Chapter 8-300

Computation of Indirect Costs

8-300 Introduction to Indirect Cost Rates

The University seeks full recovery by budgeting for all appropriate direct costs and indirect costs. As described above, the federally-negotiated rates (see 8-210) and the UC Rates (see 8-220) are indirect cost rates that approximate full recovery of indirect costs.

Indirect costs are calculated by multiplying the appropriate indirect cost rate by the indirect cost base. The indirect cost base is the direct research costs used to determine the reimbursed indirect costs for a funded project.

8-310 Applying Rates

Principal Investigators and campus administrators are responsible for submitting proposals that provide for full indirect cost recovery unless an exception is granted by a University official with the authority to do so. Every effort should be made to recover all costs of extramurally-funded projects by applying an appropriate federally-negotiated rate or a UC Rate to an appropriate base (see Section 8-370 for more information on bases).

If a campus elects to use an indirect cost rate or base other than either a federally-negotiated rate or a UC Rate, then an indirect cost exception is needed. See 8-500.

8-310.1 Applying the Federally-Negotiated Rates

For federal funding, as discussed in 8-210, campuses must apply their respective federally-negotiated rate to proposals and awards. With other awarding entities, not just the federal government, the University uses the same rate because the federally-negotiated rate is a proxy for full recovery.

When submitting a proposal for federal funding, escalations in the federally-negotiated rate agreements must be included in the budget. Once awarded, the negotiated rates in effect at the time shall be used for the “life of agreement,” defined as the competitive segment or specified period of years approved by the federal funding agency at the time of the award of that segment of the project. (2 CFR § 200, Appendix III.C.7.)

For proposals and awards with periods beyond what is stipulated in the federally-negotiated rate agreement, campuses may use the last negotiated rate until a new federally-negotiated rate agreement is finalized. See 8-410 for further information on recovery of indirect costs when new Rate Agreements result in rate changes.

8-310.2 Applying UC Rates

As discussed in 8-220, campuses should apply the respective UC Rate to the following:

When determining appropriate indirect cost recovery for these classes of sponsored activity, the UC Rate, not the federally-negotiated rate should be applied. Each UC Rate will have a clearly defined base. The University considers the UC Rate as a proxy for full cost recovery.

8-320 Application of Rates Based on Project Type and Location

The indirect cost rates in the federally-negotiated rate agreement are applicable to all extramural awards for research, instruction, and other sponsored activities from most categories of sponsors. (See 8-321 and 8-322.) Currently, all campuses have at least six basic federal indirect cost rates, as shown in the following matrix:

Applicable to Project Type

Location

On-Campus

Off-Campus

Research

______%

______%

Instruction

______%

______%

Other Sponsored Activities

______%

______%

Campuses may also have other special rates negotiated, such as for the California National Primate Research Center, the Space Science Lab, and Intergovernmental Personnel Assignment Agreements.

Additionally, the federally-negotiated indirect rates are applicable to sales and service agreements with non-University entities, including specialized service facility or recharge unit services provided to non-University entities. These fee schedules are based on internal recharges approved by the campus recharge committee as well as the applicable federally-negotiated rate. See BUS A-59, Costing and Working Capital for Auxiliary and Service Enterprises.

Sales and services of educational activities are primarily sales of products or services to multiple individuals or organizations outside the University. When sales are made to non-University customers, the University must not assume any obligation beyond delivery of a standardized University product or service at a pre-established, per unit, uniform price, such as fee schedules approved for use by hospitals and clinics, University Extension catalog courses, and the like. Indirect costs are included in the calculation of the fee or price for the product. A deviation from the pre-established uniform price or fee schedule cannot be classified as a sales or services and as such must be treated as research, instruction, or other sponsored activity.

8-320.1 Project Type

Campus Contracts and Grants Officers are responsible for determining which of their approved campus indirect cost rates is applicable to each sponsored project. This determination is dependent on a clear understanding of the distinctions between “research,” “instruction,” and “other sponsored activities,” and other special rates. See 8-230.

Sponsors generally require one indirect cost rate for the entire award. In some instances where more than one type of activity is involved in a single project, the activity which comprises the largest portion of the project should determine the appropriate indirect cost rate for the entire project.

In unusual situations, the nature of the project may dictate the use of multiple rates. Such use of multiple rates would need to be included in the proposal budget and the funding agency would need to approve it at the time of award.

8-320.2 Determining an Off-Campus Rate

In general, the on-campus rate will be applied to sponsored projects. If a sponsored project is conducted in leased facilities not owned by the University where the space rental costs are directly charged to the sponsor, in whole or in part, or in facilities owned or leased by a third party, the project is considered off-campus and the off-campus rate would apply. However, if a sponsored project is conducted in a facility leased by the University for which rental costs are paid by the campus and not charged to the sponsored project, the on-campus rate is applicable.

The following criteria for determining on- or off-campus rates are incorporated into the federally-negotiated indirect cost rate agreement for each campus:

  • Projects conducted entirely on-campus or entirely off-campus will be applied the on-campus or off-campus rate, respectively.
  • If the project involves work at both on-campus and off-campus sites, either the on-campus or off-campus rate generally should be applied, consistent with where the majority of the work is to be performed. Salary cost is generally accepted as a measure of work performed in terms of the total project.
  • The use of both on- and off-campus rates for a given project may be justified if both rates can be clearly identified with a significant portion of salaries and wages of the project. For purposes of this provision, significant is defined as approximately 25% or more of total costs, with a project’s total salary and wage costs exceeding $250,000.

8-330 Applicable Rates for Multiple Campus Awards

Multiple Campus Awards (MCAs) are awards where one UC campus performs a portion of the programmatic work of a sponsored project awarded to another UC campus. The UC campus that receives the original award is the “prime campus” while a UC campus that performs the portion of the work is considered a “participating UC campus.” MCAs are not considered subagreements, as defined in 2 CFR § 200.93, because the ten UC campuses and ANR constitute one legal entity, “The Regents of the University of California.” Therefore, it is not appropriate for the campus receiving the prime award to recover IDC on the first $25,000 of an MCA as it is an internal and not a third party transaction. See 8-396 for information on Subawards.

Each participating UC campus, however, is entitled to recover indirect costs based upon the indirect cost rate applicable to the prime award for the direct charges done on that campus, based on that campus’s federal rate agreement. A campus may not limit the opportunity of another campus to recover indirect costs on Multiple Campus Awards (MCAs). For MCAs, campuses should coordinate at time of proposal submission to determine how indirect cost recovery will be implemented.

For further information on externally-funded MCAs and multiple UC campus projects, see 10-240 through 10-248.

Awards to campuses from UC- managed programs, such as the grant programs administered by the UC Office of the President Research Grants Program Office (RGPO), that do not involve an extramural prime contract or grant, should use the rates stipulated under the policies of those programs.

For further information on internally-funded transactions, see Chapter 10 at 10-250 and 10-253.

8-340 Applicable Rates for Agreements between Campuses and Lawrence Berkeley National Laboratory

For work performed by Lawrence Berkeley National Laboratory (LBNL) personnel at the Laboratory under a subaward from a campus, the applicable indirect cost rate is the rate negotiated for that Laboratory with DOE. Campuses include the first $25,000 of a subaward to the Laboratory in the campus’ MTDC base (see Section 8-380 for a discussion of MTDC).

For work performed by a campus for a University-managed DOE Laboratory as a subawardee under an Intra-University Transaction agreement (IUT), the applicable indirect cost rates are the federally negotiated rates for that campus.

Awards to LBNL from UC- managed programs, such as the grant programs administered by the RGPO that do not involve an extramural prime contract or grant, should use the rates stipulated under the policies of those programs.

Additional information on campus-Laboratory agreements may be found in Chapter 10 at 10-251 and 10-252.

8-350 Applicable Rates for University Extension Awards

For sponsored work performed by campus University Extension (UNEX) personnel, the applicable indirect cost rate is determined by the base in which UNEX costs are included in the campus’ most recent indirect cost rate proposal. UNEX activities which require the application of the indirect rate are those customized educational services, paid for under sponsored agreements for specific sponsors, and not standard published catalogue courses. For published catalog courses, indirect costs included as part of the standard pricing should take into account the indirect costs identified in the campus rate agreement.

8-360 Applying the Base and the Calculation on the Indirect Cost Amount

Calculation of indirect costs usually entails the identification of a “base”, or the direct costs to which an indirect cost rate can be applied. Examples of two commonly used bases are Total Direct Cost and Modified Total Direct Cost.

Some sponsors provide an allocation of indirect costs by stating that a certain percentage of the Total Costs of an award may be used for indirect costs.

8-360.1 Total Cost

Total Cost (TC) refers to the total cost of the project, including the direct and indirect costs. Some sponsors may refer to Total Costs as “total project costs.”

For example, if a sponsor limits an award to $100,000 and states that ten percent of the award may be used for indirect costs, then $90,000 would be allocated for direct costs and $10,000 would be allocated for indirect costs. Ten percent of the total costs may be used for indirect cost recovery.

8-360.2 Total Direct Cost Base

The Total Direct Cost (TDC) is the sum of all costs charged to the sponsor that can be readily and specifically identified with benefiting a particular program or project. When TDC is the established base, there are no exclusions applied before the indirect cost rate is used. In other words, TDC x IDC % = Indirect Cost (IDC). Total cost of the project = TDC + IDC. For example, if TDC for a particular project is $100,000 with 50% IDC% then the following calculation could be used:

$100,000 (TDC) x 50% (IDC %) = $50,000 (IDC)

The resulting total cost of the project equals $150,000 ($100,000 TDC + $50,000 IDC).

8-360.3 Modified Total Direct Cost Base for Indirect Cost Calculation

A Modified Total Direct Cost (MTDC) is calculated by taking all direct costs and excluding certain costs. The excluded costs of the MTDC may vary depending on the sponsor. 

For federal awards, per 2 CFR § 200.68, MTDC is defined as:

[A]ll direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and subawards and subcontracts up to the first $25,000 of each subaward or subcontract (regardless of the period of performance of the subawards and subcontracts under the award). MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs, portion of genomic array (see 8-514) and the portion of each subaward and subcontract in excess of $25,000.

Additionally, “[o]ther items may only be excluded when necessary to avoid a serious inequity of the distribution of indirect costs, and with the approval of the cognizant agency for indirect costs.” 2 CFR § 200.68.

When utilizing the federally-negotiated rates, the campus must follow the MTDC definition described in the rate agreement.

Any questions about interpretation of the MTDC base can be directed to Costing Policy & Analysis. Clarifications are issued via an RPAC Guidance Memo. As a general rule, indirect cost rates are applied to those modified total direct cost items which have been used as a basis for a campus’ indirect cost rate proposal and are consistent with the negotiated indirect cost rate agreement.

For example, if TDC for a particular project is $100,000 and there is an equipment purchase of $10,000 with 50% IDC%, then the following calculation could be used:

[$100,000 (TDC) - $10,000 (equipment exclusion)] x 50% (IDC %) = $45,000 (IDC)

The resulting total cost of the project equals $145,000 ($100,000 TDC + $45,000 IDC).

8-370 Exclusions for Calculating the Modified Total Direct Cost Base

The following are the types of costs excluded from the direct costs of a sponsored project to calculate the MTDC.

8-370.1 Equipment

The University uses the federal definition of equipment as an item of nonexpendable, tangible personal property that has an acquisition cost of $5,000 or more and has a normal life expectancy of more than one year. (2 CFR § 200.33)

Costs for equipment leases or rental of equipment are not excluded from the MTDC base unless the equipment lease includes an option to purchase. Equipment leases with option to purchase are considered capital expenditures and are excluded from the MTDC base.

For fabricated equipment, all materials, supplies, and services from outside vendors or authorized internal recharge activities used in the fabrication process are excluded from the MTDC base if title is retained by the University and the item has a life expectancy of more than one year. Note that department labor, travel, or other operating expenses associated with the fabrication, such as salaries of Principal Investigators, graduate student researchers, or other comparable personnel who participate in the fabrication process, are not included in the acquisition cost of the item and should be included in the MTDC base. For more information on the treatment of fabricated equipment, see Accounting Manual Chapter P-415-32 and Contract and Grant Manual sections 2-526, 7-205, and 15-240.

8-370.2 Capital Expenditures

Capital expenditures are expenditures to acquire capital assets or expenditures to make additions, improvements, modifications, replacements, rearrangements, reinstallations, renovations, or alterations to capital assets that materially increase their value or useful life. (2 CFR § 200.13)

8-370.3 Patient Care Costs

Research patient care costs are defined in the NIH Grants Policy Statement as:

[T]he costs of routine and ancillary services provided by hospitals to individuals participating in research programs. The costs of these services normally are assigned to specific research projects through the development and application of research patient care rates or amounts […]. Research patient care costs do not include: (1) the otherwise allowable items of personal expense reimbursement, such as patient travel or subsistence, consulting physician fees, or any other direct payments related to all classes of individuals, including inpatients, outpatients, subjects, volunteers, and donors, (2) costs of ancillary tests performed in facilities outside the hospital on a fee-for-service basis (e.g., in an independent, privately owned laboratory) or laboratory tests performed at a medical school/university not associated with a hospital routine or ancillary service, (3) recruitment or retention fees, or (4) the data management or statistical analysis of clinical research results.

Medical services provided by laboratories of academic departments or organized research units are not included in this definition. Patient care costs are allowable charges to the research budget and are excluded from the MTDC base for purposes of determining indirect costs applicable to the project. These patient care costs differ from expenses for patient care that would have been incurred regardless of the research study; costs not affected by the research study are not allowable charges to the research budget.

Patient care costs should be based on a currently effective DHHS-negotiated patient care rate agreement or equivalent. However, when determining what items are excluded as patient care costs from the MTDC base in a proposal budget, patient care costs do not include: consulting physician fees; personal expense reimbursement (such as human subject fees and patient travel) or any other direct payments to patients or subjects; and costs of ancillary tests performed in facilities outside the hospital on a fee-for-service basis (e.g., in an independent, privately owned laboratory) or in an affiliated medical school/university based on an organizational fee schedule. These costs are not considered patient care costs for indirect cost purposes and are included in the MTDC base for the purpose of calculating the indirect costs applicable to the budget.

A project which does not have an Institutional Review Board (IRB) - approved human subjects protocol may not incur patient care costs. For further details about the treatment of patient care costs in a proposal budget, see Chapter 7-211 Budget Patient Care and Chapter 18 Protection of Research Subjects.

8-370.4 Tuition Remission

Tuition remission includes direct-costed expenses as allowed by University Policy for student tuition and fees.

8-370.5 Rental Costs

Rental costs include any direct-costed rental of non-University owned space and the cost of maintenance, if it is included in the rental agreement. This category does not include other kinds of rental or lease costs, such as hotel rooms, equipment, or automobiles. These other kinds of costs are direct costs subject to indirect costs.

8-370.6 Scholarships and Fellowships

Financial aid, such as scholarships and fellowships, paid to University students or postdoctoral scholars as stipends or dependent allowances is, for purposes of indirect cost base calculation, exempt from the indirect cost rate calculation base. However, this exemption does not include any awards called “fellowships,” which disburse salaries and wages or honoraria to university employees. Salaries, wages, and honoraria are included in the calculation of the indirect cost base for an award.

8-370.7 Subawards and Subcontracts

When an award includes the transfer of a portion of the substantive work of a sponsored project to a third party, such work is usually obtained by the use of a subaward. For federal awards, 2 CFR § 200 and the federally-negotiated rate agreements permit the application of the indirect cost rate to the first $25,000 of each subaward by including this amount in the MTDC base. The portion of each subaward in excess of $25,000 is excluded from the MTDC base. This limit applies to the competitive period of the prime award.

Purchases of standard commercial goods or services such as routine testing, administrative support, or consultant agreements are not considered subawards for this purpose. They are not subject to the $25,000 limit for application of indirect cost.

For non-federal awards that are subject to an indirect cost rate exception, the indirect cost base might not mirror the federal model as described above but instead may be defined by the sponsor.

8-370.8 Genomic Array

The NIH policy on indirect costs pertaining to Genomic Arrays (NOT-OD-10-097), when total purchases for Genomic Arrays will exceed $50,000 per year in any year of the project, stipulates that the indirect cost rate reimbursement will be applied to a limited Genomic Arrays cost of $25,000 in addition to the $50,000 threshold for each respective year of the award.

The following examples are from the NIH Guide Notice (NOT-OD-10-097):

Example I: Genomic Arrays is budgeted at $50,000 for each year of the project: Genomic Arrays costs would be treated as supplies and reimbursed in accordance to our customary procedures for supplies.

Example II: Award is for three years and Genomic Arrays is budgeted at $75,000 in year one and $150,000 in years two & three respectively. For each budget year the [indirect cost] rate will be applied as follows:

Year one–applied to the $75,000: The first $50,000 as supplies plus the first 25,000 over the $50,000 ($25,000 rebudgeted in the consortium/subcontract line item) for a total of $75,000;

Year two and three–applied to $75,000 each year: The first $50,000 will be awarded as supplies and receive full [indirect cost]. The remaining balance ($100,000) will be treated as consortium/subcontract costs where the first $25,000 will also receive full [indirect cost]. Any remaining portion (in this example $75,000) of each year respectively will be excluded from the [indirect cost] base calculation […].