Source: https://ucop.edu/research-policy-analysis-coordination/resources-tools/contract-and-grant-manual/chapter8/chapter-8-200.html
Timestamp: 2019-04-19 06:45:30+00:00

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Facilities and administrative (F&A) costs are the indirect costs of conducting research, instruction, or other sponsored activities that cannot be easily attributed to a specific sponsored project. When seeking the reimbursement of indirect costs on a sponsored project, the University is recovering for costs already spent to support these activities.
Additionally, the Regental policy on full recovery of indirect costs is stated in Regents Standing Order 100.4(m), Duties of the President of the University. These policies establish the principle of full cost recovery for work or services performed with extramural funds.
Indirect (F&A) costs means those costs incurred for a common or joint purpose benefiting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved.
Full cost recovery is necessary to support the University’s physical and administrative capacity to perform research. When indirect costs are not fully recovered, maintaining the University’s research capabilities and infrastructure is compromised. All sponsored agreements should share the burden of the cost of research.
To restate, from APM-020, “a charge [to the extramural sponsor] shall be made sufficient to cover all expenses, both direct and indirect” (emphasis added). As such, Principal Investigators and Administrators have a duty to ensure that sponsored projects are performed on a full cost recovery basis. Principal Investigators and Administrators are obligated to seek full recovery of indirect costs from all sponsors when applying for an extramural award.
The President is authorized to negotiate and approve all indirect cost rates, per Regents’ Standing Order 100.4(m), Duties of the President of the University. The Standing Order calls for the President to negotiate toward full recovery of indirect costs. This authority includes the power to approve exceptions to the approved indirect costs rates determined under the provisions found in the Uniform Guidance, 2 CFR § 200. University practice accepts the use of indirect cost rates negotiated with the University’s cognizant federal audit agency as meeting the requirement to obtain full recovery.
The above Presidential authority has been delegated to the Executive Vice President–Chief Financial Officer (DA-2592). Some campuses develop their indirect cost rate proposals and negotiate the rates prior to submitting either the proposal or the final agreement to the EVP-CFO for signature.
Only the authority to approve exceptions to negotiated indirect cost rates has been further delegated to the Vice President–Research and Graduate Studies and the Chancellors. See 8-510 for additional discussion of further delegated authority to approve exceptions to negotiated indirect cost rates.
Only the Regents’ Committee on Finance, has approval authority for accepting the fixed payment (lump sum payment) the University receives in lieu of indirect costs under the Department of Energy (DOE) contract for the operation of the Lawrence Berkeley National Laboratory.
Consider and approve the setting or amending of fixed payment in lieu of indirect costs applicable to contracts for management and operation of the major United States Department of Energy Laboratories.
Pursuant to this Bylaw, the fixed amount negotiated with DOE for the University’s management and operation of DOE Laboratories must be submitted to The Regents’ Committee on Finance for review and approval.
The successful negotiation of indirect cost rates involves the calculation of the actual costs of all University activities. Institutions of higher education must support indirect cost rate proposals to the federal government with cost accounting data per 2 CFR § 200.
Each campus has a federally-negotiated rate agreement in place for the purpose of recovering indirect costs primarily from federal agencies. Federal agencies are required per 2 CFR § 200 to apply these agreements to sponsored projects using federal funds.
These federally-negotiated rate agreements, which are usually effective for a period of one to five years, contain indirect cost rates to be used for organized research, instruction, other sponsored activities, and other institutional activities as well as any escalations of these rates (Federally-Negotiated Rates). Though its federally-negotiated rates yield less recovery than the actual full-cost recovery, the University considers our federally-negotiated rate a proxy for full cost recovery.
All federal awarding agencies are required to use the rates outlined in a federally-negotiated rate agreement. However, in special circumstances, they “may use a rate different from the negotiated rate for a class of Federal awards or a single Federal award only when required by Federal statute or regulation, or when approved by a Federal awarding agency head or delegate,” per 2 CFR § 200.414.
To put a federal rate agreement in place, the University must negotiate with its cognizant agency. A “cognizant agency for indirect costs” is “the Federal agency responsible for reviewing, negotiating, and approving cost allocation plans or indirect cost proposals developed under this part on behalf of all Federal agencies. The cognizant agency for indirect cost is not necessarily the same as the cognizant agency for audit.” 2 CFR § 200, Appendix III.C.11.
For most institutions of higher education, cost negotiation cognizance is generally assigned to either the Department of Health and Human Services (DHHS) or the Department of Defense Office of Naval Research (ONR), based on which agency provides the most funding to the educational institution. DHHS is the University’s cognizant agency.
In coordination with the Office of the President, F&A rates are prepared and negotiated by a campus, or if requested by a particular campus, UCOP Costing Policy and Analysis can prepare the proposal and negotiate indirect cost rates with DHHS on behalf of the campus. After submission of the indirect cost proposal and negotiation with DHHS for a particular campus, DHHS offers a Rate Agreement signed by an authorized DHHS representative. The Rate Agreement must then be approved and signed by the Executive Vice President - Chief Financial Officer. The fully executed agreement is returned to the cognizant agency and a copy of this Rate Agreement is returned to the campus.
UCOP has established certain UC Rates, indirect costs rates for certain classes of sponsored activities separate from federally-negotiated rates.
UC Rates were created in response to Recommendation 5 of the 2012 Indirect Cost Waiver Policies and Practices Workgroup Recommendations Report: Centrally Publish A Set Of Systemwide Minimum Rates For Specific Types Of Projects Or Sponsors Where Expectations For Cost Recovery May Differ From Standard Practices (e.g. Clinical Trials).
The UC Rates will be posted on the RPAC website.
The federal government or the campus may also request additional rates for distinctive programs with special costing environments. For example, a special rate can be developed for a program located in a building paid for with federal funds or for an organized research unit which is entirely supported with federal funds. Thus, institutions will normally have separate rates for instruction, organized research, and other sponsored activities as well as for any special program for which a unique rate is requested by the federal government. The federally-negotiated rate agreements do not provide a rate for other institutional activities.
Under 2 CFR § 200, instruction activities can be for credit or non-credit courses. Research training may be included in either organized research or instruction as long as this is done on a consistent basis by the campus.
Instructional activities can include instructional or training workshops for participants not enrolled as University students. If awards for such workshops are assigned to the instructional function, then the instructional indirect cost rate should apply to them. If campuses treat such workshops as public service, the award should be assigned to an accounting function other than instruction or research, e.g., public service, and use the "other sponsored activities" indirect cost rate.
(1) Sponsored research means all research and development activities that are sponsored by Federal and non-Federal agencies and organizations. This term includes activities involving the training of individuals in research techniques (commonly called research training) where such activities utilize the same facilities as other research and development activities and where such activities are not included in the instruction function.
[A]ll activities of an institution except for instruction, departmental research, organized research, and other sponsored activities, as defined in this section; indirect (F&A) cost activities identified in [Appendix III] and assignment of indirect (F&A) costs; and specialized services facilities described in § 200.468 Specialized service facilities of this Part.
Indirect costs are incurred for common or joint objectives which generally benefit sponsored projects. They cannot be specifically identified with any one particular sponsored project.
The financial data from a given fiscal year (called the base year) form the basis for an indirect cost rate proposal submitted to DHHS, which will lead to negotiated rates applicable to a stated number of future fiscal years.
Once each cost category is defined and expenses related to the activity pooled into a cost center, the costs must be allocated to all direct activities of the university/campus. The amounts in each category of indirect costs incurred by the University for both sponsored and non-sponsored activities are allocated to the various functions of research, instruction, other sponsored activities, and other institutional activities. This allocation process is carried out in accordance with the general guidelines found in Appendix III to 2 CFR § 200, Section C.2.
Depreciation expenses for buildings, capital improvements to land and buildings, and equipment are calculated on the basis of acquisition costs of the assets involved and their functional use.
Interest on debt associated with buildings, equipment, and capital improvements is based on information provided by the Corporate Accounting Office.
Expenses for operation and maintenance of the physical plant are taken from the Financial System.
Expenses for library use (including book purchases) are taken from the Financial System, and should only include expenses relating to the operation of campus-wide and branch libraries. Typically, departmental libraries are not included in the library cost pool.
Expenses for general administration are extracted from the institutional support expenditures shown in the Financial System.
Departmental administration cost pools include administrative expenses incurred by Dean’s Offices and academic departmental administration. Under Appendix III to 2 CFR § 200B.6.(2), faculty administrative effort is now a fixed component of departmental administration elements.
Expenses for sponsored projects administration consist of the expenses of separate departments or organizations whose sole function is the administration of sponsored projects. These are typically units that handle pre- and post-award administration including compliance committee expenses such as conflict of interest, and human and animal subject offices. With limited exceptions, sponsored project administration within a department is normally viewed as departmental administration.
Expenses data for student administration and services are taken from the Corporate Financial System.
The University seeks full recovery by budgeting for all appropriate direct costs and indirect costs. As described above, the federally-negotiated rates (see 8-210) and the UC Rates (see 8-220) are indirect cost rates that approximate full recovery of indirect costs.
Indirect costs are calculated by multiplying the appropriate indirect cost rate by the indirect cost base. The indirect cost base is the direct research costs used to determine the reimbursed indirect costs for a funded project.
Principal Investigators and campus administrators are responsible for submitting proposals that provide for full indirect cost recovery unless an exception is granted by a University official with the authority to do so. Every effort should be made to recover all costs of extramurally-funded projects by applying an appropriate federally-negotiated rate or a UC Rate to an appropriate base (see Section 8-370 for more information on bases).
If a campus elects to use an indirect cost rate or base other than either a federally-negotiated rate or a UC Rate, then an indirect cost exception is needed. See 8-500.
For federal funding, as discussed in 8-210, campuses must apply their respective federally-negotiated rate to proposals and awards. With other awarding entities, not just the federal government, the University uses the same rate because the federally-negotiated rate is a proxy for full recovery.
For proposals and awards with periods beyond what is stipulated in the federally-negotiated rate agreement, campuses may use the last negotiated rate until a new federally-negotiated rate agreement is finalized. See 8-410 for further information on recovery of indirect costs when new Rate Agreements result in rate changes.
When determining appropriate indirect cost recovery for these classes of sponsored activity, the UC Rate, not the federally-negotiated rate should be applied. Each UC Rate will have a clearly defined base. The University considers the UC Rate as a proxy for full cost recovery.
Campuses may also have other special rates negotiated, such as for the California National Primate Research Center, the Space Science Lab, and Intergovernmental Personnel Assignment Agreements.
Additionally, the federally-negotiated indirect rates are applicable to sales and service agreements with non-University entities, including specialized service facility or recharge unit services provided to non-University entities. These fee schedules are based on internal recharges approved by the campus recharge committee as well as the applicable federally-negotiated rate. See BUS A-59, Costing and Working Capital for Auxiliary and Service Enterprises.
Sales and services of educational activities are primarily sales of products or services to multiple individuals or organizations outside the University. When sales are made to non-University customers, the University must not assume any obligation beyond delivery of a standardized University product or service at a pre-established, per unit, uniform price, such as fee schedules approved for use by hospitals and clinics, University Extension catalog courses, and the like. Indirect costs are included in the calculation of the fee or price for the product. A deviation from the pre-established uniform price or fee schedule cannot be classified as a sales or services and as such must be treated as research, instruction, or other sponsored activity.
Campus Contracts and Grants Officers are responsible for determining which of their approved campus indirect cost rates is applicable to each sponsored project. This determination is dependent on a clear understanding of the distinctions between “research,” “instruction,” and “other sponsored activities,” and other special rates. See 8-230.
Sponsors generally require one indirect cost rate for the entire award. In some instances where more than one type of activity is involved in a single project, the activity which comprises the largest portion of the project should determine the appropriate indirect cost rate for the entire project.
In unusual situations, the nature of the project may dictate the use of multiple rates. Such use of multiple rates would need to be included in the proposal budget and the funding agency would need to approve it at the time of award.
In general, the on-campus rate will be applied to sponsored projects. If a sponsored project is conducted in leased facilities not owned by the University where the space rental costs are directly charged to the sponsor, in whole or in part, or in facilities owned or leased by a third party, the project is considered off-campus and the off-campus rate would apply. However, if a sponsored project is conducted in a facility leased by the University for which rental costs are paid by the campus and not charged to the sponsored project, the on-campus rate is applicable.
Projects conducted entirely on-campus or entirely off-campus will be applied the on-campus or off-campus rate, respectively.
If the project involves work at both on-campus and off-campus sites, either the on-campus or off-campus rate generally should be applied, consistent with where the majority of the work is to be performed. Salary cost is generally accepted as a measure of work performed in terms of the total project.
The use of both on- and off-campus rates for a given project may be justified if both rates can be clearly identified with a significant portion of salaries and wages of the project. For purposes of this provision, significant is defined as approximately 25% or more of total costs, with a project’s total salary and wage costs exceeding $250,000.
Multiple Campus Awards (MCAs) are awards where one UC campus performs a portion of the programmatic work of a sponsored project awarded to another UC campus. The UC campus that receives the original award is the “prime campus” while a UC campus that performs the portion of the work is considered a “participating UC campus.” MCAs are not considered subagreements, as defined in 2 CFR § 200.93, because the ten UC campuses and ANR constitute one legal entity, “The Regents of the University of California.” Therefore, it is not appropriate for the campus receiving the prime award to recover IDC on the first $25,000 of an MCA as it is an internal and not a third party transaction. See 8-396 for information on Subawards.
Each participating UC campus, however, is entitled to recover indirect costs based upon the indirect cost rate applicable to the prime award for the direct charges done on that campus, based on that campus’s federal rate agreement. A campus may not limit the opportunity of another campus to recover indirect costs on Multiple Campus Awards (MCAs). For MCAs, campuses should coordinate at time of proposal submission to determine how indirect cost recovery will be implemented.
For further information on externally-funded MCAs and multiple UC campus projects, see 10-240 through 10-248.
Awards to campuses from UC- managed programs, such as the grant programs administered by the UC Office of the President Research Grants Program Office (RGPO), that do not involve an extramural prime contract or grant, should use the rates stipulated under the policies of those programs.
For further information on internally-funded transactions, see Chapter 10 at 10-250 and 10-253.
For work performed by Lawrence Berkeley National Laboratory (LBNL) personnel at the Laboratory under a subaward from a campus, the applicable indirect cost rate is the rate negotiated for that Laboratory with DOE. Campuses include the first $25,000 of a subaward to the Laboratory in the campus’ MTDC base (see Section 8-380 for a discussion of MTDC).
For work performed by a campus for a University-managed DOE Laboratory as a subawardee under an Intra-University Transaction agreement (IUT), the applicable indirect cost rates are the federally negotiated rates for that campus.
Awards to LBNL from UC- managed programs, such as the grant programs administered by the RGPO that do not involve an extramural prime contract or grant, should use the rates stipulated under the policies of those programs.
Additional information on campus-Laboratory agreements may be found in Chapter 10 at 10-251 and 10-252.
For sponsored work performed by campus University Extension (UNEX) personnel, the applicable indirect cost rate is determined by the base in which UNEX costs are included in the campus’ most recent indirect cost rate proposal. UNEX activities which require the application of the indirect rate are those customized educational services, paid for under sponsored agreements for specific sponsors, and not standard published catalogue courses. For published catalog courses, indirect costs included as part of the standard pricing should take into account the indirect costs identified in the campus rate agreement.
Calculation of indirect costs usually entails the identification of a “base”, or the direct costs to which an indirect cost rate can be applied. Examples of two commonly used bases are Total Direct Cost and Modified Total Direct Cost.
Some sponsors provide an allocation of indirect costs by stating that a certain percentage of the Total Costs of an award may be used for indirect costs.
For example, if a sponsor limits an award to $100,000 and states that ten percent of the award may be used for indirect costs, then $90,000 would be allocated for direct costs and $10,000 would be allocated for indirect costs. Ten percent of the total costs may be used for indirect cost recovery.
The resulting total cost of the project equals $150,000 ($100,000 TDC + $50,000 IDC).
A Modified Total Direct Cost (MTDC) is calculated by taking all direct costs and excluding certain costs. The excluded costs of the MTDC may vary depending on the sponsor.
[A]ll direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and subawards and subcontracts up to the first $25,000 of each subaward or subcontract (regardless of the period of performance of the subawards and subcontracts under the award). MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs, portion of genomic array (see 8-514) and the portion of each subaward and subcontract in excess of $25,000.
Additionally, “[o]ther items may only be excluded when necessary to avoid a serious inequity of the distribution of indirect costs, and with the approval of the cognizant agency for indirect costs.” 2 CFR § 200.68.
When utilizing the federally-negotiated rates, the campus must follow the MTDC definition described in the rate agreement.
Any questions about interpretation of the MTDC base can be directed to Costing Policy & Analysis. Clarifications are issued via an RPAC Guidance Memo. As a general rule, indirect cost rates are applied to those modified total direct cost items which have been used as a basis for a campus’ indirect cost rate proposal and are consistent with the negotiated indirect cost rate agreement.
The resulting total cost of the project equals $145,000 ($100,000 TDC + $45,000 IDC).
The following are the types of costs excluded from the direct costs of a sponsored project to calculate the MTDC.
Costs for equipment leases or rental of equipment are not excluded from the MTDC base unless the equipment lease includes an option to purchase. Equipment leases with option to purchase are considered capital expenditures and are excluded from the MTDC base.
For fabricated equipment, all materials, supplies, and services from outside vendors or authorized internal recharge activities used in the fabrication process are excluded from the MTDC base if title is retained by the University and the item has a life expectancy of more than one year. Note that department labor, travel, or other operating expenses associated with the fabrication, such as salaries of Principal Investigators, graduate student researchers, or other comparable personnel who participate in the fabrication process, are not included in the acquisition cost of the item and should be included in the MTDC base. For more information on the treatment of fabricated equipment, see Accounting Manual Chapter P-415-32 and Contract and Grant Manual sections 2-526, 7-205, and 15-240.
[T]he costs of routine and ancillary services provided by hospitals to individuals participating in research programs. The costs of these services normally are assigned to specific research projects through the development and application of research patient care rates or amounts […]. Research patient care costs do not include: (1) the otherwise allowable items of personal expense reimbursement, such as patient travel or subsistence, consulting physician fees, or any other direct payments related to all classes of individuals, including inpatients, outpatients, subjects, volunteers, and donors, (2) costs of ancillary tests performed in facilities outside the hospital on a fee-for-service basis (e.g., in an independent, privately owned laboratory) or laboratory tests performed at a medical school/university not associated with a hospital routine or ancillary service, (3) recruitment or retention fees, or (4) the data management or statistical analysis of clinical research results.
Medical services provided by laboratories of academic departments or organized research units are not included in this definition. Patient care costs are allowable charges to the research budget and are excluded from the MTDC base for purposes of determining indirect costs applicable to the project. These patient care costs differ from expenses for patient care that would have been incurred regardless of the research study; costs not affected by the research study are not allowable charges to the research budget.
Patient care costs should be based on a currently effective DHHS-negotiated patient care rate agreement or equivalent. However, when determining what items are excluded as patient care costs from the MTDC base in a proposal budget, patient care costs do not include: consulting physician fees; personal expense reimbursement (such as human subject fees and patient travel) or any other direct payments to patients or subjects; and costs of ancillary tests performed in facilities outside the hospital on a fee-for-service basis (e.g., in an independent, privately owned laboratory) or in an affiliated medical school/university based on an organizational fee schedule. These costs are not considered patient care costs for indirect cost purposes and are included in the MTDC base for the purpose of calculating the indirect costs applicable to the budget.
A project which does not have an Institutional Review Board (IRB) - approved human subjects protocol may not incur patient care costs. For further details about the treatment of patient care costs in a proposal budget, see Chapter 7-211 Budget Patient Care and Chapter 18 Protection of Research Subjects.
Tuition remission includes direct-costed expenses as allowed by University Policy for student tuition and fees.
Rental costs include any direct-costed rental of non-University owned space and the cost of maintenance, if it is included in the rental agreement. This category does not include other kinds of rental or lease costs, such as hotel rooms, equipment, or automobiles. These other kinds of costs are direct costs subject to indirect costs.
Financial aid, such as scholarships and fellowships, paid to University students or postdoctoral scholars as stipends or dependent allowances is, for purposes of indirect cost base calculation, exempt from the indirect cost rate calculation base. However, this exemption does not include any awards called “fellowships,” which disburse salaries and wages or honoraria to university employees. Salaries, wages, and honoraria are included in the calculation of the indirect cost base for an award.
When an award includes the transfer of a portion of the substantive work of a sponsored project to a third party, such work is usually obtained by the use of a subaward. For federal awards, 2 CFR § 200 and the federally-negotiated rate agreements permit the application of the indirect cost rate to the first $25,000 of each subaward by including this amount in the MTDC base. The portion of each subaward in excess of $25,000 is excluded from the MTDC base. This limit applies to the competitive period of the prime award.
Purchases of standard commercial goods or services such as routine testing, administrative support, or consultant agreements are not considered subawards for this purpose. They are not subject to the $25,000 limit for application of indirect cost.
For non-federal awards that are subject to an indirect cost rate exception, the indirect cost base might not mirror the federal model as described above but instead may be defined by the sponsor.
The NIH policy on indirect costs pertaining to Genomic Arrays (NOT-OD-10-097), when total purchases for Genomic Arrays will exceed $50,000 per year in any year of the project, stipulates that the indirect cost rate reimbursement will be applied to a limited Genomic Arrays cost of $25,000 in addition to the $50,000 threshold for each respective year of the award.
Example I: Genomic Arrays is budgeted at $50,000 for each year of the project: Genomic Arrays costs would be treated as supplies and reimbursed in accordance to our customary procedures for supplies.
Year two and three–applied to $75,000 each year: The first $50,000 will be awarded as supplies and receive full [indirect cost]. The remaining balance ($100,000) will be treated as consortium/subcontract costs where the first $25,000 will also receive full [indirect cost]. Any remaining portion (in this example $75,000) of each year respectively will be excluded from the [indirect cost] base calculation […].
Contracts and Grants Offices are responsible for ensuring the use of the appropriate indirect cost rate in sponsored projects at the time of proposal and when an award is made. Unless an indirect cost exception has been approved or the Verified Sponsor Policy (VSP) (see 8-530.4 for more information on VSP) has been applied, the appropriate indirect cost rate for an award is the federally-negotiated rate or a UC Rate, as applicable. The campus Extramural Funds Office should not set up an account for an award at less than the applicable full indirect cost rate without an approved exception (see 8-500).
Generally speaking, the indirect cost rates used for any given project should not change for the life of the award. Per 2 CFR § 200, Appendix III.C.7 , the federally-negotiated rate agreement in effect at the time the award is made, remains in effect for the funded period of that award. Typically the same applies to non-federal awards.
However, there are times that a new federally-negotiated rate agreement is executed between when a proposal is submitted and when the award is issued. If in the new agreement the indirect cost rates increase, then additional funds to cover the increases should be requested from the sponsor as allowed by the sponsor’s policy. Generally, uncommitted or unused direct cost funds will be used to cover indirect cost deficits at the end of the funded budget period, if permitted by the terms of the award.
If in the new agreement the indirect cost rate decreases and results in an anticipated indirect cost surplus at the end of a project, available funds may be transferred to direct cost categories, if permitted by the terms of the award.
When an award is transferred to a UC campus (regardless of whether the award is coming from an outside institution or another UC campus) and the awarded indirect cost rate is less than the appropriate campus indirect cost rate, the campus should request additional funds from the sponsor to cover the indirect cost recovery deficit. If the sponsor is unable to provide additional indirect cost recovery, then the campus should request an indirect cost rate exception. The National Science Foundation's cost sharing policy prohibits a campus from reducing indirect cost rate below its federally-negotiated rate; therefore, indirect cost exceptions are not allowed for transferred NSF awards. For any renewals of that award or continuations for which a new budget is submitted, the current approved rate(s) shall apply.
When a project located off-campus is awarded an off-campus indirect cost rate and moves on-campus during the period of performance (or vice versa), the campus should rebudget any funds budgeted for direct cost of leased space as indirect costs. If the leased space rebudgeting is not sufficient to cover the full indirect cost recovery, the campus may need to request additional funds from the sponsor. If the sponsor does not award additional funds, the campus should further reallocate direct costs to achieve full indirect cost recovery.
As stated in 8-320, every effort should be made to recover all costs of extramurally-funded projects by applying an appropriate federally-negotiated rate or a UC Rate to an appropriate base. If a campus elects to use an indirect cost rate other than either of these, then an indirect cost exception is needed.
An indirect cost exception is the official authorization to accept indirect cost recovery other than what would be recovered under the appropriate federally-negotiated rate agreement or UC Rate for a given award. Each approved exception may reduce necessary financial support for critical University administrative functions and campus infrastructure.
Any reduction in indirect cost recovery must balance the University’s interests in performing the work of an extramural award and the resources the University or the campus must use to cover the lost revenue.
The authority to approve indirect cost exceptions comes from the President to the Chief Financial Officer, who has delegated to the Chancellors, to the Vice President – Agriculture and Natural Resources, and to the Vice President–Research and Graduate Studies the authority to approve exceptions to certain indirect cost rates. See 8-150. Campuses and UCOP may redelegate this authority based on location needs.
At UCOP, the Vice President–Research and Graduate Studies has redelegated the authority to approve indirect cost rate exceptions to the Research Policy Analysis and Coordination unit (RPAC). RPAC is responsible for formulating University policy regarding indirect cost rate exceptions, developing the administrative procedures for submitting and reviewing exception requests, and reviewing and coordinating requests for indirect cost rate exceptions. On behalf of the UC system, RPAC may contact sponsors directly to clarify their policies on paying indirect costs.
Only those administrators who have been delegated authority to approve an indirect cost exception may authorize less-than-full indirect cost recovery for a proposal or an award. Principal Investigators are not delegated this authority. They are not authorized to negotiate with or to accept reduced indirect cost rates from any sponsor.
The reduction of indirect cost recovery, whether imposed by a sponsor or volunteered by the University, may be a form of cost sharing if the project is not recovering its full cost.
Per 2 CFR § 200.306, voluntary committed cost sharing (e.g. reduction of indirect cost recovery) is not expected in federal funding. Further, the National Science Foundation (NSF) has stated that the voluntary reduction of indirect cost recovery is a form of cost sharing; therefore, NSF will not accept unauthorized indirect cost reductions.
Each indirect cost exception must be recorded in the Research Enterprise Management System (REMS). An exception request should be approved before a proposal is submitted. In all cases, an exception request must be approved before an award may be accepted. An exception cannot be approved retroactively after the completion of the period of performance of the underlying award.
Campuses may appeal any exception disapproval to the Vice President–Research and Graduate Studies.
University policy requires full recovery of costs for extramurally funded projects. Under exceptional circumstances, a project may recover costs other than the appropriate federally-negotiated rate or the appropriate UC Rate. Indirect cost exceptions are approved on a case-by-case basis for a specific project and are valid only at the campus of approval.
Per delegations of authority, UCOP continues to approve indirect cost exceptions for (1) all federally funded projects and (2) most State of California-funded projects. Campuses have the delegated authority to approve indirect cost exceptions for all other circumstances, but have the option to route any indirect cost exception to UCOP for review and approval consideration.
In cases where a project has a multi-campus award (MCA) to another UC campus, the participating campus receiving the funds may use the rate and the respective rationale in effect for the prime campus award. However, a separate case-by-case exception must be approved by the campus receiving the MCA because indirect cost exception approvals are linked to delegations of authority to each Chancellor. A campus receiving an MCA may not be forced to accept a reduction of indirect cost recovery if it does not agree to the reduction.
The copy function in REMS can be used to expedite the creation of a case-by-case exception, whether it is for an exception for an MCA or for a sponsor policy not currently on the VSP list.
Where 2 CFR § 200 applies to a federal award, it is expected that UC’s federally-negotiated rate applies. Many federal programs that have valid restrictions, as defined in 2 CFR § 200, appear on the Verified Sponsored Policy (VSP) list.
Upon receipt of an exception request for a federal program, RPAC will research if the agency has authority to impose a reduction of the indirect cost rate. In cases where there is no policy basis for the reduction of indirect costs on a federal award, an exception may not be approved.
On flow-through funding under 2 CFR § 200, it is expected that UC’s federally-negotiated rates be honored.
The California State University and UC have established an indirect cost recovery model for State of California funding. It is expected that State of California sponsored projects in the appropriate UC Rate for indirect cost recovery. Case-by-case exceptions for State of California funding must follow the special approval process described in REMS Sponsor Guidance record 306 (see also 8-540.3 Special Approval).
UCOP maintains a Verified Sponsor Policies (VSP) list of sponsors whose policies limit indirect cost recovery. The sponsors listed on the VSP have been reviewed and vetted by UCOP as having legitimate policies limiting indirect cost recovery, applicable to all grantees. Campuses may use this list as part of an expedited approval process if they wish. The VSP list can be found in the REMS application.
Inclusion of a sponsor’s policy on the VSP list is prompted when a policy is verifiable, applied to all grantees, and the campuses frequently submit proposals and receive funding from that sponsor. UCOP reviews the VSP list on a periodic basis to ensure that it is current and reliable.
When applied to a specific proposal or award, the VSP identifier code should be noted in quarterly reporting in the Corporate Sponsored Projects Information System (SPX). There is no requirement to request a case-by-case exception when the VSP listing is applied.
Historically, UCOP approved “Individual” indirect cost exceptions, valid only for a named single award, and “Class” exceptions, which could apply to multiple awards issued under a specific sponsor program or policy. Additionally, exceptions were approved either under a specific sponsor policy (i.e., “sponsor policy exception”) or based on a strategic decision to reduce or fully waive indirect cost recovery (i.e., “vital interest exception”).
In 2016, the University substantially revised its system for tracking indirect cost rates in extramural awards to accommodate greater campus decision-making in approving indirect cost exceptions. Campuses should not apply Class exceptions to any new proposals submitted on or after July 1, 2016. A Class exception remains valid if it was applied to a new proposal submitted prior to July 1, 2016. At time of competitive renewal, the historical Class exception should no longer be used; the appropriate UC Rate or VSP listing should be applied or a new case-by-case exception should be requested.
Records of historical Class exceptions are available in REMS so that post-award accounting may validate the application of a particular exception.
For exceptions that fall within their delegated authority, campuses shall determine their criteria for approving case-by-case exceptions. Requests to reduce indirect cost recovery should be carefully reviewed by appropriate and responsible parties and approved only in cases where the vital interests served by conducting the project outweigh the financial cost to the University, regardless of whether a sponsor proffers a policy on indirect cost recovery.
Regardless of the specific criteria that each campus may develop, indirect costs exceptions must be documented as outlined in 8-530.
Most indirect cost exceptions arise from a sponsor’s restriction on indirect cost recovery.
When considering such an exception, the basis for approval should stem from a sponsor’s established, published policy. Sponsor restrictions on indirect cost recovery may be by statute, codified agency regulations, or program terms published in the sponsor’s solicitation or announcement.
To assist the University in its advocacy with sponsors and the on-going curation of the Verified Sponsor Policy list, an indirect cost exception record in REMS should indicate if a sponsor policy is the reason for the exception.
If approving an exception because of a sponsor’s restriction, it should be a bona fide restriction initiated by the sponsor and not an ad hoc restriction based on discussions with the campus.
Any sponsor documentation of its restriction of indirect cost recovery should include all required elements needed to calculate the indirect cost recovery, including a rate and a base. Documentation should be unambiguous in describing how indirect cost recovery is calculated so that UC may recover its entitled indirect cost under a sponsor’s policy. For example, many small foundations do not clearly state an indirect cost base. Typically, these sponsors do not use the MTDC, as defined in UC’s negotiated rate agreements. Instead they may cap the total cost of an award and permit recovery as an allocation of the Total Costs. Thus, it is necessary for the campus to seek clarification from a sponsor when there is any ambiguity.
The State Auditor has ruled that reductions of indirect cost rates to for-profit entities and foreign governments is gift of public funds for private benefit as the sponsor is not reimbursing the University for the full cost of the project. Without full indirect cost recovery, the University is subsidizing the cost of the project for the sponsor.
Under certain circumstances, an exception based on sponsor policy from a for­-profit corporation or a foreign government may be considered for a legitimate, general University community service, scholars’, or fellowship program sponsored by a for-­profit corporation. The criteria for considering an exception for such a program would include: (1) the corporation has published an announcement calling for proposals under which grants would be awarded; (2) exceptions to University policies for the subject program, such as intellectual property language, are carefully considered and justified, specifically in light of the indirect cost rate exception, and approved by the appropriate University authority; and (3) the announcement does not require a specific deliverable to the corporation other than technical/final and financial reports. Such a program would have to be clearly distinguishable from research contracts which state anticipated outcomes in specific areas of corporate interest solicited by the corporation.
It is the responsibility of each campus to determine criteria for approving indirect cost exceptions when there is no sponsor policy supporting the reduction of the recovery.
Despite campus-developed criteria for case-by-case exceptions, UCOP may implement special criteria for approvals for certain sponsors where it is in the interest of the University to seek a common cost recovery approach for these sponsors.
Campus criteria should not be developed to usurp due diligence in confirming a sponsor's policy.
Criteria may vary by campus.
Certain exceptions may fall under a special approval process.
Currently, State of California case-by-case exceptions must follow the special approval process described in REMS Sponsor Guidance record 306 and should be designated as "Special Approval" in REMS.
A request for an exception to applicable indirect cost rates requires consideration of the intellectual property rights to be provided to the sponsor under the terms of the subject agreement. The campus must consider what intellectual property rights, a potentially valuable consideration, to provide to a sponsor that does not pay full applicable indirect costs to the University (See Chapter 11). If intellectual property rights arrangements requiring exceptions to University policy are desired, approvals must be secured from the appropriate University authority prior to approval of the related indirect cost rate exception.
Sometimes a sponsor may not allow for a campus’ approved indirect cost rate to be charged to an award, but instead provides an administrative fee or institutional allowance. This amount should be remitted as indirect costs unless the sponsor has restricted it (e.g. paying for fringe benefits on a fellowship).
If the allowance is greater than the amount recoverable as indirect costs using the approved campus rates, the excess amount may be retained by the campus and re-budgeted at the campus’ discretion.
Indirect cost exceptions are not required for awards issued by University-administered programs when those are funded by intramural funds within the University. For the purposes of this section, “intramural funds” are funds appearing on the University’s general budget, such as direct appropriations to the University of California budget by the State, as opposed to those received via a contract, grant, or other agreement with a sponsor external to the University (i.e., “extramural” funds).
If you are unsure whether the funds are intramural or extramural, you should contact the program making the award.
“Pass-through” or “flow-through” are both terms used when funds flow from a prime awardee or prime contractor to a subrecipient or subcontractor. The federal government uses the term “Pass-Through Entity” (PTE) to refer to the party directly awarding funds to a subrecipient other than the originating federal agency.
If a campus is a subrecipient of federal funds, the campus should receive its federally-negotiated indirect cost rate from the entity providing the funds to the University. Uniform Guidance at 2 CFR § 200.331 requires the PTE to provide subrecipients their federally negotiated indirect cost rate.
If the ultimate source of funds is non-federal, the campus should receive its federally-negotiated indirect cost rate from the entity providing the funds, to the extent allowed by the prime sponsor.
If the campus is the pass-through entity/flow-through entity, to the extent allowed under the prime award, it should honor the subrecipient’s indirect cost rate. As required by Uniform Guidance at 2 CFR § 200.331, the campus must permit a subrecipient to receive its federally negotiated indirect cost rate when passing through federal funds, or a de minimis as defined in 2 CFR § 200.414 if no such rate exists.
Campus Principal Investigators or administrators may not unilaterally limit indirect cost recovery on an extramural award for subgrants to non-UC institutions or Multiple Campus Awards (MCAs) to other UC campuses.
Case-by-case exceptions (previously known as Individual exceptions) apply to the period of performance of the underlying award, provided there is no material change in the project that affects the basis on which the exception was approved.
A new exception must be requested for each competitive period of the project. Since an exception addresses the amount of funding the campus is willing to forego in indirect cost recovery at the time of the submission, a new assessment of that campus’ position on the basis of additional funding in the new application must be considered by the campus and entered into REMS.
Indirect cost rate exceptions are not approved retroactively after the completion of the period of performance of the underlying award or after termination to cover expenses not paid for by the award sponsor. Such situations can include: overdrafts of the award amount, disallowed costs, sponsor default where the sponsor does not provide full payment, and withholding of payments due to non-performance or disputes.
Campuses play an active role in negotiating and preparing indirect cost rate agreement proposals. University of California Office of the President (UCOP) Costing Policy and Analysis is jointly responsible, along with campuses, for determining what information is needed to compute indirect costs. The information collected may change over time in response to federal requirements and the degree of sophistication of relevant computer systems. Indirect costs are computed in accordance with the applicable provisions of Appendix III to 2 CFR § 200.
Campuses create records in Research Enterprise Management System (REMS) to manage the approval process of indirect cost rate exceptions and capture data for each exception.
On a quarterly basis, campuses report sponsored project proposal and award data, including data on indirect cost recovery, through the Corporate Sponsored Projects Information System (SPX), formerly known as Corporate Contract and Grant Information System (CGX).
Extramural Funds Officers report the indirect cost rate and base applied to each award in the Corporate Financial System (CFS).
Research Policy Analysis and Coordination (RPAC), in coordination with Costing Policy and Analysis and the campus C&G/SPO offices, maintains this chapter about indirect cost recovery as it pertains to sponsored research at the University of California. Chapter 8 provides background information and guidance on the application of indirect cost agreements and the process for indirect cost exceptions.
Archive of Chapter 8 prior to October 26, 2017: Chapter 8, specifically 8-500, was republished on October 26, 2017 to reflect changes to how indirect cost exceptions are categorized and provide revised guidance on intramural funding.
Archive of Chapter 8 prior to November 28, 2016: Chapter 8 was republished on November 28, 2016 to reflect substantial changes in University practices around indirect cost recovery.

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