F&A Booklet
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1. What is the origin of the indirect cost concept
and Circular A-21?
Federally funded research is a prominent feature at all major American research universities today. Prior to World War II, however, federal support for research, as we know it, was virtually nonexistent. The situation changed dramatically during the war as the federal government, initially through the Office of Scientific Research and Development, invested heavily in the discovery and development of new technological tools to support the war effort. Successes achieved by the scientific, medical, and engineering communities at American universities created a new awareness of the potential of university-based science and technology.
During and after the war, the Office of Naval Research (ONR) engaged faculty members at universities to carry out contract research for special projects. By 1947, ONR began to formalize such funding programs. In the process, the issue of institutional costs (now designated F&A costs) was addressed. It became apparent that a successful university-based research infrastructure could expand and improve only if the costs incurred in connection with these Navy contracts—beyond the obvious direct costs of research—were reimbursed. ONR formally acknowledged the legitimacy of establishing differential F&A cost elements. They recognized that when reimbursing an institution for a given project, one had to take into account whether many or only a few capital facilities would be required, whether substantial or token utility costs would be incurred, and so forth. Despite ONR’s formal acknowledgment of these F&A cost principles, the practice in the early years was to provide a flat-rate reimbursement for F&A costs.
After World War II, discussions of F&A cost rates continued between the universities and the federal government. In 1958, a formal and extensive set of guidelines for determining F&A costs was issued as Bureau of the Budget Circular A-21. The Circular A-21 guidelines included formal criteria for justifying costs, methods for distributing the costs between instruction and research, and documentation requirements. In addition, certain costs were declared as unallowable.
Prior to 1958 the Department of Health, Education and Welfare (DHEW) had also acknowledged the ONR philosophy on F&A costs, but restricted recovery of F&A costs by setting an upper limit of eight percent. Today this is still the mandatory rate for most training grants. In 1958, the general rate for NIH was fixed by law at 15 percent, and then raised to 20 percent in 1963.
In the same way, the Department of Agriculture currently limits the F&A rate to 19 percent. USDA Cooperative State Research, Education, and Extension Service (CSREES) allows 19 percent of total award or our federally negotiated rate, whichever calculates to be less, on the National Research Initiative grants and the Integrated Research. Approximately four years ago this rate was increased from 14 percent of total award to the current rate of 19 percent of total award. These grants represent the major source of USDA funds received by our research faculty. USDA-CSREES does not allow any F&A on our Special Research Grants or our Cooperative Extension Smith-Lever Special Projects grants. This is by legislation that historically goes back to the beginning and is related to the Land Grant University system. There are other USDA-CSREES grants or agreements funded through various legislation, such as the Risk Management Education program, that do allow full F&A. Other areas of USDA such as the Agricultural Research Service and the Forest Service usually issue Cooperative Agreements and do not allow F&A as a direct charge, while the F&A is used as our cost sharing on these projects.
In 1966, the government removed the F&A cost ceiling and established the policy that universities should be fully reimbursed for the F&A costs incurred in conducting funded research projects. Nevertheless, some federal agencies still limit the maximum F&A rate. When the federal government removed the F&A cost ceiling in 1966, mandatory cost-sharing language was instituted in the DHEW Appropriations Act, requiring that federally funded grants be augmented with support from the University. At many institutions, including Washington State University, this requirement has been satisfied by documenting that a portion of faculty time is devoted to the grant but not reimbursed by federal sources. The guidelines in Circular A-21 -provided a mechanism for universities to receive -reimbursement for their costs, but the guidelines also imposed new compliance standards, requiring detailed -documentation.