1. Indirect Cost Calculations: Beyond the Basics Jim Carter Huron Consulting Tuesday March 12, 2013 2:45 – 3:30 PM 1

2. – Overview – F&A Rate Environment – Rate Optimization Strategies – Space – Review of the proposal – Negotiations 2

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4. Overview 4

5. 5 Multiple forces are creating pressure to increase F&A Recovery Pressures to increase F&A cost recovery fund utilization effectiveness Desire to better understand F&A cost recovery fund allocation University research strategic directions and priorities Opportunities to invest more in conducting and developing research Significant and growing costs of research Recent work of Committees and Task Forces

6. Building Depreciation Interest Equipment Depreciation Operations & Maintenance Library Admin Organized Research Instr & Dept Research Other Sponsored Activity Other Inst. Activity Facility Pools Space Sq Ft Space Sq Ft Space Sq Ft Space Sq Ft FTE & SW MTDC Allocation Method DENOMINATOR NUMERATOR 6

7. March 2013 May 2013 April 2013 New rate is in place for beginning of the new fiscal year April/May 2012 July 1, 2013 June/ July 2012 September/ October 2012 Space Survey completed Audit completed, Financial statements issued December 31, 2012 Proposal submitted to DHHS-DCA 7 F&A cost rate proposal is developed based on FYE audited financial data Client closes fiscal year between 6/30-8/30 DHHS-DCA conducts site review and negotiates new rate DHHS-DCA conducts desk review of proposal

8. Increasing recovery can be achieved in three main areas: – Optimize F&A Rate Calculation – Optimize Negotiated F&A Rate – Manage accounting and research charging practices Control F&A cost rate waivers Recover more costs directly Develop strong cost sharing policies 8

9. F&A Rate Environment 9

10. Geographic Location – Local costs indirect – Direct costs national Private vs. Public ONR vs. DCA Size of Undergraduate Population Political realities – State Budgets – Federal budget – 1.3% Utility Cost Allowance (eliminated) – 26% Admin cap 10

11. DHHS-DCA Responsible for 95% of the rates Reviews conducted by negotiator Negotiations are loosely based on results of the review Gap between calculated and negotiated rate depends on: – Quality of proposal – History of past proposals – Regional prejudices Rates are all predetermined Regions have autonomy over rate issues 11 ONR ONR negotiates only 45 institutions nationwide and is a single office DCAA conducts audits and provides an Audit Report to ONR Negotiations are conducted by ONR once an audit is completed Negotiations are based on the Audit Gap between calculated and negotiated rates depends on: – Issues raised by audit – History of past proposals – Quality and Relevancy of DCAA issues

12. Rate Maximization Strategies 12

13. 13 “In theory the system should….” We have all the data we need “The University reconciles the Fixed Asset system to the Financial statements” “We have a perpetual inventory system and ….” We identify all space We can identify all our cost sharing We scrubbed our base

14. The F&A rate calculation can be optimized in 4 ways: – Treat F&A rate calculations as an ongoing program – Minimize the on-campus Organized Research Base – Maximize costs in the Facilities-related pools Depreciation, O&M, Interest, Library – Maximize allocation of facilities costs to Organized Research Through space assignments to Organized Research 14 The majority of rate increases are as a result of borrowed capital and new construction for research facilities.

15. Develop campus and system programs – Strategic planning associated with rate calculations and negotiations – Maintain and develop or enhance key systems Building and Equipment Inventory Space survey system Utility metering and monitoring – Rate Increases can only occur when submitting rates Shorten the rate submission cycle (3 year or less) – Strategically analyze the position of each rate 5 year goals and objectives by universities – Prepare annual projections on the rate – Maximize effective recovery rate 15

16. Organized Research Base – On vs. Off campus identification Identifying the Off-campus projects correctly – Minimize cost sharing – Organized Research vs. other base definitions (Instruction, OSA) – The ‘definition of research’ for financial reporting vs. Organized Research Help to minimize reclassifications from Research to other activities in the F&A proposal 16

17. Building and Equipment – Track equipment to building, department and room – Useful life analysis for building components – Fully depreciated equipment (clean it up, minimize risk) Operations and Maintenance – Identification of costs to the research buildings Accurate metering of utilities costs to buildings Work order system records for maintenance and repair – Identification of non capital O&M – Strategic spending in the base year – Analyze large off-setting credit amounts in OM pools – Accumulation of defensible statistical information Through documentation of all EHS costs Through documentation of lease and rental costs 17

18. Space and space usage – Better use of facilities Maximize research activity in newer and more expensive space Strategic space assignments to highly funded PIs Minimize space identified for research but occupied by non research activities Minimize vacant space – Types of research by campus (lab vs. office based) – Maintain accurate occupant information – Consistent use of space coding – Ability to match occupants and activities in a database – Maintain occupancy data on all leases 18

19. Develop practices for charging faculty time to projects – incentives to charge more – Faculty want to ‘save’ money for other costs Other direct charging practices – Charge tech time Service centers charging practices and subsidies involved – Core facility management – Animal and other rates Cost sharing commitments that aren’t required – Minimize the use of Voluntary Uncommitted cost sharing Administrative costs – Documentation of internal assessments (charge back to hospitals, auxiliaries, etc.) 19

20. Use overhead return policies as an incentive to charge the full rate Service Center and Recharge Operations – Are typically subsidized – A focus of Federal review Accounting transparency – Differences in costing practices that affect the FA – Creation of clear accounting transactions to track interdepartmental charging – Cost recovery policies for auxiliary and other self funded departments – Treatment of interrelated entities Sponsored Project Administration – Pre-award setup for appropriate identification of on-campus vs. off-campus – Classification of non-sponsored activity as research 20

21. Space 21

22. Define bases (OR, OSA, Service, IN) Define pools Applicable regulations (federal, state, etc.) Policies and procedures may impact Senior management and consultants State, Federal, sponsoring agencies Research administration, F&A staff Department and central administrators Base Review First 22

23. Campus-wide space management committee Space management system personnel Joint or separate surveys F&A space (occupant) survey staff ITS technical support and senior staff –Space Management System (SMS) –F&A occupant/activity system Core Space Survey Team 23

24. Survey Team - Departmental Key departmental contacts list Both fiscal and facilities managers Email, phone, location Spirit of partnership Relationships established pay dividends throughout study Certain administrators as key advisors 24

25. Review 25

26. 26 What does one point provide the University? What does it cost the Federal Government? How many Admin $ are required to increase the admin component by one point? How many Facilities $ are required to increase the facilities rate by one point? How much OR space is needed to increase the rate? The value of a point

27. 27 What three things are you most comfortable with? What three things do you have the most concern about? Where are there possibilities for an increase in the rate? If you were the government where would you look to decrease the rate? Questions Management should be asking

28. Negotiations 28

29. Timeline – Get the proposals done on time – December 31, 20XX – Negotiations are conducted on a first in first out basis – DCA may request a significant amount of information – DCA may conduct a site visit – Takes up to 1 year to negotiate Common issues that impact negotiations – Building componentization – Equipment inventory records – Space survey results – Prior negotiation issues – Issues with other schools Last Resort – DCA Grant Appeals Board – Last appeal on F&A rates was 1987 – Universities want to avoid – DCA wants to avoid 29 ONR/DCAA has a different approach

30. What is the calculated Rate? What can the University live with? What is the negotiated Rate? What is the collected Rate? 30

31. 31 What did we do right? What can we do better next time? Fix it before you start the next one! Did the original data require any change? Is there a consistent department number? Do our buildings have the same name in the space and building value? Do we use the same building numbers for the space, building value and equipment inventory?