COMMENTS ON A REPORT FROM THE
NATIONAL SCIENCE AND TECHNOLOGY COUNCIL

ENTITLED:



RENEWING THE FEDERAL GOVERNMENT-UNIVERSITY
RESEARCH PARTNERSHIP FOR THE 21ST CENTURY

"COST SHARING"





SUBMITTED BY:

THE ASSOCIATION OF AMERICAN UNIVERSITIES
COUNCIL ON GOVERNMENTAL RELATIONS
NATIONAL ASSOCIATION OF STATE UNIVERSITIES AND LAND-GRANT COLLEGES
FEDERAL DEMONSTRATION PARTNERSHIP



TO:

ASSISTANT TO THE PRESIDENT FOR SCIENCE AND TECHNOLOGY


 

Included in this site are the:

EXECUTIVE SUMMARY

 

Presidential Review Directive-4 called for a review of the government-university partnership and sought recommendations to strengthen it. As a result, the National Science and Technology Council (NSTC) recently issued a report entitled, "Renewing the Federal Government-University Research Partnership for the 21st Century," which identifies the underlying principles of this partnership and endorses continued strengthening of the linkage between research and education. The report's articulation of both basic guiding principles and the inclusion of operating principles intended to assist agencies, universities, researchers and auditing and regulatory bodies in implementing the guiding principles is especially welcome and supported by the commentors.

The Association of American Universities, Council on Governmental Relations, Federal Demonstration Partnership and National Association of State Universities and Land-Grant Colleges have collaborated to offer comments on an important aspect of the report. Our comments focus on agency cost sharing practices and making them consistent with the overarching guiding principles and operating principles. Cost sharing policies and practices are singled out for special emphasis, because cost sharing has increasingly become a mechanism for cost shifting as universities are asked to provide increased institutional contributions, or to waive Facilities and Administrative costs in conjunction with performing federally sponsored research.

In 1985, the director of OSTP recommended that the requirement for documenting cost sharing on research projects be eliminated. Citing the partnership between the government and the universities, a partnership in which both parties bear costs, the Director said,
The requirement for documentation of mandatory cost sharing has been studied repeatedly with the same conclusions: it should be eliminated. Cost sharing is a basic element of the partnership forged between the Federal Government and the universities. The universities provide the facilities, faculty and the new environment in which the Federal Government selectively invests. Both partners share the benefits; both share the costs. Fixing the share for each partner and requiring documentation to show that the obligation has been met complicates the documentation and calculation of indirect costs; it does not increase the total yield or quality of research performed.  1 
We agree with the need to eliminate documentation of mandatory cost sharing, however, this paper deals with the three cost sharing issues raised in the NSTC report and follows with recommendations to address them. Those issues are:
  1. Disincentives against contribution of voluntary faculty effort;
  2. Making cost sharing requirements more explicit; and
  3. Limitations on reimbursement of costs.
Our priority is to first deal with the most troubling and problematic aspects of voluntary cost sharing, after which the elimination of documentation of mandatory cost sharing, may be dealt with.

DISINCENTIVES AGAINST CONTRIBUTION OF VOLUNTARY FACULTY EFFORT

Of most concern are developments regarding the voluntary contributions of faculty time and the related implications for the calculation of Facilities and Administrative rates. Recent developments in this area are straining the partnership ties by creating obstacles and disincentives for universities to voluntarily provide resources in support of government sponsored research. Briefly stated, a university's willingness to voluntarily contribute faculty time to a federally funded research project results in the university also having to make a corresponding contribution of indirect costs. This artificially reduces the indirect cost rate, thereby, necessitating that the university come up with additional funds to cover lost reimbursement. This is a perverse incentive for university researchers to reduce their contributed time or to alternatively charge the government for time the researcher would have otherwise freely donated. The result of these actions likely would be either less research or a higher cost to the government to perform the same amount of research.

Universities and investigators should be given every encouragement to volunteer intellectual resources to the pursuit of research and not be penalized for such contributions to this important endeavor. Therefore, we recommend that only cost sharing which is required by statute and cost sharing which is budgeted and made a condition in the award document need be used in calculating the indirect cost rate. This means that neither donated faculty effort nor the space these researchers occupy is used to calculate the indirect cost rate.

MAKING COST SHARING REQUIREMENTS MORE EXPLICIT

Any impression that cost sharing or matching commitments could influence funding decisions at the expense of technical merit is worrisome to university researchers and should be avoided. Ambiguous language in program solicitations causes further confusion and promotes tension between investigators and their university administration as they struggle to determine what types and amounts of cost sharing will ensure a competitive proposal. However, absence of written policies governing cost sharing has exacerbated perceptions of a deteriorating relationship. Government-wide guidance or a policy directive would establish core doctrine in critical areas. We recommend that a government-wide cost sharing policy be developed using the recent NSF policy as a model.

LIMITATIONS ON REIMBURSEMENT OF COSTS

Changes during the 1990s to the cost principles in OMB Circular A-21 have increasingly imposed regulatory limits on reimbursement. The most prominent limitation on reimbursement is the 26 percent cap on the administrative components of the Facilities and Administrative rate. Universities with administrative costs at the cap had to draw on other institutional resources to pay the higher costs associated with increasingly robust compliance requirements, increased auditing and dozens of new federally-imposed administrative requirements. Further upward pressure on administrative costs resulted from heightened emphasis on environmental protection, and protecting human volunteers and animals in research. Additionally, universities at the cap are unable to recoup the costs of implementing rules of the Cost Accounting Standards Board (CASB), an unnecessary set of rules which are both onerous and expensive to implement.

Universities thus became the only community precluded from recovering such costs. CASB implementation costs and other compliance costs are allowable for both commercial companies and for other nonprofit organizations, but not for universities. We endorse the NSTC recommendation to establish a mechanism to review the impact of proposed changes in business practices. We recommend that such a mechanism be used to temper the application of regulations in light of the cap on administrative costs, and that rules of the CASB be withdrawn for colleges and universities.



 

National Science and Technology Council
Office of Science and Technology Policy

Renewing the Federal Government-University
Research Partnership for the 21st Century

 

Presidential Review Directive-4 called for a review of the government-university partnership and sought recommendations to strengthen it. The goal was to review principles of the partnership, promote cost-effective university-based research, ensure fair allocation of research costs, and support the linkages between research and education, while maintaining appropriate accountability for expenditure of public funds. As a result, the National Science and Technology Council (NSTC) recently issued a report entitled, "Renewing the Federal Government-University Research Partnership for the 21st Century," which identifies the underlying principles of this partnership and endorses continued strengthening of the linkage between research and education. The report's articulation of both basic guiding principles and the inclusion of operating principles intended to assist agencies, universities, researchers and auditing and regulatory bodies in implementing the guiding principles is especially welcome.

The Association of American Universities, Council on Governmental Relations, Federal Demonstration Partnership and National Association of State Universities and Land-Grant Colleges have collaborated to offer comments on an important aspect of the report. There was uniform support for the focus of the report's four important guiding principles, without which more detailed operational principles would lack relevance and authority. Our comments focus on agency cost sharing practices and making them consistent with the overarching guiding principles and operating principles.

Cost sharing policies and practices is one of the topics singled out for special emphasis. This is principally because cost sharing has increasingly become a mechanism for cost shifting as universities are asked to provide increased institutional contributions, or to waive Facilities and Administrative costs in conjunction with performing federally sponsored research. In addition to expecting universities to contribute larger sums, recent focus on financial accountability gives too much attention to the precision of cost accounting and not enough attention to research outcomes.

One of the guiding principles in the NSTC report is that accounting and accountability are not the same. The current practices "which emphasize costing precision and detailed documentation, rather than judgments on the reasonableness of decisions, will have an adverse and potentially enervating effect on the efficiency, effectiveness, and enthusiasm of research performance" 2 . This statement, from a 1980 report of the National Commission on Research still rings true today. Universities have a strong record of contributing substantially to research programs. The emphasis on recordkeeping to assure voluntary contributions to research is misplaced. It is essential to national science policy that universities and investigators are given every encouragement to volunteer intellectual resources to the pursuit of research and not be penalized for such contributions to this important endeavor.

This paper addresses in detail each of the three cost-sharing issues raised in the NSTC report and follows with recommendations to strengthen the partnership. This paper also calls for the rules of the Cost Accounting Standards Board to be withdrawn from application to colleges and universities in lieu of exclusive coverage by OMB Circular A-21.
  1. Disincentive Against Contribution of Voluntary Faculty Effort
    The recent interpretation of OMB Circular A-21, which has been influenced by the application of Cost Accounting Standards (CAS) and which classifies voluntarily contributed faculty effort [effort contributed beyond that pledged as organized research has disrupted the prevailing partnership with respect to cost sharing. This has resulted in tensions between universities and agencies in sustaining the necessary interplay between research and education, and is likely to drive universities to contribute less faculty effort to research projects or to increase the direct charge for faculty time on these projects. This paper recommends clarifying policy language to resolve this problem.

  2. Making Cost Sharing Requirements More Explicit
    The absence of clear, government-wide cost sharing policies has led to the perception that cost sharing, or matching commitments, can exert an inappropriate influence on funding decisions. In some cases, however, even when agency cost-sharing policies are explicit, program officers sometimes ignore them or layer additional requirements. We recommend that the NSTC move quickly to establish and enforce a government-wide policy statement on cost sharing and encourage agencies, auditors and scientific program officers to adhere to this government-wide policy.

  3. Limitations on Reimbursement
    Limitations on the reimbursement of allowable costs under government-sponsored university research (which do not exist for any other class of grantees) coupled with a marked increase in regulatory compliance requirements and mandated changes in business practices has added significant administrative and cost burdens for universities. Because of a government-imposed cap on administrative cost reimbursement, it is incumbent on the government to lessen the fiscal impact of mandated changes in business practices and to implement regulatory requirements with more care.

 

CONTRIBUTION OF VOLUNTARY FACULTY EFFORT

Of the three issues identified in the NSTC report concerning cost sharing policies and practices, of most concern are developments regarding the voluntary contributions of faculty time and the related implications for the calculation of Facilities and Administrative rates. Recent developments in this area are straining the partnership ties by creating obstacles and disincentives for universities to voluntarily provide resources in support of government sponsored research. While it may be appropriate for universities to document cost sharing required by statute, it does not seem reasonable that universities should expend faculty and administrative effort to extensively document that the government is indeed receiving benefits for which it is not paying. Because of the potential conflicts, which are arising between Principal Investigators, university administrations, and funding agencies, it is important to achieve clarity on this issue. In response to the Report's call for action on this subject, we recommend that a clarification be issued which states: "Only cost sharing which is statutorily required or specifically pledged and budgeted and made a condition in the award document need be classified as organized research in calculating Facilities and Administrative rates." We believe that without such a change, we will see either less science done in areas of interest to the government or increased cost to the government for the same amount of science.

To better understand this problem, we first review the existing language in Circular A-21 that defines various categories and functions. Next we discuss the benefits of the pattern of partnership which has been the norm up until now. Then we comment on how new interpretations are causing this to become an increasingly contentious area. Finally, we talk about the benefits of the proposed clarifying policy language, which we believe will address the desire of both universities and the government to leverage each other's available resources to produce the maximum amount of scientific effort in areas of mutual interest.

OMB CIRCULAR A-21 DEFINITIONS

While a resolution of cost sharing issues is a public policy question, the current debate and dissatisfaction with existing practices has as its genesis creative interpretations of OMB Circular A-21. We, therefore, offer several paragraphs of technical discussion to inform the debate.

Much of the current debate is focused on the description and definition of the activity of faculty members as they pursue their university funded responsibilities. Typically faculty members have at least three primary responsibilities: to engage in the instructional program at undergraduate, graduate and postdoctoral levels, to pursue independent research and scholarship, and to serve in an array of public service, professional, clinical, and administrative activities.

OMB Circular A-21, in its description of the major functions of the university, makes further distinctions among different types of research, dividing it into three categories: departmental research, sponsored research, and university research. These latter two categories are grouped into what is referred to in the Circular as organized research, which means, "...all research and development activities of an institution that are separately budgeted and accounted for." Sponsored research is that where the funding comes from federal and non-federal agencies and organizations. University research is those activities "...separately budgeted and accounted for by the institution under an internal application of institutional funds." Departmental research is viewed as separate from organized research in that it lacks the distinguishing characteristics of being both separately budgeted and separately accounted for. While organized research is described as a major function of the institution which must be used in constructing its Facilities and Administrative rates, the Circular directs that departmental research be included as a part of the instructional function. This merging of two institutionally funded elements is consistent with the NSTC belief that "The Linkage between Research and Education is Vital."

OMB Circular A-21 definitions are generally consistent with the way universities operate with regard to the activity of their faculty. Typically, salary charges to be paid by external sponsors are assigned to sponsored research. Similarly, most endowments or state appropriations restricted to research support are separately budgeted and accounted for and may cover portions of faculty activity, creating university research. However, many faculty salaries are charged to general institutional or instructional accounts. Such accounts are typically funded through a combination of basic state appropriations, tuition revenues, endowment earnings designated for general purposes or for the support of professorial positions and gifts which are either unrestricted in nature or earmarked for general faculty support.

To the extent that such institutional accounts fund efforts which end up being devoted to research, as opposed to other university responsibilities, these efforts would be classified by OMB Circular A-21 definitions as departmental research with one important exception. When, as a condition of a contract or grant, the university specifically proposes in the financial budget of a project the provision of faculty activity which will be covered by institutional funds, this creates a category of expense called mandatory cost sharing. Because these efforts are separately budgeted (in the formal proposal and subsequently in the approved budget of the project) and accounted for (because the university must keep records to show that its commitments have been fulfilled), such efforts now meet the criteria of organized research. This mandatory cost sharing is included in the organized research function for the purposes of establishing direct cost bases and appropriately allocating overhead costs as prescribed in Circular A-21. However, except for such mandatory cost sharing, universities do not require faculty members to distinguish their efforts between instruction and departmental research and, as such, the total of both are treated as instructional costs as directed for A-21 purposes. Thus, while faculty members might be spending some of their time working on what would, at a university, generically be referred to as research, universities have not been required to include such costs in the organized research base.

BENEFITS OF THE PREVAILING PARTNERSHIP PATTERN

Under these arrangements, it has not been unusual for Principal Investigators in some disciplines to voluntarily donate some of their university-funded departmental research time to further the work of their sponsored projects. This is consistent with the way many agencies view the universities' role in the partnership.

This pattern of donated effort seemed to have many virtues and has allowed for the efficient leveraging of resources. The government received additional effort on projects it was interested in supporting without having to pay the direct salary and benefits for the donated effort. The universities, that may have adequate non-federal support for faculty positions, were able to make contributions to further research efforts in which they were interested. Faculty were often pleased not to feel that regular salary payments were dependent on what is often referred to as "soft" or non-permanent monies. The system allowed faculty members to feel free to pursue the most promising line of research inquiry at any given point, without the need for administrative constraints, documentation, or readjustments. Indeed, this arrangement successfully avoided consuming unnecessary faculty time in administrative procedures whose sole purpose would be to more precisely quantify how institutional funds were being expended. Making such artificial divisions is particularly counterproductive from the viewpoint of faculty and there do not appear to be any compelling policy reasons, which would require either financial or operational distinctions between research and education.
NEW INTERPRETATIONS

Since the patterns outlined above seemed generally acceptable to both the government and universities, the question is why has this become a more contentious issue. There are a number of factors that have contributed, each of which might have some merit from a particular viewpoint, but which when combined in an emerging new pattern creates difficult tensions for Principal Investigators, university administration, government auditors and cost negotiators, and ultimately sponsoring agencies.

The current problem seems to originate in a legitimate desire by government program officers to insure that federal research monies are well spent and overseen. Therefore, they have encouraged or sometimes required Principal Investigators to indicate in the background text of a proposal (although not in the actual project budget), an estimated amount of effort they might spend on the project during periods when no salary was being charged to the government. Some have argued that such indications are unnecessary given the professional nature of the vocation and the responsibilities incumbent on the institutions as recipients, not to mention the government's ability to terminate the relationship on renewal for non performance or any other reason. However, absent other factors, it has not seemed unreasonable to ask for some indication of the Principal Investigator's commitment and Principal Investigators and universities were willing to comply.

Unfortunately, absent clarity on this issue, federal auditors and cost negotiators have begun to use such statements of intent for entirely different purposes. It is probably not fair to say that this is entirely attributable to the application of the Cost Accounting Standards (CAS); however, these are often cited as a rationale. Clearly, to the extent to which they have tended to change the nature of the federal-university research relationship from one of partnership to one of procurement, they have fostered such developments. Auditors and cost negotiators are taking the stance that, because a commitment is informally mentioned in the text of a proposal, this makes it part of the budget. They interpret this as now meeting the separately budgeted part of the critical distinction between organized and departmental research. Subsequently, they cite the Cost Accounting Standards Board requirement for consistency between budget and accounting and say that if it was separately budgeted it must, therefore, be separately accounted for, thus requiring universities to complete the second step necessary to change these costs from departmental to organized research. (On at least one occasion, a government auditor has argued that since such donated effort could have been separately budgeted and accounted for, it must be treated as organized research.) As a result, government officials have caused some universities to begin to move such costs out of the instructional area and into the research area. This artificial distinction between research and instruction serves to drive down the organized research rate and thus lowers the amount the federal government would otherwise reimburse the university. In other words, a university's willingness to voluntary contribute faculty time to a federal project, and to assure program officers that satisfactory supervision of the project will be made even in the absence of the government having to pay for it, has created a situation whereby the university is also forced to make a corresponding sharing of indirect costs.

In the absence of clarification on this issue, costs to the university community are likely to increase significantly and rapidly as agency negotiators use this as leverage to further drive down reimbursement rates and as auditors begin to follow new audit guides. Universities will be cited as non-compliant with regulations. Faced with a new interpretation that artificially reduces their indirect cost rate, universities will be forced to come up with alternative means to cover lost reimbursement. Universities could protect themselves by prohibiting faculty members from indicating, even informally, that any institutionally funded efforts will go toward the furtherance of federal project grants or require that any such efforts be directly charged as cost to the project. The result of these actions likely would be either less science done in areas where the government is interested (because there would be less volunteered effort) or a higher cost to the government to do the same amount of science (because agencies would have to pay more for Principal Investigator salary costs).
BENEFITS OF PROPOSED CLARIFYING POLICY LANGUAGE

The most straightforward solution to this problem is for the Office of Management and Budget (OMB) to issue a clarifying statement which is consistent with the intent and wording of current OMB Circular A-21 definitions. Such guidance would simply state: "Only cost sharing which is statutorily required or specifically pledged and budgeted and made a condition in the award document need be classified as organized research in calculating Facilities and Administrative rates." This means that donated faculty effort need not be included in the organized research base or reflected in any functional division of space used for organized research. This would provide a sufficient guideline to auditors and cost negotiators in fulfilling their responsibilities with regard to determining such rates. Such a resolution would allow universities to freely donate resources covered by non-federal sources which they already have or can raise. It will avoid contention between university administrations, and Principal Investigators and allow all participants in the partnership to refocus on maximizing the amount of science, not the amount of accounting. Such a restatement of intent and resolution of clarity is consistent with both the NSTC guiding and operating principles.
MAKING COST SHARING REQUIREMENTS MORE EXPLICIT

University cost sharing is a hallmark of the government-university partnership. Many agencies have cost sharing or matching expectations. Often these are program-specific. Sometimes the requirements are defined; sometimes not. For example, one DOD program indicates that cost sharing is "encouraged" but not "required." This ambiguity sometimes leads to "bidding" wars and escalation of expectations.

Any impression that cost sharing or matching commitments could influence funding decisions at the expense of technical merit is worrisome to university researchers and should be avoided. Competition should be on the basis of scientific merit. Ambiguous language in program solicitations causes further confusion and promotes tension between investigators and their university administration as they struggle to determine what types and amounts of cost sharing will ensure a competitive proposal. Principal Investigators would generally concur that there is room for other criteria within a broad set of funding determinants, as long as scientific merit is the first priority. However, absence of written policies governing cost sharing has exacerbated perceptions of a deteriorating relationship. Government-wide guidance or a policy directive would establish core doctrine in critical areas. We also note that proposal documentation such as "Other Support" and "Current & Pending Support" may be an underlying cause of some unintended consequences.

The university community gratefully cheered in May 1999 when the National Science Foundation anticipated the report of the NSTC and issued a cost sharing policy statement. NSF program announcements and solicitations now must provide early and clear standards for cost sharing requirements. The policy isolates matching or cost sharing as an applicant eligibility requirement, which is separate from merit review considerations and funding decisions. The NSF policy makes clear that "bottom line" funding should be commensurate with the effort supported. The issuance of written policy at NSF, as subsequently enhanced by their clarifying Frequently Asked Questions document, is to be commended because it should lead to consistency in the agency. The absence of an NSF statement of policy on contributed effort by faculty should be addressed by the government-wide clarification recommended in this report.

In articulating a Cost Sharing Statement, NSF has gone a long way to assure the community that costs will not be shifted unfairly to the university in exchange for a promise to fund. However, the process is an imperfect one. Principal Investigators must be attentive to the power of the Program Officer's funding decision. The Program Officer does have to consider objectively the overall level of resources available for the project. There are no perfect answers, but the clarity gained through NSF's written statement, confirming that scientific merit and the capability to carry out the proposed research takes priority over financial contributions, is a positive step forward.

The distinction between an eligibility requirement vs. a review criterion may be problematic. Agencies might consider a certification or a check-off as a method to confirm compliance with a stipulated cost sharing requirement. For proposals submitted in response to solicitations or program announcements where cost sharing was required, an applicant would not make a specific dollar commitment at the proposal stage, other than a "certification" that it accepts responsibility to meet a specified (for example, 5 percent) cost sharing requirement for a proposed award as defined in the announcement. That way, the university would know that if the agency reduced its funding level from the requested amount that the institution's cost sharing obligation would be lowered accordingly, but still 5 percent. This would keep unnecessary budget information from distracting during the review process, and eliminate excessive bidding commitments from universities that think, e.g., if 5 percent is required, their funding prospects would be increased by committing 15 percent. It would also assure a university that it would not be accountable for a greater cost sharing obligation than the specified percent of cost sharing.

DEMONSTRATION OF INSTITUTIONAL COMMITMENT

No phrase more exemplifies investigator's and university administrators' frustration with cost sharing uncertainties than the term "institutional commitment." There is widespread understanding that institutional commitments to a research project affect the likelihood of funding, especially with large scale centers, multi-investigator program projects, and programs of the Department of Education.

In basic science disciplines, such understanding may take the form of a contribution of academic year effort by the principal investigators or it may be the recitation of the start-up funds and renovation of laboratory space that has already been completed to position an investigator to undertake new or leading edges of inquiry. Because institutional commitment is an important factor in the competitive position of proposals, investigators will aggressively detail that commitment. Such descriptions in proposal text tend to become entangled with commitments made in proposal budgets. Past investments, that cannot meet audit standards as cost sharing, are often not distinctly separated from new cost sharing commitments during the period of the award. Consistent with the NSTC action recommendation, funding agencies should avoid ambiguous terms and communicate clear information about the amount of cost sharing requirements. If an agency wants an institution to describe what it has already expended to create and sustain the capacity to conduct the project, it should be plainly excluded from precise documentation as formal cost sharing in the event an award is made.

GOVERNMENT-WIDE COST SHARING POLICIES

The NSF policy statement, while not perfect, does offer other research-funding agencies a model. NSTC has set a twelve-month goal for agencies to develop and implement cost sharing policies. We urge NSTC to move up the timetable and aggressively establish cost sharing policies government-wide. The attributes of the NSF statement have considerable general applicability and should offer a fast-track for a government-wide policy statement.
CURRENT AND PENDING SUPPORT DOCUMENTATION

Sponsoring agencies should be assured that investigators they are funding have sufficient uncommitted time available to carry out the technical program they have proposed. Some agencies are also concerned that an investigator does not have such an abundance of support already available for his/her research program, that their agency's funds would be superfluous. Consequently, agencies ask for a list of current and pending support. While current support is a known amount, a list of pending applications is nothing more than wishful thinking. To ascribe usefulness to this list for audit purposes is inappropriate. Agency cost sharing policies should be clear enough to prevent this.

LIMITATIONS ON REIMBURSEMENT

Reimbursement of otherwise allowable costs under government sponsored university research has been subject to a variety of limitations. Some have been prescribed by statute, others have been imposed by regulation. Of the statutory limitations existing today, the most notable are the 14% of total federal funds limit on Facilities and Administrative costs under Department of Agriculture research grants, the requirement for NSF grants to include cost sharing and the cap on salaries under NIH grants.

Changes during the 1990s to the cost principles in OMB Circular A-21 have increasingly imposed regulatory limits on reimbursement. The most prominent limitation on reimbursement is the 26 percent cap on the administrative components of the Facilities and Administrative rate promulgated by an October 1991 revision to the Circular. In a 1995 report, the General Accounting Office estimated that $104 million of Facilities and Administrative costs were lost to universities whose administrative components exceeded the 26 percent cap.  3  Having been set for almost ten years, it is now appropriate to review and reconsider the administrative cost cap, its implementation and events that followed especially in light of the NSTC recommended action to establish a mechanism to review the impact of proposed changes in university business practices.

While it can be argued that limiting the recovery of administrative expenses may have promoted more efficient and effective business practices at universities, subsequent actions by the Government caused considerable upward pressure on costs in the capped administrative component. For this reason, it is believed that the amount of unrecovered administrative costs have increased well beyond the GAO's original estimate. The full impact of the cap is difficult to ascertain because of subsequent incremental changes to OMB Circular A-21 cost principles, other federally mandated changes to business practices, the widespread use of multi-year predetermined Facilities and Administrative rates and the fact that some universities see little value in tracking administrative costs in excess of that recoverable within the 26 percent limit.

Some federally mandated business practices are described here. Each of them has either shifted costs from the government to the universities or has increased university administrative costs.

The results of these changes were the shifting of additional categories of costs to the administrative components limited by the 26 percent cap. This reduced reimbursement of university costs.

Universities thus became the only community precluded from recovering such costs. CASB implementation costs are allowable for both commercial companies and for other nonprofit organizations.

The rules of the Cost Accounting Standards Board are designed for large defense contractors as an additional means of policing their accounting practices. Applying these procurement rules to grants and to nonprofit colleges and universities is inappropriate because it feeds the notion that research and education ought to be separated and precisely accounted for in columnar fashion. The thrust of the NSTC report is for greater integration of research and education. CASB rules also drive the audit interpretations which in turn create the disincentive for universities to contribute to the cost of conducting federally supported research. The rules of CASB should be withdrawn from application to universities.

We endorse the NSTC recommendation to establish a mechanism to review the impact of proposed changes in business practices. The primary purpose of such a mechanism should be to temper the application of regulations in light of the cap on administrative costs and other unique elements of the government-university relationship.

IN CONCLUSION

The report calls for action to clarify or amend cost sharing policies and the collaborators make the following recommendations in response to that request for implementing measures.

  1. NSTC should secure clarification from OMB, which removes the disincentive to contribute faculty effort to federally sponsored research grants. Only cost sharing which is statutorily required or specifically pledged and budgeted and made a condition in the award document need be classified as organized research in calculating Facilities and Administrative rates. This means that donated faculty effort need not be included in the organized research base or reflected in any functional division of space used for organized research;

  2. NSTC should develop a government-wide cost sharing policy, using the recent NSF policy as a model and encourage agencies to adopt the newly developed policy;

  3. NSTC should examine the dynamics that increasingly subject universities to additional federal regulations at the same time that costs of compliance are capped and should temper the application of regulations because of such cap; and

  4. NSTC should review the impact of CASB rules on university research and seek to have them withdrawn from application to universities, in lieu of exclusive coverage by OMB Circular A-21.

 

NOTES
1   Memorandum dated November 7, 1985, entitled
     "OSTP Recommendations on Indirect Cost Issue,"
     Director, Office of Science and Technology Policy

 

2   National Commission on Research
     Accountability: Restoring the Quality of the Partnership,
     1980, pp. 21 - 22

 

3   The impact of the cap is more severe with regard to performance under Government contracts. Congress enacted a prohibition against capping Facilities and Administrative rates under Department of Defense contracts. Very few institutions have taken advantage of this provosion, however, because of the complexity and expense involved with managing both capped and uncapped Facilities and Administrative rates.