August 12, 1987
Subject: Indirect Costs on HHS Grants (including NIH)
Enclosure I is a copy of the new HHS Grants Administration Manual Chapter 6-150, Reimbursement of Indirect Costs (6/12/87). Enclosure 2 is the Federal Register Notice of June 12 announcing the availability of the new chapter 6-150; this Notice also provides a summary of the changes and responses to comments made on the earlier proposed rule. The purpose of this Memo is to clarify the effect of these changes on campus Contract and Grant Offices and Accounting Offices. The following sections are divided roughly into "Effect on C& G Offices" and "Effect on Accounting Offices," but there is material in each section that pertains to both sets of offices.
Effect on C& G Offices
Proposals: Proposals using the new PHS 398 and 2590 forms (dated 9/86) will now show total proposed project costs, in addition to direct costs, for each budget period. The same method used by the campus to project indirect costs on the second and succeeding years of an NSF proposal should be used to estimate the indirect costs on succeeding years of a PHS proposal. NIH awards will continue to show recommended direct costs for future years (not total costs) and will therefore not act as a ceiling on the total amount proposed for a given future year.
Awards: Awards made after October 1, 1987, by HHS awarding units (including NIH) will show a total amount that includes both direct and indirect costs. This amount is a fixed ceiling for the budget period of the award. Additional funds to cover indirect cost rate increases occurring in the middle of a budget period will not be awarded. (Please refer to p. 3 of the new chapter 6-150 for a list of the four cases where additional indirect costs may be awarded.) Campuses should use the same general procedures for establishing budgets on PHS grants awarded after October 1, 1987, they now use for establishing budgets on NSF grants. Campuses may rebudget between direct and indirect costs categories, in either direction, without awarding office approval, so long as the project scope is not affected. Revisions to the campus institutional prior approval system for PHS grants should be made to reflect the new flexibility for transferring between direct and indirect cost categories.
Effect on Accounting Offices
Charging Indirect Costs on HHS Grants: Accounting Manual Chapter C-557-37, Indirect Costs for NIH Grants, will not apply to NIH grants awarded after October 1, 1987. This means that campuses will have to develop new procedures for handling indirect cost rate changes and budget transfers made during the budget period of an NIH grant. Up until now, changes that resulted in increases in indirect costs beyond the amount shown in the Summary Listing could be recovered from the agency on the Summary Report of Expenditures Adjustment Sheet. For grants awarded after October 1, 1987, however, the total ceiling approach will mean that indirect cost expenditures beyond the amount awarded will either have to be taken out of direct costs (so long as the project scope is not affected) or waived under authority of C& G Memo 82-30 (August 2, 1982). Campus procedures for dealing with this situation should generally conform with existing procedures used for NSF grants.
Expenditure Reporting--Predetermined or Fixed Rates: HHS grants will still require submission of annual and final Financial Status Reports (FSRs). Indirect cost amounts claimed on the FSRs will continue to be limited to the amount authorized. However, the amount authorized will no longer be set by a Summary Listing. Instead, the amount authorized will be based on the total amount of the award for the budget period being reported on, the base direct cost expenditures, and the applicable indirect cost rate or rates. The total amount claimed for both direct and indirect costs may not exceed the total amount awarded. Summary Report of Expenditure Adjustment Sheets will only be submitted in those cases where an indirect cost rate used in an FSR turns out not to be the applicable rate. This would almost never happen where the campus has uninterrupted predetermined or fixed rates (but see below under "Expenditure Reporting--Provisional Rates").
Expenditure Reporting--Provisional Rates: Indirect cost rates used in FSRs should always be the most current rates available at the time the report is submitted.
When a provisional rate used for charging and billing purposes is subsequently replaced by a final, fixed, or predetermined rate before the FSR is submitted, the FSR should reflect the latter permanent rate. In these cases, the procedures listed under "Expenditure Reporting--Predetermined or Fixed Rates" should be followed.
When FSRs are submitted that reflect rates that are still provisional, it will be necessary to adjust the amount of indirect costs claimed if the subsequent permanent rate for that period differs from the provisional rate used in the FSRs. Such differences are to be reported on an annual Summary Report of Expenditure Adjustment Sheet for each awarding component of HHS (NIH, ADAMHA, OHDS, HCFA, etc.). Where the subsequent permanent rate is lower, money will have to be returned to the agency. Where the subsequent permanent rate is higher, additional funds will be awarded up to the amount of the unobligated balance for an individual grant for the period reported on, provided agency funds are available and the request is made within six months of the date of the permanent rate agreement.
The Public Health Service is working on changes to its own Grants Administration Manual. Our best information is that these changes will follow 6-150 of the HHS Grants Administration Manual. We will let you know if this is not the case.
Refer: Bill Sellers
David F. Mears
University Contracts and
Donald L. Alter
Director, Corporate Accounting
Vice Chancellors for Research
Lab Contract & Grant Officers