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GAO Report Examines Indirect Cost Policies

September 9, 2010

A new report by the Government Accountability Office (GAO) highlights differences in the approach taken and outcomes of indirect cost rate negotiations for federally sponsored university research between the Department of Defense (DOD) and the Department of Health and Human Services (HHS). DOD and HHS serve as the cognizant rate-setting agencies for federally sponsored research. Based on a survey of 144 universities, the study found that the difference between proposed and negotiated indirect cost rates was significantly larger when HHS was the cognizant agency (4.3 percent) than under DOD (0.1 percent). The final negotiated rates were relatively close, however: the average rate for HHS was 49.1 percent versus 51.6 percent for DOD. Twenty years ago, the spread was notably larger with an average negotiated rate at HHS of 50 percent versus 59 percent for DOD.

Rate Caps

The report also looked at the impact of two existing caps on certain indirect cost reimbursements. Since 1991, the Office of Management and Budget has set a cap of 26 percent for administrative expenses. When first proposed in 1986, the amount was determined based on the average over the previous five years for major universities. Now, more than 80 percent of universities report indirect administrative expenses higher than 26 percent. Some of the increase is likely due to greater demands for accountability and heightened security concerns in the last decade. GAO recommended that OMB review whether 26 percent was still the appropriate cap.

More recently, in 2007, Congress imposed a 35 percent cap on indirect costs--both administrative and facility costs--on DOD-funded basic research. Although it determined that 22 percent of schools with such funding had indirect cost rates high enough to potentially be affected by this cap, GAO found it difficult to determine the actual impact. The approach to the cap is different than that in OMB Circular A-21. It is calculated based on a percentage of total award costs rather than the familiar modified total direct costs (MTDC), and so can only be determined on an award-by-award basis and when total costs are available.

Oversight Lacking

GAO expressed concern about the methods used by DOD to oversee indirect cost reimbursements. The agency relies heavily on single audits along with some audits by the Defense Contract Audit Agency (DCAA). DOD did not verify indirect costs as part of award closeout checks. GAO cited several weaknesses in these oversight processes, noting in particular that four of the 32 institutions with DOD research funding in its sample were not audited individually under the Single Audit Act. These were public institutions included in either a system wide or state single audit. In addition, because of the way programs are selected for audit under the A-133 Compliance Supplement, no research and development awards were selected for review at 7 of the 32 universities.

GAO recommended that DOD:

  • Establish a process for verifying at grant closeout whether a university has requested reimbursement at the correct indirect cost rate.
  • Assess the current level of audit coverage for monitoring indirect cost reimbursements and whether use of closeout audits should be expanded.
  • Develop a policy for oversight of indirect costs that includes the use of alternate oversight information for institutions that are not individually audited under the Single Audit Act or where audit coverage of research and development awards is insufficient.


Anne Gross
Vice President, Regulatory Affairs