CRS Report: History of Indirect Cost Policies

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Publication date: 
22 November 1994

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.