Calculating Indirect Cost Recovery

UC negotiates Facilities & Administration (F&A) rate agreements with the Department of Health and Human Services to calculate the indirect costs associated with all federally-funded sponsored programs conducted at our campuses. 2 CFR 200 Subpart E provides the costing principles used to account for the direct and indirect costs of a sponsored project. 

As noted in the journal Nature:

A common misconception is that indirect-cost rates are expressed as a percentage of the total grant, so a rate of 50% would mean that half of the award goes to overheads. Instead, they are expressed as a percentage of the direct costs to fund the research. So, a rate of 50% means that an institution receiving $150 million will get $100 million for the research and $50 million, or one-third of the total, for indirect costs. But there are multiple caps that lower the base amount from which the indirect rate is calculated, or that limit the amount of money that a research institution can request. So very few institutions receive the full negotiated rate on the direct funding they receive.. 

Modified Total Direct Cost Base: Typically Federal Projects

For federally-sponsored projects, indirect costs are typically determined by applying the campus's negotiated F&A rate to the modified total direct cost (MTDC) base. 

The MTDC base is a subset of the total direct costs of the project, excluding such items as equipment, student tuition, research patient care costs, rent and the first $25,000 of subrecipient charges. MTDC is defined in 2 CFR 200 and UC's campus rate agreements.

Say a researcher is applying to the National Science Foundation for a grant in which the direct costs are $10,000. Because of certain exclusions like equipment and tuition, the Modified Total Direct Cost base is $6,000. The campus's federally-negotiated indirect cost rate is 50%. Applying the formula (rate x MTDC = indirect cost recovery), the university would receive $3,000 for F&A costs on top of the $10,000 direct costs of the grant (.50 x 6,000 = $3,000) for total costs of $13,000.  In this scenario, where the indirect cost rate is 50 percent, 23 percent of the grant's total costs would be allocated to indirect costs.

Because of certain federal statutes or regulations, on limited occasions, a federal agency may be permitted to apply a lower rate or forego awarding indirect costs. 

Some non-federal sponsors do exclude certain cost categories from the base; however, it is important to remember that their definition of an MTDC base is likely different from a federally-defined MTDC. This distinction has important costing implications, so it is always critical to understand a sponsor's policy and seek clarification if it is ambiguous. Typically, non-federal sponsors that use an MTDC base exclude different costs than UC's federally-defined MTDC.

Total Direct Cost Base and Total Costs: Typically Non-Federal

Given the dominance of federal funding at UC, applying a rate from a federally-negotiated rate agreement to the federally-defined MTDC base is the most common approach used to calculate indirect cost recovery. However, it is important to note that most non-federal sponsors follow indirect cost recovery formulas that may seem similar to the federal approach, but often feature lower rates and different definitions of the indirect cost base than what you would see in a standard federal award subject to a federally-negotiated rate agreement.

Many non-profit sponsors will often offer a rate applied to a Total Direct Cost (TDC) base. Unlike an MTDC base, none of the direct costs are excluded when the rate is being applied.

For example, if the total direct cost for a particular project is $100,000  and 50% is the sponsor's allowable indirect cost rate, one would calculate indirect cost recovery by multiplying $100,000 by 50%, yielding $50,000 in indirect costs. The resulting total cost of the project equals $150,000 ($100,000 TDC + $50,000 IDC), and 33 percent of the grant's total cost would be allocated for indirect costs.

Many smaller foundations often provide a capped amount to an award and then allow a certain percentage of that award to go to indirect cost recovery. This "Total Cost" allocation of indirect costs should not be confused with a sponsor using a TDC base.

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 cost may be used for indirect cost recovery.

Certain federal programs that are subject to statutory indirect cost restrictions also feature total cost restrictions in lieu of applying a federally-negotiated rate agreement. 

When discussing indirect cost recovery, it is important to consider both the indirect cost rate and the base being used, and appreciate the difference between using a rate and base to calculate indirect costs versus allocating a percentage of an award toward indirect costs.

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