Indirect Cost Recovery

Case study

The University of California recovers nearly $900 million each year in indirect cost revenue from the conduct of approximately $4 billion in externally-sponsored research.  These costs reimburse the University for a wide-range of expenses which support a healthy research environment.  These include the costs of maintaining laboratories and offices, utilities, libraries, and critical administrative functions, such the safe and responsible management of human subjects.

Owing to UC’s low negotiated rates, approximately $250 million in annual costs are not covered by research sponsors, and must therefore be supplied from the University’s general fund.   Additionally, UC grants cost waivers amounting to approximately $250 million annually.  Thus, actual losses due to unrecovered indirect costs are approximately $500 million per year.  As State support has declined, this lost research support has become an unsustainable burden for the University. 

The University is working to increase the rate at which it recovers the full costs of research by: (1) increasing indirect cost rates, (2) decreasing the number of cost waivers, and (3) finding ways to recover the shared costs of research from external organizations. 

This is a long‐term project, with a time horizon of three to four years. Individual projects may see earlier results. 

Many influential factors in the under-recovery of research costs relate to the policies and practices of UC’s research sponsors, and are thus outside of UC’s direct control. UC will need to work closely with these external research partners in order to influence reform.

In the case of federal rate reform, federal policies governing cost recovery are set by the Office of Management and Budget (through OMB Circular A-21); and responsibility for negotiating UC’s federal indirect cost rates lies with the office of Health and Human Services. Instituting changes in these organizations will require a strong national push, and coordinated efforts across many academic institutions. UC has already engaged with a number of national organizations (COGR, APLU, AAU and the National Academy of Sciences), which are making strides on these issues. Progress, however, is likely to be slow.

State rate reform might be more timely. Yet, often there is an assumption that California already adequately funds UC research through tuition subsidies and other sources. As State funding continues to decline, this assumption needs to be challenged in order to secure adequate funding for research facilities and support.

Finally, many funding agencies – especially private foundations – have policies which require some amount of cost sharing (or waivers) on their research grants. As a result, UC must choose between turning down funds or taking on the burden of those uncompensated costs. UC will continue to work with agencies to persuade them of the long-term corrosive effects of these policies on the University.

It is clear, however, that as State funding decreases, UC can no longer afford to substantially underwrite the costs of conducting research for external sponsors. While cost sharing may sometimes be appropriate – particularly in supporting the humanities and arts, new faculty, or other under-funded areas of research – the University must carefully examine its policies and practices on cost sharing and waivers, and begin a system-wide discussion on how to better recover the full costs of doing research.

Some faculty members are concerned that increases in indirect cost rates will reduce the funding available to support their research. Others worry that more stringent cost sharing policies may require researchers to turn down grants where cost sharing is required. Most critically, many faculty members are concerned about transparency, desiring a clear connection between the indirect costs the University recovers and the research infrastructure they depend on for their work. It will be critical to provide faculty and administrators with this information and provide system-wide opportunities to participate in crafting policies and practices concerning indirect cost recovery. 

Initial investment
Initial investments are primarily related to staff time and travel (approximately $20,000). Additional investments may be required to augment data systems to provide more regular and detailed reporting on indirect cost recovery.  

Fiscal results, current and anticipated
In its Fall 2010 report, the UC Commission on the Future recommended redoubling efforts to obtain full cost recovery on all sponsored research. The report sets an aggressive goal: increasing indirect cost recovery by $300 million annually. The working group advising the Commission on Research Strategies had put forth a more conservative target of $100 million annually.

In either case, progress towards these goals is contingent upon UC’s ability to work with and influence policies and practices at federal and state agencies, as well as private companies and foundations. Substantial gains may take many years to achieve. A lesser amount may be achievable through improved management of cost waivers, and coordinated efforts to negotiate higher indirect cost rates. 

Current action and next steps
The Vice President for Research and Graduate Studies at the Office of the President will continue to work with UC’s government relations officers and the heads of several national associations including the Association of American Universities (AAU), the Association of Public and Land‐grant Universities (APLU), and the Council on Governmental Relations (COGR) to reform federal policies and practices. The University is also working with its representatives in Congress to address the rate problems, as well as the faculty senate to bring about reforms in the way UC recovers the costs of its research.

A UC-wide task force on indirect cost recovery is being established to facilitate a broad and coordinated approach to reform across UC campuses. 

Concluding statement
Goals such as these have already been realized by many of the best private universities in the country. For example, MIT has an indirect cost recovery rate about 15% higher than UC’s average, and it has policies in place that make cost waivers rare. There is a national mood among many of our public peers to redress the imbalance between their costs and their reimbursements, and three major national associations – the Association of American Universities (AAU), the Association of Public and Land‐grant Universities (APLU), and the Council on Governmental Relations (COGR) – have made indirect cost recovery reform a top priority for the coming year. This is a propitious time to address a problem that is costing the University of California dearly.