University Research:

Policies for the Reimbursement of Indirect Costs Need to Be Updated

GAO-10-937: Published: Sep 8, 2010. Publicly Released: Sep 8, 2010.

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In fiscal year 2007, the majority of the Department of Defense's (DOD) basic research obligations were provided to higher education institutions. DOD reimburses these institutions for both direct and indirect costs for research. Two federal agencies, DOD and the Department of Health and Human Services (HHS), negotiate indirect cost rates used to reimburse higher education institutions for indirect costs on federally funded research awards, including DOD awards. GAO was asked to examine the following issues related to higher education institutions performing basic research for DOD: (1) the variation in proposed and negotiated indirect cost rates and factors that may contribute to variations; (2) how and to what extent the administrative cap and the DOD basic research cap limit reimbursement of indirect costs; and (3) the methods DOD uses for overseeing compliance with indirect cost reimbursement for grants. GAO surveyed a generalizable sample of higher education institutions performing basic research for DOD; reviewed agency guidance and policies; and interviewed officials from federal agencies, independent public accounting firms, and higher education institutions.

GAO identified wide variation in indirect cost rates at schools receiving DOD funding in fiscal year 2007, which may be related to a number of factors. For example, the average difference between a school's proposed and its negotiated rate was much larger for schools with HHS as the cognizant rate-setting agency than for those with DOD, in part due to the agencies' differing approaches to negotiation. GAO also found that schools receiving a 1.3 percent add-on to their rate to assist with the cost of utilities both proposed and negotiated higher rates than those without the adjustment. Contrary to guidance to periodically review school eligibility, the fixed list of schools eligible to receive this add-on has not been revisited since established in 1998. The cap on the administrative portion of the indirect cost rate limited fiscal year 2007 reimbursement for about 83 percent of schools. The cap was established nearly 20 years ago with the intent of limiting federal reimbursement for schools' administrative costs, and OMB has not reexamined this cap since its implementation. We estimate the DOD basic research cap might have limited fiscal year 2008 reimbursement for some awards at about 22 percent of schools, but the limitation depends on the types of costs included in each individual award and is difficult to determine up front on a schoolwide basis until total costs for each award are tallied. GAO identified weaknesses in the three methods DOD says it uses to oversee that indirect costs for research grants are reimbursed appropriately: the single audit, the closeout process, and audits by DOD's Defense Contract Audit Agency or by cognizant agencies for audit. At least one of the three methods was used at most of the schools we reviewed, but four schools were not covered by any of the methods, indicating a gap in coverage. In our discussions with cognizant agencies for audit, we learned that recent audits of research awards to schools at HHS have led to some significant findings of improper billings of indirect costs. Inconsistencies in rate-setting and reimbursement processes lead to perceived and actual differences in the treatment of schools. Moreover, because of the weaknesses in its oversight methods, DOD lacks assurance that it is reimbursing indirect costs appropriately. GAO is making recommendations to address consistency in rate-setting and to improve oversight of indirect cost reimbursement. The agencies generally agreed with these recommendations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: OMB has taken the actions necessary to implement this recommendation. In December 2013, OMB issued final OMB Uniform Guidance, which replaces OMB Circular A-21 "Cost Principles for Educational Institutions", along with several other OMB Circulars. One key purpose of this consolidated guidance is to provide for consistent and transparent governmentwide treatment of costs, including indirect costs. Another objective is the elimination of duplicative and conflicting guidance to improve consistency.

    Recommendation: To address different processes for negotiating rates by the two cognizant rate-setting agencies for higher education institutions, the Director of OMB should identify methods to ensure that the rate-setting process is applied consistently at all schools, regardless of which agency has rate cognizance. This would include identifying ways to ensure that differences in cognizant rate-setting agencies' approaches, goals, policies, and practices do not lead to unintended differences in schools' rate reductions for indirect costs.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  2. Status: Closed - Implemented

    Comments: OMB has taken the actions necessary to implement this recommendation. In December 2013, OMB issued final OMB Uniform Guidance, which replaces OMB Circular A-21 "Cost Principles for Educational Institutions", along with several other OMB Circulars. The guidance extends to all institutions of higher education the provisions for the recovery of utility costs associated with research.

    Recommendation: To ensure that indirect cost reimbursement practices are consistent with the current state of indirect research costs at schools providing federal basic research, the Director of OMB should clarify the roles and responsibilities of federal agencies (including DOD, HHS, and OMB) in accepting applications and reevaluating the eligibility of schools to receive the utility cost adjustment.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  3. Status: Closed - Not Implemented

    Comments: In 2011 and 2012, an OMB official reported that OMB is not conducting a review to re-examine whether the administrative cap achieves the appropriate level of cost control and achieves the government's objective that the federal government bear its fair share of total costs. In 2011, the official stated that OMB believes the administrative cap has helped the schools to be more efficient with their administrative effort and more disciplined with spending in administrative costs.

    Recommendation: To ensure that indirect cost reimbursement practices are consistent with the current state of indirect research costs at schools providing federal basic research, the Director of OMB should reexamine and determine whether reimbursing administrative costs at a maximum rate of 26 percent achieves the appropriate level of cost control and achieves the government's objective that the federal government bears its fair share of total costs.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  4. Status: Closed - Implemented

    Comments: DOD has taken the actions necessary to implement this recommendation. On November 17, 2010, DOD's Director of Defense Research and Engineering issued a memorandum requiring DOD components that award or administer grants or cooperative agreements to schools to (1) require recipients of these awards to submit information on indirect expenses after the end of a project period, and (2) have post-award administrators analyze the indirect cost information provided by the award recipients on a sample of the indirect cost submissions. The DOD memorandum outlines a process by which DOD will verify whether schools have requested reimbursement at the accurate indirect cost rate and dollar amount, and is therefore responsive to GAO's recommendation.

    Recommendation: To improve DOD's ability to oversee reimbursement of allowable indirect costs to schools, the Secretary of Defense should direct that the Under Secretary of Defense for Acquisition, Technology and Logistics to establish a process for administrative grants/contracting officers to verify at grant closeout whether a school has requested reimbursement at the accurate indirect cost rate and dollar amount, which includes calculating whether the dollar amount reflects the appropriate application of rates for that award.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DOD has taken the actions necessary to implement this recommendation. DOD's Office of Naval Research, whose administrative grants or contracting officers are generally delegated postaward administration responsibilities for grants to schools, reported it increased the focus in its annual risk assessment on indirect cost reimbursement. ONR assessed the adequacy of audit coverage based on several different sources of information, such as indirect cost data included on a financial reporting form as well as closeout audits performed by other agencies during fiscal years 2008 to 2010. Overall, ONR determined that its annual risk assessment did not reveal issues of sufficient magnitude or extent to warrant increased audit activity specific to indirect costs, but noted the office will continue to conduct annual assessments to evaluate the sufficiency of audit coverage in many areas, including indirect cost reimbursement.

    Recommendation: To improve DOD's ability to oversee reimbursement of allowable indirect costs to schools, the Secretary of Defense should direct that the Under Secretary of Defense for Acquisition, Technology and Logistics to assess the current level of audit coverage for monitoring DOD indirect cost reimbursement for schools and determine what level is sufficient and whether to expand use of closeout audits and other audits to oversee compliance.

    Agency Affected: Department of Defense

  6. Status: Closed - Not Implemented

    Comments: DOD officials reported that DOD does not have plans to develop a policy for oversight of indirect costs that includes the use of alternative oversight information in certain circumstances, given that it has established annual risk assessments with more of a focus on indirect costs reimbursement, and these risk assessments did not indicate a problem that would warrant the use of alternative oversight approaches.

    Recommendation: To improve DOD's ability to oversee reimbursement of allowable indirect costs to schools, the Secretary of Defense should direct that the Under Secretary of Defense for Acquisition, Technology and Logistics to develop a policy for oversight of indirect costs that includes the use of alternative oversight information (1) for those schools not individually audited under the single audit, and (2) for those schools where the audit coverage of research and development awards is not sufficient for oversight of indirect costs.

    Agency Affected: Department of Defense

 

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