Allowable/Unallowable Costs

What is the difference between the term “Indirect Costs”, “Overhead Costs”, or “F&A costs”?

Nothing other than the fact that old habits die hard! Accountant-type folks typically are used to using the terms “indirect cost” or “overhead costs” as that is standard accounting terminology. In the world of higher education research, though, many other folks besides accountants are involved in or affected by this costing concept. At some point OMB was convinced by the world of higher education that the term “Facilities and Administrative” (F&A) costs would be more accurate and better understood by administrators and researchers alike. Universities must break their indirect cost rate into two parts for proposing and negotiating a rate agreement with the federal government. These two components are the “facilities” portion and the “administrative” portion, hence the name. An example of a facilities cost would be costs related to building costs and maintenance, whereas an example of an administrative cost would be central or departmental administrator’s salaries.

What is an Indirect Cost?

Indirect costs are costs incurred for common or joint objectives, benefit multiple projects and activities and are more general in nature than direct costs. Utilities costs, building and equipment depreciation and office supplies are examples of indirect costs.

By contrast, the definition of a direct cost is a cost that can be specifically identified with a particular project or activity. If a cost benefits multiple projects, it must be allocated among the benefiting projects. If this cannot be done with relative ease and a high degree of accuracy, then they must be treated as indirect costs.

Note: A separate chart below provides a more comprehensive list of examples of direct and indirect costs.

What are the applicable guidelines for determining what an indirect cost is?

Guidance for determining indirect costs is in OMB Circular A-21, “ Cost Principles for Educational Institutions”. Section J includes a list of allowable costs, however this section cannot be read independently from the rest of A-21. Section J describes the allowability of a cost regardless of its treatment as direct or indirect and ultimately tells us what we can include in our F&A proposal as allowable or unallowable. Other sections of A-21 provide guidance on treatment of costs as direct or indirect.

Are there specific costs that are considered to be indirect costs?

Yes. OMB Circular A-21 identifies a number of specific costs that should “normally” be treated as indirect, along with providing definition and general guidance for determining indirect costs. The circular also indicates that we must be consistent in our treatment of costs as direct or indirect across all activities. In other words, we can’t decide to treat postage as indirect in one circumstance and as direct in another circumstance when the circumstances are essentially the same.

Some of the items specifically identified in OMB Circular A-21 as indirect costs:

Administrative and clerical salaries (this is probably the one that is most difficult to remember and understand!)
Office Supplies
Postage
Local telephone
Memberships and dues
General purpose equipment
General purpose land or buildings

Exhibit C of OMB Circular A-21 provides examples of situations where the above costs may be treated as direct costs. To actually charge these costs as direct in the situations given, the costs must be clearly included and approved by the sponsor in the project budget.

How do indirect costs get charged to sponsors?

KSU is required to negotiate an indirect cost rate (F&A!) with the Federal Government. A rate is calculated based on all KSU expenditures during a given base year. The calculation is quite complex and takes a significant amount of time to prepare. After review by the federal negotiators, an agreement is reached on the rate, the activity it applies to, and the period of time for which that rate is applicable. For example our current rate for research activity is 46%, and is applicable through FY 2008. All federal agencies are supposed to accept this rate on proposals submitted by KSU. Most other sponsors will accept this rate also. Of course, many federal programs and some private sponsors have limits on the rates they will actually pay.

To charge the sponsor, the negotiated rate (or the rate allowed by a specific sponsor) is used to apply a charge for all indirect costs to each sponsored project. Therefore, when the 46% rate is applied to a research award, that indirect charge is essentially charging that project for utilities, office supplies, administrative salaries, and so on. If you also try to charge office supplies directly to a project, you (actually the sponsor) would be paying for all these items twice. Understandably, this is not something a sponsor wants to happen. PI’s should also realize that this is not a good way to use their project funds! When KSU is reimbursed by the sponsor for indirect cost charges, a portion of that revenue is normally distributed to the department or college SRO account. The SRO account or another departmental account is the appropriate place to “directly charge” indirect cost items.

Can payments for indirect cost items be charged to matching accounts?

No, not normally. If either KSU or a third party is providing matching/cost sharing for a project, the rules for determining what is an allowable direct cost (vs. an indirect cost) must be applied to those funds also. Departments especially need to remember this when reporting cost shared effort (via KSU’s PAR system). Administrative and clerical salaries cannot be used as cost sharing as they do not normally qualify as direct costs!

Can payments for indirect cost items be charged as direct costs if the sponsor is not paying indirect costs?

No, not normally. When KSU accepts an award from a specific sponsor or federal program that does not pay indirect costs, KSU has essentially agreed to pay for those costs from KSU funds, which is also known as cost sharing.

Examples of Direct vs. Indirect (Facilities & Administrative) Costs
*The list below is not intended to be all-inclusive.*
Direct	Indirect
Salaries, Wages & Fringe Benefits for programmatic personnel such as principal investigators, research assistants, technicians.	Salaries, Wages, & Fringe Benefits for non-technical personnel. Includes clerical and administrative personnel such as accountants, secretaries, business officers, office administrators, president, vice presidents, deans and directors.
Advertising - recruitment of personnel approved for a specific project or recruitment of research subjects.	Advertising - public relations.
Equipment - scientific and technical.	Depreciation (use of) of equipment, buildings Equipment - General purpose or office, including computers >= $5,000.
	Furniture - office or lab.
Maintenance agreements on scientific and technical equipment (project period only).	Repair & Maintenance of non-scientific or technical equipment or scientific/technical equipment not used exclusively on the project.
Materials and Supplies including non-capitalized equipment such as computers that are < $5,000 - Only scientific or technical items used/consumed during the project period.	Materials and Supplies including non-capitalized equipment such as computers that are < $5,000 - Office or general use items that are used/consumed during the project period.
	Memberships & Subscriptions.
Phone - long distance only.	Phone - basic service, installation, maintenance.
	Postage - unless for significant costs easily identifiable to the project, such as survey-related mass mailings.
Services - consultants, other professional, printing, lab, data processing, delivery (like Fed-Ex) - Only those that are specific to the project. Usually also high volume, non-routine.	Services - printing, copying, delivery, administrative fees, hazardous waste disposal, anything general, routine, administrative in nature.
Subcontracts.
Travel necessary to complete the project, to accomplish project objectives.
Tuition - as compensation in lieu of salary.
	Utilities.
Note: Costs listed as Direct become Indirect costs when they are for general functions or activities and cannot be identified with relative ease and a high degree of accuracy to those functions or activities.	Note: Costs listed as indirect may be charged as direct in certain limited circumstances as described in OMB Circular A-21 Exh. C and when included in the sponsor approved budget. Costs listed as indirect that relate to projects with non-federal sponsors that do not disallow such charges may be charged directly to such projects.

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