive ligands are sometimes much more expensive than some chemical The major
drawback
is that it is often difficult
determine the actual cost of certain services, the investigators days to find the appropriate
and
government representativesafterthe universityhas calculated what it spent on indirectcostsforthe previous year.Presently, negotiate
separate pools of universities. Different items go into the calculation but it is always based on last year’s actual expenses. A figure of X% is proposed by the university and then a process of horse trading normally begins. Rather than auditing the expenses that form the basis of the calculation (audits are performed separately by a different branch of the government), the government representativescounter with (X-Y)% and after some negotiations that often include offers of slightly higher rates if the university is locked in for the next 5 years, a rate is agreed on that is normally 1-3 percentage points below the proposed rate.
methods.
Cost Rates Determined?
cost rates are negotiated
Be Improved?
that can
but they deal with
writing
to
which could take information when
a grant.
Dr. Sheetz is professor and chairman, Department of Cell Biology, Duke University Medical Center,468 Sands Bldg/Research Dr.,Box 3011, Durham, NC 27710, USA.
3234 NEWS & FEATURES \/nI ioQ w.fasebj.org by Iowa State University Serials Acquisitions Dept (129.186.138.35) on January 29, 2019. The FASEB Journal Vol. ${article.issue.getVolume()}, No. ${article.issue.getIssueNum
#{149} Tagging Equipment Depreciation Costs for Replacement When major items of equipment are purchased with university or private dollars, the depreciation costs of that equipment can be charged to the indirect cost base. Some institutions have accounts to which such indirect cost funds are targeted but in other institutions those funds may go to another department, another branch of the university, or the new statue gracing the front of the administration building. Some form of earmarking of such funds for equipment replacement is being considered, although others contend that regulation would only add paperwork and would create false expectations (it is unlikely that the funds obtained would be adequate to replace outmoded equipment). #{149} Interest Costs for New Buildings The construction of new buildings has been the major inflator of indirect costs over the last 15 years; consequently, it should be a major item for consideration in the reform of indirect costs. Interest charges to indirect cost began in the early ‘70s when a building program for medical schools was dropped from the federal budget. After that time, the only way for the government to support or leverage the construction of new buildings was to allow interest from the loans used to build those buildings to be charged to indirect cost. More specifically, this means that the university will construct a building with money borrowed from a bank, using the endowment of the university as collateral on the loan. The interest on that loan can then be charged to indirect cost while the university is able to collect intereston the endowment funds. This amounts to a major subsidy of the building costs and actually accounts for about five to ten percent of the current indirect costs. These are longterm commitments, and many universities have taken advantage of this provision and are now holding considerable debt. Because there is no current regulation of this activity, it could grow to become an even greater portion of the indirect cost. Several different solutions to the problem have been proposed. The obvious first choice is a building program that
would be supported by funds outside of the NIH budget, and grants would be made from that building fund. Most people feel that this possibility is highly unlikely given the present drive to reduce government spending. A second option is to continue with the status quo. A third option is to block any further expansion of research space through this category and grandfather those that are currently on. A fourth is to take the attitude that there should be no interest charged to indirect cost, and thus disallow all existing programs. This latter possibility strikes fear into the hearts of many faculty and administrators, who could not make the payments on past construction with the current indirect costs. A related issue that could alleviate the problem of charging interest to the indirect cost is the issue of the depreciation of buildings. Some believe that NIH should pay a significant portion of the indirect cost related to research activities. In terms of the buildings and infrastructure, NIH should pay what it would cost for lab space to be rented in the private sector or some fair fraction thereof. In a time of stationary budgets many feel that there should be no dollars for new buildings but only for the replacement or renovation of existing facilities. This could be done either by giving a reasonable depreciation on the existing buildings (something on the order of 20 years, for example, as opposed to the 50-year depreciation rate currently in effect) or by using a survey of rents in the area to arrive at a reasonable market value for the space being utilized.
Summary Like the tax laws many possible loopholes are in these proposed changes and therefore they have to be considered very carefully. If there is such a thing as a collective wisdom, it should be brought to bear on this problem. With strong and wellconsidered actions, which would be implemented in a controlled way, the mechanisms for funding research could be improved to encourage efficient use of funds.
3235 NEWS & FEATURES Vol. 6 November 1992 w.fasebj.org by Iowa State University Serials Acquisitions Dept (129.186.138.35) on January 29, 2019. The FASEB Journal Vol. ${article.issue.getVolume()}, No. ${article.issue.getIssueNum
Feature/Commentary Can
Indirect
Cost
Funding
Michael
P. Sheetz
The fractionof NIH funds going to indirect costs has increased over the last 15 years and this has cut into the direct funds availablefor research. Because of the confusion over indirect costs and the large percentage of NIH monies dedicated to them, today’s indirect cost system has been called an accident waiting to happen. Significant reforms are now under consideration that could have far-reaching effects on the way we do science. Those reforms could dramatically alter the bureaucratic workload of doing research and the structure of laboratories in the future. It is important for the scientific community to be informed about the system and the possible changes. We need to look beyond the yachts and flowers to understand what are the major needs for indirectcosts,the inflators, and how reforms might affectscientificresearch.
is Indirect
What
Cost?
Although everyone realizes that bench scientists are supported by many services, we easily forget or make light of that contribution and its cost. NIH has provided funds for the support of needed services and the maintenance of labs.In addition, those costs, which cannot specifically be identified with any one project such as the library costs, has been at least partially supported. Everyone agrees that this is reasonable because of the benefits to society that have come from biomedical research. The problems arise in defining the items to be charged to indirect cost and even in the basic principles that should guide indirect cost policy. Recently, a group of scientists and administrators has met to define a set of principles for indirect costs and they have agreed on several principles for defining indirect costs. The government agencies, particularly the Office of Management and Budget, is considering major modifications,improvements to the system that wifiprobably take those principles as a base.
Operationally,
indirect
cost has been defined
by circular
A-21, which isshort as such documents go but alsovery vague. It allows a wide variety of differentitems to be charged to the indirect cost base, which makes the comparison of indirect costs between institutions nearly impossible. For example, yachts, flowers,and many other items were not specifically prohibited by A-21. Some of the glaring anomalies have been fixed by fiat from the Office of Management and Budget in
a revision to A-21 earlier this year. Perhaps more important is that the circular allows different universities to charge different items to their indirect cost base such as secretaries tuition. In addition, although there are many differences tween the support services needed for a mouse genetics and a biochemistry lab, NIH has allowed one indirect
rate to be negotiated
cost
for the whole university.
How are Indirect The indirect
and belab
between
there are two cognizant indirect
agencies
(NIH
cost rates with universities
Why
university
and ONR)
Reform
the
System?
The current budget crises and political pressures have focussed attention on the Indirect Cost portion of the NIH budget which most do not understand. Everyone is uneasy because politicalpressures may force Congress to make arbitrary changes in the ground rulesthatwould have dramatic negative
effects on university
cash flow. On the positive side, if reforms
are well conceived and implemented, they could simplify the system and promote cost-saving measures. What
Reforms
are Being
Considered?
A number of changes are being considered to improve the efficiency and equitability of the system. Of the two major categories of indirect cost, administrative costs and facilities, the administrative costs have received the greatest scrutiny although the inflation has been in the facilities category. Changes to the system have to be carefullyconsidered to be sure they will not impair scientific productivity through excessive paperwork (e.g., the excessive animal experimentation paperwork designed to discourage experiments with animals) or result in long-term damage to the infrastructure.
#{149} Standardization
of Indirect Cost Items
A number institutions
of items are part of the indirect cost pool in some and the direct cost pool in others.Aside from being logical, standardization would make it easier to make comparisons and foster cost-saving measures to lower rates.
#{149} Movement of Items from Indirect to Direct Costs Several items like secretaries and radiation waste disposal are often assigned to indirect costs. Logically those costs should be born by the grants that fund the research needing those items. The major advantage in moving those items to a direct category is that investigators would see that radioactive ligands are sometimes much more expensive than some chemical The major
drawback
is that it is often difficult
determine the actual cost of certain services, the investigators days to find the appropriate
and
government representativesafterthe universityhas calculated what it spent on indirectcostsforthe previous year.Presently, negotiate
separate pools of universities. Different items go into the calculation but it is always based on last year’s actual expenses. A figure of X% is proposed by the university and then a process of horse trading normally begins. Rather than auditing the expenses that form the basis of the calculation (audits are performed separately by a different branch of the government), the government representativescounter with (X-Y)% and after some negotiations that often include offers of slightly higher rates if the university is locked in for the next 5 years, a rate is agreed on that is normally 1-3 percentage points below the proposed rate.
methods.
Cost Rates Determined?
cost rates are negotiated
Be Improved?
that can
but they deal with
writing
to
which could take information when
a grant.
Dr. Sheetz is professor and chairman, Department of Cell Biology, Duke University Medical Center,468 Sands Bldg/Research Dr.,Box 3011, Durham, NC 27710, USA.
3234 NEWS & FEATURES \/nI ioQ w.fasebj.org by Iowa State University Serials Acquisitions Dept (129.186.138.35) on January 29, 2019. The FASEB Journal Vol. ${article.issue.getVolume()}, No. ${article.issue.getIssueNum
#{149} Tagging Equipment Depreciation Costs for Replacement When major items of equipment are purchased with university or private dollars, the depreciation costs of that equipment can be charged to the indirect cost base. Some institutions have accounts to which such indirect cost funds are targeted but in other institutions those funds may go to another department, another branch of the university, or the new statue gracing the front of the administration building. Some form of earmarking of such funds for equipment replacement is being considered, although others contend that regulation would only add paperwork and would create false expectations (it is unlikely that the funds obtained would be adequate to replace outmoded equipment). #{149} Interest Costs for New Buildings The construction of new buildings has been the major inflator of indirect costs over the last 15 years; consequently, it should be a major item for consideration in the reform of indirect costs. Interest charges to indirect cost began in the early ‘70s when a building program for medical schools was dropped from the federal budget. After that time, the only way for the government to support or leverage the construction of new buildings was to allow interest from the loans used to build those buildings to be charged to indirect cost. More specifically, this means that the university will construct a building with money borrowed from a bank, using the endowment of the university as collateral on the loan. The interest on that loan can then be charged to indirect cost while the university is able to collect intereston the endowment funds. This amounts to a major subsidy of the building costs and actually accounts for about five to ten percent of the current indirect costs. These are longterm commitments, and many universities have taken advantage of this provision and are now holding considerable debt. Because there is no current regulation of this activity, it could grow to become an even greater portion of the indirect cost. Several different solutions to the problem have been proposed. The obvious first choice is a building program that
would be supported by funds outside of the NIH budget, and grants would be made from that building fund. Most people feel that this possibility is highly unlikely given the present drive to reduce government spending. A second option is to continue with the status quo. A third option is to block any further expansion of research space through this category and grandfather those that are currently on. A fourth is to take the attitude that there should be no interest charged to indirect cost, and thus disallow all existing programs. This latter possibility strikes fear into the hearts of many faculty and administrators, who could not make the payments on past construction with the current indirect costs. A related issue that could alleviate the problem of charging interest to the indirect cost is the issue of the depreciation of buildings. Some believe that NIH should pay a significant portion of the indirect cost related to research activities. In terms of the buildings and infrastructure, NIH should pay what it would cost for lab space to be rented in the private sector or some fair fraction thereof. In a time of stationary budgets many feel that there should be no dollars for new buildings but only for the replacement or renovation of existing facilities. This could be done either by giving a reasonable depreciation on the existing buildings (something on the order of 20 years, for example, as opposed to the 50-year depreciation rate currently in effect) or by using a survey of rents in the area to arrive at a reasonable market value for the space being utilized.
Summary Like the tax laws many possible loopholes are in these proposed changes and therefore they have to be considered very carefully. If there is such a thing as a collective wisdom, it should be brought to bear on this problem. With strong and wellconsidered actions, which would be implemented in a controlled way, the mechanisms for funding research could be improved to encourage efficient use of funds.
3235 NEWS & FEATURES Vol. 6 November 1992 w.fasebj.org by Iowa State University Serials Acquisitions Dept (129.186.138.35) on January 29, 2019. The FASEB Journal Vol. ${article.issue.getVolume()}, No. ${article.issue.getIssueNum
