During and after the war, the Office of Naval Research (ONR) engaged faculty members at universities to carry out contract research for special projects. By 1947, ONR began to formalize such funding programs. In the process, the issue of institutional costs (now designated F&A costs) was addressed. It became apparent that a successful university-based research infrastructure could expand and improve only if the costs incurred in connection with these Navy contracts--beyond the obvious direct costs of research--were reimbursed. ONR formally acknowledged the legitimacy of establishing differential F&A cost elements. They recognized that when reimbursing an institution for a given project, one had to take into account whether many or only a few capital facilities would be required, whether substantial or token utility costs would be incurred, and so forth. Despite ONR's formal acknowledgment of these F&A cost principles, the practice in the early years was to provide a flat-rate reimbursement for F&A costs.
After World War II, discussions of F&A cost rates continued between the universities and the federal government. In 1958, a formal and extensive set of guidelines for determining F&A costs was issued as Bureau of the Budget Circular A-21. The Circular A-21 guidelines included formal criteria for justifying costs, methods for distributing the costs between instruction and research, and documentation requirements. In addition, certain costs were declared as unallowable.
Prior to 1958 the Department of Health, Education and Welfare (DHEW) had also acknowledged the ONR philosophy on F&A costs, but restricted recovery of F&A costs by setting an upper limit of 8%. Today this is still the mandatory rate for most National Institutes of Health (NIH) training grants. In 1958, the general rate for NIH was fixed by law at 15%, then raised to 20% in 1963. In 1966, the government removed the F&A cost ceiling and established the policy that universities should be fully reimbursed for the F&A costs incurred in conducting funded research projects. At the same time, mandatory cost-sharing language was instituted in the DHEW Appropriations Act, requiring that federally funded grants be augmented with support from the University. At many institutions, including the University of Washington, this requirement has been satisfied by documenting that a portion of faculty time is devoted to the grant but not reimbursed by federal sources. The guidelines in Circular A-21 provided a mechanism for universities to receive reimbursement for their costs, but the guidelines also imposed new compliance standards, requiring detailed documentation.