Research Policy Analysis and Coordination
Indirect Cost Exceptions
8-500 Exceptions to Approved Indirect Cost Rates
As stated in 8-320, 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. If a campus elects to use an indirect cost rate other than either of these, then an indirect cost exception is needed.
An indirect cost exception is the official authorization to accept indirect cost recovery other than what would be recovered under the appropriate federally-negotiated rate agreement or UC Rate for a given award. Each approved exception may reduce necessary financial support for critical University administrative functions and campus infrastructure.
Any reduction in indirect cost recovery must balance the University’s interests in performing the work of an extramural award and the resources the University or the campus must use to cover the lost revenue.
8-510 Delegation of Authority to Approve Exceptions to Approved Indirect Cost Rates
The authority to approve indirect cost exceptions comes from the President to the Chief Financial Officer, who has delegated to the Chancellors, to the Vice President – Agriculture and Natural Resources, and to the Vice President–Research and Graduate Studies the authority to approve exceptions to certain indirect cost rates. See 8-150. Campuses and UCOP may redelegate this authority based on location needs.
At UCOP, the Vice President–Research and Graduate Studies has redelegated the authority to approve indirect cost rate exceptions to the Research Policy Analysis and Coordination unit (RPAC). RPAC is responsible for formulating University policy regarding indirect cost rate exceptions, developing the administrative procedures for submitting and reviewing exception requests, and reviewing and coordinating requests for indirect cost rate exceptions. On behalf of the UC system, RPAC may contact sponsors directly to clarify their policies on paying indirect costs.
Only those administrators who have been delegated authority to approve an indirect cost exception may authorize less-than-full indirect cost recovery for a proposal or an award. Principal Investigators are not delegated this authority. They are not authorized to negotiate with or to accept reduced indirect cost rates from any sponsor.
8-520 Indirect Cost Exceptions and Cost Sharing
The reduction of indirect cost recovery, whether imposed by a sponsor or volunteered by the University, may be a form of cost sharing if the project is not recovering its full cost.
Per 2 CFR § 200.306, voluntary committed cost sharing (e.g. reduction of indirect cost recovery) is not expected in federal funding. Further, the National Science Foundation (NSF) has stated that the voluntary reduction of indirect cost recovery is a form of cost sharing; therefore, NSF will not accept unauthorized indirect cost reductions.
8-530 Procedures and Documentation for Indirect Cost Exceptions
Each indirect cost exception must be recorded in the Research Enterprise Management System (REMS). An exception request should be approved before a proposal is submitted. In all cases, an exception request must be approved before an award may be accepted. An exception cannot be approved retroactively after the completion of the period of performance of the underlying award.
Campuses may appeal any exception disapproval to the Vice President–Research and Graduate Studies.
8-530.1 Case-by-Case Exceptions
University policy requires full recovery of costs for extramurally funded projects. Under exceptional circumstances, a project may recover costs other than the appropriate federally-negotiated rate or the appropriate UC Rate. Indirect cost exceptions are approved on a case-by-case basis for a specific project and are valid only at the campus of approval.
Per delegations of authority, UCOP continues to approve indirect cost exceptions for (1) all federally funded projects and (2) most State of California-funded projects. Campuses have the delegated authority to approve indirect cost exceptions for all other circumstances, but have the option to route any indirect cost exception to UCOP for review and approval consideration.
In cases where a project has a multi-campus award (MCA) to another UC campus, the participating campus receiving the funds may use the rate and the respective rationale in effect for the prime campus award. However, a separate case-by-case exception must be approved by the campus receiving the MCA because indirect cost exception approvals are linked to delegations of authority to each Chancellor. A campus receiving an MCA may not be forced to accept a reduction of indirect cost recovery if it does not agree to the reduction.
The copy function in REMS can be used to expedite the creation of a case-by-case exception, whether it is for an exception for an MCA or for a sponsor policy not currently on the VSP list.
8-530.2 Case-by-Case Exceptions Approved at UCOP for Federal Funding
Where 2 CFR § 200 applies to a federal award, it is expected that UC’s federally-negotiated rate applies. Many federal programs that have valid restrictions, as defined in 2 CFR § 200, appear on the Verified Sponsored Policy (VSP) list.
Upon receipt of an exception request for a federal program, RPAC will research if the agency has authority to impose a reduction of the indirect cost rate. In cases where there is no policy basis for the reduction of indirect costs on a federal award, an exception may not be approved.
On flow-through funding under 2 CFR § 200, it is expected that UC’s federally-negotiated rates be honored.
8-530.3 Case-by-Case Exceptions Approved at UCOP for State of California Funding
The California State University and UC have established an indirect cost recovery model for State of California funding. It is expected that State of California sponsored projects in the appropriate UC Rate for indirect cost recovery. Case-by-case exceptions for State of California funding must follow the special approval process described in REMS Sponsor Guidance record 306 (see also 8-540.3 Special Approval).
8-530.4 Verified Sponsor Policy List
UCOP maintains a Verified Sponsor Policies (VSP) list of sponsors whose policies limit indirect cost recovery. The sponsors listed on the VSP have been reviewed and vetted by UCOP as having legitimate policies limiting indirect cost recovery, applicable to all grantees. Campuses may use this list as part of an expedited approval process if they wish. The VSP list can be found in the REMS application.
Inclusion of a sponsor’s policy on the VSP list is prompted when a policy is verifiable, applied to all grantees, and the campuses frequently submit proposals and receive funding from that sponsor. UCOP reviews the VSP list on a periodic basis to ensure that it is current and reliable.
When applied to a specific proposal or award, the VSP identifier code should be noted in quarterly reporting in the Corporate Sponsored Projects Information System (SPX). There is no requirement to request a case-by-case exception when the VSP listing is applied.
8-530.5 Historical Exceptions
Historically, UCOP approved “Individual” indirect cost exceptions, valid only for a named single award, and “Class” exceptions, which could apply to multiple awards issued under a specific sponsor program or policy. Additionally, exceptions were approved either under a specific sponsor policy (i.e., “sponsor policy exception”) or based on a strategic decision to reduce or fully waive indirect cost recovery (i.e., “vital interest exception”).
In 2016, the University substantially revised its system for tracking indirect cost rates in extramural awards to accommodate greater campus decision-making in approving indirect cost exceptions. Campuses should not apply Class exceptions to any new proposals submitted on or after July 1, 2016. A Class exception remains valid if it was applied to a new proposal submitted prior to July 1, 2016. At time of competitive renewal, the historical Class exception should no longer be used; the appropriate UC Rate or VSP listing should be applied or a new case-by-case exception should be requested.
Records of historical Class exceptions are available in REMS so that post-award accounting may validate the application of a particular exception.
8-540 Considerations for Indirect Cost Exceptions
For exceptions that fall within their delegated authority, campuses shall determine their criteria for approving case-by-case exceptions. Requests to reduce indirect cost recovery should be carefully reviewed by appropriate and responsible parties and approved only in cases where the vital interests served by conducting the project outweigh the financial cost to the University, regardless of whether a sponsor proffers a policy on indirect cost recovery.
Regardless of the specific criteria that each campus may develop, indirect costs exceptions must be documented as outlined in 8-530.
The basis for a case-by-case exception must be identified in an exception record. The basis types for an exception are:
- Sponsor Policy
- Campus Determination
- Special Approval
8-540.1 Sponsor Policy
Most indirect cost exceptions arise from a sponsor’s restriction on indirect cost recovery.
When considering such an exception, the basis for approval should stem from a sponsor’s established, published policy. Sponsor restrictions on indirect cost recovery may be by statute, codified agency regulations, or program terms published in the sponsor’s solicitation or announcement.
- To assist the University in its advocacy with sponsors and the on-going curation of the Verified Sponsor Policy list, an indirect cost exception record in REMS should indicate if a sponsor policy is the reason for the exception.
- If approving an exception because of a sponsor’s restriction, it should be a bona fide restriction initiated by the sponsor and not an ad hoc restriction based on discussions with the campus.
- Any sponsor documentation of its restriction of indirect cost recovery should include all required elements needed to calculate the indirect cost recovery, including a rate and a base. Documentation should be unambiguous in describing how indirect cost recovery is calculated so that UC may recover its entitled indirect cost under a sponsor’s policy. For example, many small foundations do not clearly state an indirect cost base. Typically, these sponsors do not use the MTDC, as defined in UC’s negotiated rate agreements. Instead they may cap the total cost of an award and permit recovery as an allocation of the Total Costs. Thus, it is necessary for the campus to seek clarification from a sponsor when there is any ambiguity.
- The State Auditor has ruled that reductions of indirect cost rates to for-profit entities and foreign governments is gift of public funds for private benefit as the sponsor is not reimbursing the University for the full cost of the project. Without full indirect cost recovery, the University is subsidizing the cost of the project for the sponsor.
- Under certain circumstances, an exception based on sponsor policy from a for-profit corporation or a foreign government may be considered for a legitimate, general University community service, scholars’, or fellowship program sponsored by a for-profit corporation. The criteria for considering an exception for such a program would include: (1) the corporation has published an announcement calling for proposals under which grants would be awarded; (2) exceptions to University policies for the subject program, such as intellectual property language, are carefully considered and justified, specifically in light of the indirect cost rate exception, and approved by the appropriate University authority; and (3) the announcement does not require a specific deliverable to the corporation other than technical/final and financial reports. Such a program would have to be clearly distinguishable from research contracts which state anticipated outcomes in specific areas of corporate interest solicited by the corporation.
8-540.2 Campus Determination
It is the responsibility of each campus to determine criteria for approving indirect cost exceptions when there is no sponsor policy supporting the reduction of the recovery.
- Despite campus-developed criteria for case-by-case exceptions, UCOP may implement special criteria for approvals for certain sponsors where it is in the interest of the University to seek a common cost recovery approach for these sponsors.
- Campus criteria should not be developed to usurp due diligence in confirming a sponsor's policy.
- Criteria may vary by campus.
8-540.3 Special Approval
Certain exceptions may fall under a special approval process.
Currently, State of California case-by-case exceptions must follow the special approval process described in REMS Sponsor Guidance record 306 and should be designated as "Special Approval" in REMS.
8-540.4 Intellectual Property Provisions and Indirect Cost Exceptions
A request for an exception to applicable indirect cost rates requires consideration of the intellectual property rights to be provided to the sponsor under the terms of the subject agreement. The campus must consider what intellectual property rights, a potentially valuable consideration, to provide to a sponsor that does not pay full applicable indirect costs to the University (See Chapter 11). If intellectual property rights arrangements requiring exceptions to University policy are desired, approvals must be secured from the appropriate University authority prior to approval of the related indirect cost rate exception.
8-550 Administrative Fee or Institutional Allowance in Lieu of Indirect Costs
Sometimes a sponsor may not allow for a campus’ approved indirect cost rate to be charged to an award, but instead provides an administrative fee or institutional allowance. This amount should be remitted as indirect costs unless the sponsor has restricted it (e.g. paying for fringe benefits on a fellowship).
If the allowance is greater than the amount recoverable as indirect costs using the approved campus rates, the excess amount may be retained by the campus and re-budgeted at the campus’ discretion.
8-560 Intramural Funds
Indirect cost exceptions are not required for awards issued by University-administered programs when those are funded by intramural funds within the University. For the purposes of this section, “intramural funds” are funds appearing on the University’s general budget, such as direct appropriations to the University of California budget by the State, as opposed to those received via a contract, grant, or other agreement with a sponsor external to the University (i.e., “extramural” funds).
If you are unsure whether the funds are intramural or extramural, you should contact the program making the award.
8-570 Treatment of Pass-Through Funds
“Pass-through” or “flow-through” are both terms used when funds flow from a prime awardee or prime contractor to a subrecipient or subcontractor. The federal government uses the term “Pass-Through Entity” (PTE) to refer to the party directly awarding funds to a subrecipient other than the originating federal agency.
If a campus is a subrecipient of federal funds, the campus should receive its federally-negotiated indirect cost rate from the entity providing the funds to the University. Uniform Guidance at 2 CFR § 200.331 requires the PTE to provide subrecipients their federally negotiated indirect cost rate.
If the ultimate source of funds is non-federal, the campus should receive its federally-negotiated indirect cost rate from the entity providing the funds, to the extent allowed by the prime sponsor.
If the campus is the pass-through entity/flow-through entity, to the extent allowed under the prime award, it should honor the subrecipient’s indirect cost rate. As required by Uniform Guidance at 2 CFR § 200.331, the campus must permit a subrecipient to receive its federally negotiated indirect cost rate when passing through federal funds, or a de minimis as defined in 2 CFR § 200.414 if no such rate exists.
Campus Principal Investigators or administrators may not unilaterally limit indirect cost recovery on an extramural award for subgrants to non-UC institutions or Multiple Campus Awards (MCAs) to other UC campuses.
8-580 Applicability and Duration of Approved Exceptions
Case-by-case exceptions (previously known as Individual exceptions) apply to the period of performance of the underlying award, provided there is no material change in the project that affects the basis on which the exception was approved.
A new exception must be requested for each competitive period of the project. Since an exception addresses the amount of funding the campus is willing to forego in indirect cost recovery at the time of the submission, a new assessment of that campus’ position on the basis of additional funding in the new application must be considered by the campus and entered into REMS.
8-580.1 Retroactive Indirect Cost Exceptions for Overdrafts, Sponsor Default, or Disallowed Costs
Indirect cost rate exceptions are not approved retroactively after the completion of the period of performance of the underlying award or after termination to cover expenses not paid for by the award sponsor. Such situations can include: overdrafts of the award amount, disallowed costs, sponsor default where the sponsor does not provide full payment, and withholding of payments due to non-performance or disputes.
8-590 Collection and Analysis of Data
Campuses play an active role in negotiating and preparing indirect cost rate agreement proposals. University of California Office of the President (UCOP) Costing Policy and Analysis is jointly responsible, along with campuses, for determining what information is needed to compute indirect costs. The information collected may change over time in response to federal requirements and the degree of sophistication of relevant computer systems. Indirect costs are computed in accordance with the applicable provisions of Appendix III to 2 CFR § 200.
Throughout the lifecycle of a sponsored project, campuses provide data to UCOP for analysis and reporting to key stakeholders, including to the President, the Regents, and the State of California. These data are collected three ways:
- Campuses create records in Research Enterprise Management System (REMS) to manage the approval process of indirect cost rate exceptions and capture data for each exception.
- On a quarterly basis, campuses report sponsored project proposal and award data, including data on indirect cost recovery, through the Corporate Sponsored Projects Information System (SPX), formerly known as Corporate Contract and Grant Information System (CGX).
- Extramural Funds Officers report the indirect cost rate and base applied to each award in the Corporate Financial System (CFS).