GIM 22
Attachment A
A Primer on Facilities and Administrative Costs
1. What is the origin of the indirect cost concept and Circular
A-21?
Federally funded research is a prominent feature at all major American research
universities today. Prior to World War II, however, federal support for research as
we know it was virtually nonexistent. The situation changed dramatically during the
war as the federal government, initially through the office of Scientific Research
and Development, invested heavily in the discovery and development of new
technological tools to support the war effort. Successes achieved by the scientific,
medical and engineering communities at American universities created a new awareness
of the potential of university-based science and technology.
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.
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