1 Facilities and Administrative (Indirect) Costs at The Ohio State University Administrative Research Council April 15, 2008 Tom Ewing, Associate University Controller Phil Schirtzinger, Sr. Cost Allocation Analyst

2 Overview of Today’s Presentation What are indirect (F&A) costs? What is an F&A cost rate? How are F&A rates calculated? The proposal and negotiation process Trends in F&A rates, total annual cost recoveries, and distribution of cost recoveries What are we doing to maintain or increase the University’s F&A rate? The Ohio State University - Office of the ControllerApril 15, 2008

3 What are Indirect (F&A) Costs? The federal government funds most sponsored research (and certain other instructional and public service programs) on a cost reimbursement basis. Institutions bill federal sponsor agencies for the direct and indirect costs of a project. Direct costs are those costs that can be directly attributed to an activity (or “function”) of the institution. Indirect costs are all other costs that are, at least in part, attributable to an activity. The federal government refers to these costs as “facilities and administrative” or F&A costs. OMB Circular A-21, Cost Principles for Educational Institutions, which is issued by the U.S. Office of Management and Budget, is the federal government’s “rule book” for college/university cost accounting. The Ohio State University - Office of the ControllerApril 15, 2008

4 What is an Indirect (F&A) Cost Rate? The Ohio State University - Office of the ControllerApril 15, 2008 Total Allocated F&A Costs Modified Total Direct Costs = Indirect (F&A) Cost Rate An indirect (F&A) cost rate is a way of expressing the relationship between the direct and indirect costs of the various functions of an institution. Although institutions calculate F&A rates for all major functions, the primary focus for OSU (in terms of overall financial impact) is on the organized research rate.

5 F&A Rate is Mechanism for Billing Sponsors for Indirect Costs of Organized Research The Ohio State University - Office of the ControllerApril 15, 2008 On behalf of the University, the OSU Research Foundation bills federal sponsors for F&A costs, using pre-determined rates negotiated with the federal government. The F&A rate is applied to the modified total direct costs incurred on a research grant. OSU Research Foundation Project January 2008 Direct Costs: Wages and Benefits $ 500 Supplies 300 Travel 200 Subtotal-MTDC $ 1,000 Add: F&A Costs (50%) 500 Total Billed to Sponsor $ 1,500

6 The Ohio State University - Office of the ControllerApril 15, 2008 How are F&A Rates Calculated? Total current funds expenditures Less: Unallowable Costs Less: Equipment purchases and other capitalizable items charged to Current Funds Add: Depreciation on plant and equipment, and interest expense on plant debt Total allowable costs

7 The Ohio State University - Office of the ControllerApril 15, 2008 How are F&A Rates Calculated? (continued) Direct Costs (costs directly attributable to the institution’s major functions) Total allowable costs Instruction Organized Research Other Sponsored Activities Other Institutional Activities Indirect Costs (costs not directly attributable to the institution’s major functions) Facilities Costs: Depreciation Interest Plant Operation/Maintenance Library Administrative Costs: General Administration Departmental Administration Sponsored Program Administration Student Services and Administration

8 The Ohio State University - Office of the ControllerApril 15, 2008 How are F&A Rates Calculated? (continued) Direct Costs also referred to as “modified total direct costs” or MTDC Instruction Organized Research Other Sponsored Activities Other Institutional Activities Facilities Costs allocated primarily on functional use of University space; library allocated based on use Allocated to Instruction Administrative Costs allocated based on MTDC; sponsored program administration allocated to sponsored programs Allocated to Org Research Allocated to OSA Allocated to OIA Allocated to Instruction Allocated to OIA Allocated to Org Research Allocated to OSA

9 The Proposal and Negotiation Process The Ohio State University - Office of the ControllerApril 15, 2008 Institutions are required to propose and negotiate an F&A cost reimbursement rate agreement with the federal government. Each institution is assigned a cognizant federal agency (DHHS for OSU), which is responsible for negotiation and administration of rate agreements with that institution. OSU will prepare an F&A Proposal based on FY It should be submitted to DHHS by December 31, 2008 and negotiated by June 30, In rate negotiations, the federal government typically challenges cost calculations in the proposal. Final rate is usually below the proposed rate.

10 Trends in F&A Rates at OSU The Ohio State University - Office of the ControllerApril 15, 2008 On-Campus Rates for Organized Research FY04FY05FY06FY07 Facilities Component Administrative Component * Total F&A Rate * Administrative rate is capped at 26%. 23.5% 26% 23.5% 24% 49.5% 50% FY08 26% 24% 50%

11 What’s a Point Worth to OSU? Trends in F&A Rates vs. Total Cost Recoveries The Ohio State University - Office of the ControllerApril 15, 2008 Total F&A recoveries are a function of both the F&A rate and the Organized Research base. NOTE: If indirect costs do not grow as fast as (direct) organized research costs, calculated F&A rates will decline. OSU, however, has been able counter this effect through improvements in its cost accounting for the (uncapped) Facilities components of the rate. * Projected

12 Distribution of F&A Cost Recoveries The Ohio State University - Office of the ControllerApril 15, 2008 College base budgets now include revenue from F&A cost recoveries, as a result of Budget Restructuring. With the exception of the Library component, 100% of the annual changes in F&A cost recovery revenues are allocated directly to the colleges that generated them. F&A cost recoveries are excluded from the revenue which is taxed to cover central commitments.

13 What are We Doing to Maintain or Increase the University’s F&A Rate? The Ohio State University - Office of the ControllerApril 15, 2008 Building Componentization and Room-by-Room Cost Allocation (special studies allow OSU to depreciate buildings more quickly and to specifically identify the higher construction costs associated with research space). Increased Capitalization Thresholds from $500 to $3,000 on equipment, and from $25,000 to $100,000 on building repair/renovation projects (accelerates cost recovery by replacing multi-year depreciation with current-year charges to expense) Expanded Space Survey (to identify functional breakouts of all rooms on campus and tie OSURF projects and employees to specific rooms). Space drives most facilities cost allocations.

14 Summary The Ohio State University - Office of the ControllerApril 15, 2008 Indirect costs are costs that cannot be directly attributed to a major function of an institution. They are now known as facilities and administrative (or F&A) costs. A-21, the federal government’s rule book on cost reimbursement, sets forth a methodology for allocating F&A costs to all major functions of an institution. OSU’s F&A rate, which is a negotiated figure that reflects allocated F&A costs as a percentage of total direct costs, is currently 50% for on-campus organized research. The OSU Research Foundation is expected to bill sponsors for approximately $81 million in F&A costs during FY08. To maintain or increase the F&A rate, we will need to make continued improvements in our cost accounting for the (uncapped) facilities components of the rate.

15 Questions? The Ohio State University - Office of the ControllerApril 15, 2008 Tom Ewing, Associate University Controller Phil Schirtzinger, Sr. Cost Allocation Analyst Allan Freeman, Cost Allocation Analyst Please feel free to contact a member of our cost allocation team