CRS Report: History of Indirect Cost Policies

On August 2, the Congressional Research Service (CRS) released a report entitled “Indirect Costs for R&D at Higher Education Institutions: Annotated Chronology of Major Federal Policies.” The 33-page report provides a history of the federal government’s policies on indirect cost reimbursement from the World War II era to the present day. Below is a summary of the report:

“During World War II, the Federal Government reimbursed higher education institutions for indirect costs at a fixed rate, up to 50 percent of salaries and wages. After the war, some Federal agencies disallowed indirect costs; others required academic institutions to share costs on the grounds that research was a normal academic function and that colleges and universities benefitted from the performance of Federal R&D by raising their stature and expanding their infrastructure. Cost-sharing obligations could be met either by not claiming allowable indirect costs or by claiming a lower indirect cost rate. Indirect costs rates ranged from 8 percent to 25 percent of total direct costs during the period 1947 to 1965. Some of these rates were capped in appropriations statutes. In 1965, Congress removed most caps and allowed the negotiation of rates based on actual costs for most agencies. Today, Congress still requires cost sharing, but agencies interpret this requirement differently. Indirect costs rates started climbing after 1965. Today, the average rate is about 53 percent of modified total direct costs. It is estimated that one-third of Federal R&D funds for academia support indirect costs, rather than the direct performance of research.

“In 1958, the Bureau of the Budget released Circular A-21, governing indirect cost reimbursement policies, documentation, and accounting practices.... The Circular has been revised to clarify allowable costs and to satisfy researchers’ demands that more money be made available for research....”

As a result of allegations of fraud and abuse in the early 1990s, “Circular A-21 was modified to standardize implementation and to clarify allowable direct and indirect costs.” The revisions, effective January 1, 1994, split the overhead rate into two categories, administrative and facilities. Although administrative costs stayed capped at 26 percent, institutions were allowed several options for calculating their claims.

In the FY 1995 budget request, President Clinton proposed capping indirect cost reimbursements at the FY 1994 level, and announced an Administration study of the issue. The one-year “pause” was expected to save $130 million, but Congress chose not to include it in the VA/HUD and other appropriations bills. It is of note that reducing the “overhead rate on federally sponsored university research” has been suggested by Republican House Budget Committee staffers as one of the “possible offsets” for the Republicans’ Contract with America.

The report can be obtained through the offices of your Members of Congress. The Capitol Switchboard number is 202-224-3121.