Universities have indicated that lack of clarity about agency cost sharing expectations reduces their ability to plan financially. Unaware of an agency’s cost sharing expectations, a university may be caught short if it has submitted a proposal in response to a program announcement but does not learn in a timely way about the agency’s cost sharing expectations. Without knowing what are the "rules of the game," a university may be outbid by another and lose the award, or an agency may not receive the optimum level of cost sharing that it seeks. To avoid these difficulties, and to ensure a level playing field, it would be helpful if agencies announced, in advance, as part of their request for proposals in program announcements, if cost sharing is a criterion of award selection, and how, including explicit information regarding the amount of cost sharing expected and about the process by which cost sharing will be considered.

OMB Circular A-21 requires that all university research activities, regardless of their source of support (Federal, university, or private sponsor) be included in calculating total research costs. These total costs provide the basis for calculating the university’s Facilities and Administration (F&A) rate (also called indirect rate) and for determining the share of the F&A costs for which the Federal government will reimburse the university (the share is based on the portion of the total research that is supported by the Federal government). Consequently, when a faculty member who wishes to invest more time on a research project than already agreed to in the research proposal or than is required by the Federal agency as cost sharing, the time must be still be accounted for in the base of "organized research" for the purpose of computing the indirect cost rate. Universities regard this requirement as a double penalty; not only does the university bear the costs of the direct charges for faculty time spent on the project above that expected, but including those direct costs in the base of organized research decreases the F&A rate for the school for all projects.

The Federal government’s intent in requiring this accounting practice is to ensure that the overhead costs related to research activities (whether they are funded by the Federal government or by the institutions) are allocated to the benefitting activities. But it is worth noting that this level of precision in accounting normally will not fully account for faculty time beyond that required by the faculty member’s employment agreement with the institution. Moreover, faculty donate time to other activities that are central to the working of the research enterprise, yet this donated time is not a factor in calculating F&A rates, nor should it be, as these duties are rightly considered by the university as part of the faculty’s responsibilities. For example, agencies rely extensively on the expertise of university scientists and engineers to serve on agency advisory panels, peer review panels, and committees, often with no compensation, providing critical input that enables agencies to shape their research agenda and foster research excellence. Such activities are vital to the functioning of the partnership; indeed, they are central to it.

Mandatory cost sharing stems from Federal cost principles and some statutes that limit institutions’ recovery of costs that are otherwise reimbursable, including limitations on indirect cost rates established by legislation. An issue of current concern to some agencies and universities involves the cap on administrative costs as it impacts universities that administer R&D laboratories for Federal agencies or have other relationships with the government that have procurement aspects. For relationships that are solely procurement in nature, the cap on administrative costs inappropriately forces universities to share in the administrative costs for the goods and services purchased by those agencies (unless the university’s administrative costs are at or below the cap).

Issue: Differences in policy and practice across Federal agencies oblige institutions of higher education to maintain separate internal operating procedures for each agency with which they conduct business. Programmatic variations among agencies may justify some of these differences. However, opportunities to streamline excessive requirements could save time and resources for universities as well as for Federal agencies.

Discussion: More uniform policies and procedures for the administration of Federal research project grants can reduce paperwork and free faculty to spend more time on research. The Federal Demonstration Partnership (FDP) has developed standardized grant terms and conditions to apply to all FDP institutions that receive support from FDP agency members. These streamlined standards have helped reduce the burden placed upon researchers and university administrators by narrowing the differences in grants management practices among agencies, but without compromising accountability. However, not all agencies participate in the FDP, and only 65 universities are members. The benefits of streamlined standards and uniform terms and conditions could be extended to those other agencies and universities by making them applicable across all agencies. Agency efforts to reduce agency-specific requirements should also continue.

Broader adoption of standardized procedures should not hinder further streamlining by agencies. Prompted both by the promise of new technology and a desire to reinvent government for better performance, efficiency, and service, Federal agencies are developing a variety of new approaches to grants administration. One example is in the area of electronic research administration (ERA) where the Federal Commons now under development will provide universities a streamlined and consistent electronic interface with the Federal agencies. Another is the "modular grant" concept currently being studied by NIH, in which the investigator is asked to provide a best-estimate-of-cost for a proposed project in $25,000 increments, and which encourages subsequent disengagement from complex budget negotiations. Such agency streamlining efforts should be encouraged and accelerated.

Issue: Universities have expressed serious concerns about the cumulative impact of Federally mandated requirements in business practices. For example, the implementation of Cost Accounting Standards (CAS) by the Cost Accounting Standards Board imposed administrative burden on universities, while provisions in OMB Circular A-21 place limits on the recovery of both administrative costs and other costs associated with operating the research enterprise.

Discussion: The implementation of CAS is an example of what can happen when Federally mandated business practices are implemented without consideration of their cumulative impact. In 1996, OMB incorporated the requirement to comply with four cost accounting standards in OMB Circular A-21, and, for institutions with Federally sponsored agreements totaling $25 million or more, the requirement to file a Disclosure Statement. The latter describes the cost accounting practices of the institution, and provides the cognizant Federal agency the ability to determine whether the institution is in compliance with the CAS.

The university community strongly opposed the implementation of CAS. Officials in both the university and government communities question whether CAS is appropriate given that universities often share in the costs of research, not only as a result of the administrative cap, but as a result of a variety of legislatively mandated cost sharing and other practices.

Taken in isolation, the CAS requirements reflect sound business practice. Yet questions about their efficacy are raised when they are considered in the larger context in which universities operate. For example, the costs of CAS implementation are recoverable under Federal contracts with commercial concerns, but they are not for universities (at least if their administrative costs are above the A-21 mandated cap on administrative costs.) There are other important differences between the treatment of commercial concerns and universities under CAS that should not be overlooked in the future when changes in accounting practices are proposed. In the commercial arena, adjustments are made in contracts when cost recovery is affected by government changes in cost accounting. For universities, however, where the government favors multi-year F&A rates, changes in recovery can only be made at the time the new F&A rate is renegotiated. More importantly, Federal sponsoring agencies rarely increase the overall value of sponsored agreements to accommodate increases in F&A rates.