# Background

The allocation of facilities costs to direct and indirect functions is
the single most important element in the calculation of Facilities and
Administrative (F&A) rates at colleges and universities. Arguably, it is
also the most problematic, costly, and contentious aspect of determining
of F&A rates. The root of the problem lies with the regulations
governing the reimbursement of the costs of Federally sponsored research
projects for colleges and universities. OMB Circular A-21 prescribes two
types of allocation formulas for the assignment of facilities costs[^1]
space used jointly by more than one function. Facilities costs may be
allocated to instruction, research and other university functions based
on the Full Time Equivalent (FTE) employees or the salaries and wages of
those individual functions benefiting from the use of that space or
institution-wide FTEs or salaries and wages applicable to the major
functions. Since most university rooms are used for more than a single
function, an institution choosing the A-21 prescribed methodology would
use FTE or salaries and wage data to allocate the costs of most academic
rooms. Because these allocation formulas result in an inequitable
distribution of costs to research, most large institutions employ an
alternative to the A-21 method to allocate facilities costs to
university functions.

Using FTEs or salaries and wages to distribute facilities costs does not
take into account many of the factors that result in research facilities
being more costly than buildings used for instruction, administration or
other university functions. Research buildings are generally more costly
to build, maintain and renovate because of the special structural and
programmatic requirements of the space. Research conducted at most major
universities is cutting-edge and the laboratories must be specially
outfitted and periodically refinished or rehabilitated to meet the
changing needs of the research. Instructional facilities, on the other
hand, have much simpler requirements and the rooms remain relatively
unchanged from year to year. Institution-wide FTE or salary data do not
take into account the unique nature, and higher costs, of research
facilities relative to other types campus facilities.

Another major shortcoming of an FTE calculation is that does not
recognize the impact of hours of use when assigning facilities costs to
functions. Activities performed in research laboratories are generally
much more utility intensive than activities performed in other types of
rooms, especially classrooms and lecture halls. Moreover, research
experiments often continue around the clock, whether the room is
occupied or not. Equipment used for research and the infrastructure
supporting research, air handling systems and lighting for example,
often run non-stop. Conversely, the hours of use of classrooms and other
teaching areas are typically shorter than research laboratories. There
is a relatively small amount of equipment in classroom areas compared to
research labs and utility consumption is substantially reduced
after-hours.

Allocating research labs and teaching rooms strictly on the basis of FTE
counts or salaries and wages does not take into consideration many of
the factors (i.e. cost drivers) that influence utility consumption,
maintenance, and other types of facilities costs. Compiling accurate
FTEs counts or salaries and wage data on a room- by-room basis would be
problematic as many academic employees work n several rooms and
virtually all employees move freely within a building or department.
Institution-wide FTEs or salaries and wages would be easier to compile
but these aggregate data aren't accurate allocation statistics because
they have little relationship to the factors that influence facilities
costs. For these reasons, many institutions utilize methods other than
the A-21 "default" methodology to allocate facilities costs.

The most common alternative method is the room-by-room space survey, a
process by which one or more occupants, or "owners," of a room are
interviewed to determine what the functional utilization of the room has
been over a prior period of time, typically the previous twelve months.
For research laboratories, which are the primary focus of the
government's review of space surveys, the survey process is laborious,
costly and imprecise. While the results reflect a more accurate
representation of functional use than FTE counts or salaries and wages,
even this methodology is inherently difficult, if not impossible, to
[accurately]{.underline} summarize the activities that took place in a
room in the past year. The survey process relies heavily on human memory
and takes into account various inferential data, such as individuals
with access to a room, salaries and wages, sources of funding, (i.e.
grants, contracts, gifts), to approximate room usage. Furthermore, the
estimation process has been made particularly difficult for research
laboratories because of the government negotiators' expectation that
universities should account for all activities that take place in a
room, even if this activity does not have a material impact on
facilities costs. The space survey process, therefore, ignores the
concept of *incidental* use of rooms. That is, there may be secondary
activities conducted in a room concurrent with the room's primary
activity, but this secondary, or incidental, use does not incur
additional facilities costs. For example, a graduate research assistant
may be working in a research laboratory monitoring a research
experiment, a process that often entails ample downtown when the student
is free to perform other activities. If during the experiment monitoring
the GRA has an opportunity to work on his/her dissertation, the current
expectation is that the space survey should reflect this secondary,
incidental, activity. In reality, the dissertation work did not incur
any facilities costs over and above those generated by the primary
activity in the room, i.e. research experimentation. Allocating
facilities costs to the incidental activity is unrealistic and adds an
unwarranted degree of complexity to the survey process.

Applying this type of detailed analysis by the number of different
students and staff working in a research laboratory and the multiple
experiments, projects (and dissertations) that occur in the typical lab
illustrates the complexity of estimating room use. Performing this
detailed analysis for hundreds of rooms and thousands of individuals on
a major campus is a very costly and burdensome endeavor and the quality
of the information collected should be considered as questionable at
best.

Section J.8. of A-21 includes a statement that "it is recognized that in
an academic setting, teaching, research, service, and administration are
often inextricably intermingled. A precise assessment of factors that
contribute to costs is not always feasible, nor is it expected."
Although this statement is made in reference to the distribution of
salaries and wages, the concept holds true for the spaces where
instruction and research are conducted as well as the people directly
engaged in these activities. Using interviews to try and separate the
proportion of a room used for instruction versus research is imprecise
and can be a futile exercise. In reality, it is often impractical to
separate teaching and research because these functions often occur
simultaneously and are performed by the same people within the same
spaces.

The occurrence of instructional activities in research laboratories is a
key issue for Federal auditors and negotiators. These officials argue
that some portion of a research lab is invariably used for non-research
purposes, for instance the example cited above of the graduate student
working on a dissertation while monitoring a research experiment.
Auditors and negotiators scrutinize the space survey closely to find
research laboratories that are classified as 100% research. Invariably,
negotiators require these rooms to be "discounted" by the university so
that some attribution is given to the instructional activities that
occur in the laboratory. There is no similar scrutiny applied to
classrooms, lecture halls, or teaching laboratories to determine if any
research activities may be occurring in these rooms, the expectation is
that these rooms are all used 100% for Instruction. We strive for
precision in the allocation of research laboratory costs yet we use a
default for the classification of Instruction rooms. In addition to
being burdensome and costly, the survey process has a bias towards
instruction.

# Problem Statement

As an alternative to the A-21 prescribed methodology, the space survey
is superior because it results in a more reasonable approximation of
space usage thereby allowing universities to obtain a more equitable
recovery of facilities costs. However, the space survey methodology is
burdensome, costly, imprecise and uneven in its enforcement. It is not
unusual for a major research institution to invest hundreds of thousands
of dollars to update the survey and to involve scores of people on the
campus in the process. With the advent of the administrative cap, the
space survey became the main cost driver in the F&A calculation and the
major focus of Federal officials involved in F&A rate negotiations. Yet
the magnitude and complexity of the survey process and the inherent
difficulties is trying to accurately separate instruction and research
in a campus environment where these "products" occur jointly make the
survey results highly subjective, judgmental, and prone to error.

Finding a simple and equitable method to allocate space costs could
result in substantial savings for universities and the government and
this could also

significantly simplify the calculation and negotiation of F&A rates. The
key is finding a formula that will provide an equitable reimbursement
for universities without increasing F&A rates. As the administrative
burden on universities continues to grow, with no concomitant increase
in administrative reimbursements, the search for less burdensome ways to
comply with Federal regulations becomes imperative. Developing and
implementing an equitable, reliable, and simple process to replace space
surveys has the potential to yield significant benefits both for
universities and the federal government.

[A Proposal for the Allocation of Space Costs According to Primary
Use]{.underline}

The underlying assumption behind the concept of Primary Use is that in
an academic setting many categories of rooms serve a single principle
purpose and this purpose should be the sole cost driver used to allocate
the room's costs. Furthermore, although other activities may
occasionally occur in a room, these uses are incidental to the primary
purpose and the costs of the incidental activities are immaterial.

Rooms in academic departments and centers that are used for the conduct
of the institution's direct functions often serve only one primary
purpose. Assigning the cost of the room to the primary function is
simple, logical, and reasonable. Academic rooms that don't serve a
primary function, for example faculty offices, conference rooms, common
areas, etc. should be classified as *joint use* space and allocated to
the department's major functions based on aggregate salaries and wages
for the fiscal year corresponding to the F&A base year proposal. Spaces
used primarily for indirect cost categories such as G&A, SPA, Plant O&M
and Library would be assigned 100% to these functions.

Under this proposal, the assignment of room use to primary function
would be based on two attributes that are common to the space inventory
classification system for most institutions. These two attributes,
generally referred to as functional category (or function code) and room
use (or room type) code, are widely used and clearly defined in industry
literature. A taxonomy for the functional categories of space and room
use codes is published by the U.S. Department of Education in the
"Postsecondary Education Facilities Inventory and Classification Manual
(PEFICM)." Tables summarizing these two types of classifications are
attached to this document.

The following illustrates the concept of Primary Use based on PEFICM
classifications:

For rooms used primarily for direct cost functions, these rooms would be
assigned by comparing the institution's functional category to the room
use

classification. For example, rooms with Use Code 100 (Classroom
Facilities) would be assigned entirely to Instruction (Functional
Category 1). Laboratory facilities (Use Code 200) would be classified to
either Instruction or Research as follows: a Class Laboratory or Open
Laboratory (Codes 210-225) would be assigned to Instruction and
Research/Non-Class Laboratories (Codes 250-255) would be assigned to
Research. Office Facilities (Room Use Code 300) would normally be
considered joint use space and allocated to functional category based on
departmental salaries and wages. However, specific offices may be used
primarily for one purpose, such as the office of a Teaching Assistant or
a Research Scientist, and these offices may be assigned entirely to one
function.

Under the Primary Use methodology, rooms are either attributable 100% to
a direct function or they are considered as joint use and allocated
based on salaries and wages. If it isn't clear that a room has a primary
use, the assignment of room defaults to the joint use allocation.

The benefits of Primary Use as a methodology for the allocation of
facilities costs are many. It is simple to administer, relatively
inexpensive, and much less subjective than a space survey/interview
process. It relies on classification standards published by the Federal
government that are recognizable to most universities. Similar to the
requirements associated with the effort certification process, the
method takes into account the primary drivers of facilities costs and
ignores incidental use of space for uses that are immaterial in cost and
add an unnecessary degree of complexity to the space allocation process.
It reduces the burden on PIs and Departmental administrators who bear
much of the responsibility for the space survey process. It would be
relatively simple to verify and audit. It will make the F&A calculation
process much less complicated and it will reduce a significant issue of
contention in the audit and negotiation of rates.

Implementation of this method would also serve to minimize, if not
eliminate, the disparate interpretations among the various federal
officials on how universities should conduct a space utilization survey
and what data should be collected. Adoption of a simplified, standard
methodology such as Primary Use would also make the allocation of
facilities costs more consistent from institution to institution which
would help to reduce variability in F&A rates. Since there is no
prescribed approach to conducting a space utilization survey, there is
inconsistency in the way universities conduct the survey and the ways in
which various Federal officials evaluate the survey results. has been
noted, this is an onerous process and absent adequate formal guidelines
by either OMB or DHHS & ONR, the processes used by institutions -are
inconsistent, very subjective and, at times, very contentious. A
standardized method that is easy to administer and easy to verify would
achieve a much greater degree of consistency in the F&A process and
reduce variability in F&A rates.

The disadvantages of this method are the apparent lack of precision in
the allocation of the costs of research laboratories and the belief that
it will increase costs for the government. Since research laboratories
are normally not assigned 100% to research, it is likely that Primary
Use will be perceived as a less precise method than a space survey.
However, this is the same principle by which Federal auditors and
negotiators evaluate the use of Classroom and Teaching space; for these
rooms it is assumed that they are used 100% for Instruction. Using this
same logic to allocate the costs of research laboratories is reasonable.
Furthermore, taking into consideration the complexities of the space
survey process, the seemingly precise way in which institutions parse
research laboratory usage between instruction and research is merely an
illusion of precision. Under closer examination, it is clear that this
parsing is arbitrary and subjective and the survey process is imprecise.
Comparable results could be achieved with a less onerous and less costly
process. Allocating facilities costs using a Primary Use methodology has
the potential to provide comparable results at a fraction of the cost of
space surveys and it will produce a more equitable result than the A-21
prescribed methodology. Although it would increase the allocation of
facilities cost to research by classifying all research laboratories as
100% research, this increase would be offset by the allocation of costs
for joint use rooms based on a salaries and wages formula. However,
understanding the true cost to the government will require institutional
modeling to determine the impact that a Primary Use methodology would
have on F&A rates. An evaluation of the cost impact for a representative
sample of research institutions should be undertaken as soon as possible
in order to determine the cost to government research projects. The
results of this evaluation will determine the viability of this
alternative approach to the allocation of facilities costs.

# 

# Summary 

To summarize, in the spirit of the FDP, a cooperative effort is being
sought between colleges and universities and the federal government, in
particular, the Office of Management and Budget, the Department of
Health and Human Services, Division of Cost Allocation, and the Office
of Naval Research, to identify and implement a methodology that
simplifies the allocation of facilities costs. The ultimate solution
should benefit all parties and not disadvantage any of the stakeholders.
Active and positive participation by all stakeholders in this process is
critical if a successful outcome is to be realized. What has been
detailed in this paper is one of potentially several viable options in
the anticipation that it will serve to stimulate thoughts and initiate a
dialogue toward a more practical process. 

It is critical, as we move through this process, that we all keep in
mind the underlying concept of consistency. That is, the functional
classification of space and assignment of facilities costs must be
consistent with the functional classification of the source(s) of funds
supporting the activities. This does not necessarily imply that there
exists a direct correlation between organized research space (facilities
costs) and organized research dollars (or FTE), however, we do need to
identify a methodology and/or proxy that recognizes this concept and
satisfactorily assigns these costs through a simpler and less
contentious method. We must be creative, unprejudiced by existing
methodologies, and collegial in our approach if we are to realize to a
successful solution.

[^1]: Facilities costs including depreciation on buildings and
    equipment, interest on external debt, plant operations and
    maintenance, and library costs.