| perspective: place. instance, the Unice CHAPTER 15 Case STANFORD UNIVERSITY: Indirect-Cost Allocation, Indirect-Cost Recoverya In 1990, an extensive audit was conducted on Stanford received or other equitable relationship. The test of allowa- University's cost allocations for federally funded research. The bility of costs under these principles are: (a) they must be federal government follows a policy of reimbursing universities reasonable; (b) they must be allocable to sponsored agree- for the full costs of conducting federally sponsored research. In ments under the principles and methods provided herein; (c) a statement to investigators, Stanford President Donald they must be given consistent treatment through application Kennedy provided some historical of those generally accepted accounting principles appropri- ate to the circumstances, and (d) they must conform to any After WWII, the United States made the decision to limitations or exclusions set forth in these principles or in the convert its wartime research efforts into a greatly sponsored agreement as to types or amounts of cost items. expanded basic research program located in our univer- sities, where the training of the next generation of scien- Unless a university and its cognizant government agency tists takes Originally, federal support of basic agree on a different method of cost determination, the method research in universities developed along the lines of an ology in the circular applies. Indirect-cost rates are negotiated "assistance model": academic scientists wanted to work each year between universities and their cognizant federal on fundamental problems and the government in the first agencies, such as the National Institutes of Health and the the Office of Naval Research) wanted to get National Science Foundation . The agencies are also responsi- done. Federal eral support for university research has ble for auditing university contracts. The Department of made possible an extraordinarily broad oad array of valuable Defense (DoD) is the cognizant agency for Stanford, with its . advances in fields from microbiology to engineering, from Office of Naval | Research (ONR) negotiating cost rates and the particle physics to genetics. At Stanford, federal research Defense Contract Audit Agency (DCAA) conducting audits. support has played a critical role in stunning advances, Stanford's 1988-1989 operating expenses were about $355 including such non-invasive technologies as magnetic million. In that year, Stanford received $78 million in indirect-cost resonance imaging; the discovery of the first reliable cure reimbursement from the government . Some of the indirect-cost for Hodgkin's disease;... and a series of basic discover- pools included for reimbursement were economy-class air ies essential to modern genetic engineering." travel related to a specific research project; depreciation on the university's yacht Victoria; alcoholic beverages and entertain- Indirect Cost Recovery ment costs; advertising; organized fund-raising costs, costs of Specific governmental guidelines existed for determination of books and periodicals purchased for campus libraries; alumni costs eligible for indirect-cost recovery for research activities. activities; investment management, operation, renovation, and Office of Management and Budget (OMB) Circular A-21, titled depreciation of university-owned houses, and public relations. "Cost Principles for Educational Institutions," establishes: Stanford deducted a certain percentage (say, 20%) from the ... principles for determining the costs applicable to indirect-cost poolst to adjust for the amounts included in the cost research and development, training, and other spon- pools that are unallowable or unallocable to government con- sored work performed by colleges and universities under tracts. It then allocated the remaining amount in the indirect- grants, contracts, and other agreements with the federal government . The cost of a sponsored agreement is com- cost pool to government-sponsored research contracts on the basis of its agreement with the government. prised of the allowable direct costs incident to its perfor- QUESTIONS mance, plus the allocable portion of the allowable indi- 1. Why does the federal government engage in cost-plus rect costs of the institution. . Direct costs are those costs that can be identified contracting rather than seek competitive bids for spon sored research? specifically with cally with a particular sponsored project, an 2. During the audit, there was a review of the costs that fall under instructional activity, or any other institutional activity; or The induce that can be directly assigned to such activities relatively Circular A-21. As defined in this case, distinguish between: he ta a. Direct and indirect costs easily with a high degree of accuracy. Indirect costs are those that are incurred for common or joint objectives and b. Allocable and unallocable costs therefore cannot be identified readily and specifically 3. There are four possible combinations of the terms above with a particular sponsored project. with (for example, indirect, allocable costs). Use the table col- the sponsored work rather than the nature of the goods or umn layout below to to categorize the costs given in the next- services involved is the determining factor in distinguish- to-last paragraph in the case. ing direct from indirect costs of f a sponsored project At Allocable educational institutions, such [indirect) costs normally are Indirect Unallocable classified under the following indirect cost categories: depreciation and use allowances, general administration 4. Why does the federal government pay indirect costs of and general expenses, sponsored projects administration sponsored research? expenses, operations and maintenance expenses, library Case summary prepared from the entire case on Stanford expenses, departmental administration expenses, and University by Steven Huddart, copyright 1992 by the Board of Trustees of the Leland Stanford Junior University student administration and services. Donald Kennedy, in a statement to the Congressional A cost is allocable to a particular cost objective ... if the Subcommittee on Oversight and Investigations (March 13, 1991) goods or services involved are chargeable or assignable to Excerpts from Office of Management and Budget Circular A:21 such cost objective in accordance with relative benefits "Cost Principles for Educational Institutions" (March, 1979). project. Identification Example Direct Explanation or or ame CHAPTER 15 564