National Science Foundation: Actions Needed to Improve Oversight of Indirect Costs for Research
Published: 2017-09-28T00:00:00

Fast Facts:
The National Science Foundation awards billions of dollars annually to K-12 schools, universities, and others to support scientific research and education. NSF reimburses these organizations for direct costs, such as researchers' salaries and equipment, and has a formula for funding a portion of awardees' indirect costs like rent and utilities.
We found that NSF does not consistently take steps to ensure it pays no more than its fair share of indirect costs, which could unnecessarily limit the amount of funds available for research.
We made three recommendations to NSF to help it improve its guidance for setting indirect cost rates.

Highlights:
section_title: Why GAO Did This Study
paragraphs: NSF awards billions of dollars to institutions of higher education (universities), K-12 school systems, industry, science associations, and other organizations to promote scientific progress by supporting research and education.
NSF reimburses awardees for direct and indirect costs incurred for most awards. Direct costs, such as salaries and equipment, can be attributed to a specific project that receives an NSF award. Indirect costs, such as the costs of operating and maintaining facilities, are not directly attributable to a specific project but are necessary for the general operation of an awardee's organization. For certain organizations, NSF also negotiates ICR agreements, which are then used for calculating reimbursements for indirect costs. ICR negotiations and reimbursements are to be done in accordance with federal guidance and regulation and NSF policy.
GAO was asked to review the amount of NSF funding for indirect costs and NSF's negotiation of ICRs. This report examines (1) what is known about indirect costs on NSF awards over time, and (2) the extent to which NSF has implemented guidance for setting ICRs for organizations over which it has cognizance. GAO reviewed relevant regulations, guidance, and agency documents; analyzed budget data and a nongeneralizable sample of nine ICR files from fiscal year 2016 selected based on award funding; and interviewed NSF officials.
section_title: What GAO Found
paragraphs: For National Science Foundation (NSF) awards during fiscal years 2000 through 2016, budgeted indirect costs varied from 16 to 24 percent of the total annual amounts the agency awarded. The percentage fluctuated during this period, though this percentage generally has increased since reaching a low point in 2010. The variation from year-to-year was based on various factors such as by the types of activities supported by the awards and the types of awardee organizations receiving the awards.
Note: Award funding has not been adjusted for inflation.
NSF has developed internal guidance for setting indirect cost rates (ICR) but has not consistently implemented this guidance and has not included certain details and procedures, in particular:
NSF has not consistently implemented its guidance because it has not yet required NSF staff to follow aspects of its guidance, such as using a documentation checklist that NSF developed to verify that an awardee's ICR proposal package is complete.
NSF did not include details on supervisory activities, such as the criteria to be used by the supervisor of the ICR process for assessing an ICR proposal's risk level and mitigating risks at each level.
NSF did not include certain procedures, such as for implementing new provisions of federal guidance on setting ICRs.
NSF officials described ways that staff implement procedures even though the procedures are not fully detailed or included in guidance. Nevertheless, with complete guidance that includes the missing details and procedures and that is consistently followed, NSF could better ensure that ICRs are set consistently and in accordance with federal guidance on indirect costs and with federal internal control standards.
section_title: What GAO Recommends
paragraphs: GAO recommends that NSF take three actions to improve its guidance for setting ICRs, including adding certain details and procedures. NSF concurred with GAO's recommendations and described plans to address them.

section_title: Letter
paragraphs: The National Science Foundation (NSF) funds billions of dollars in awards  each year to promote scientific progress by supporting research and  education. In fiscal year 2017, NSF had a total budget of $7.5 billion, and  according to NSF, over 90 percent of its appropriated funds directly  support research and education. For example, in fiscal year 2017, NSF  funded awards to support research on improving earthquake predictions,  programs for increasing the number of students in science fields, and  translation and online dissemination of scholarly research as a resource  for scientists, historians, and educators. NSF makes these awards to  institutions of higher education (universities), K-12 school systems,  industry, science associations, and other organizations involved in  research.
For most awards, NSF reimburses awardees for both direct and indirect  costs incurred. Direct costs, such as salaries for employees working on  NSF-supported projects and costs for leasing equipment, can be  attributed to a specific project. Indirect costs are not directly attributable to  a specific project but are necessary for the general operation of an  organization receiving an award. Such costs can include depreciation on  buildings and equipment; the costs of operating and maintaining facilities;  and general administration and expenses, such as salaries and expenses  for management, personnel administration, and accounting.
To be reimbursed for indirect costs, organizations must properly identify  and claim reimbursement for these costs in accordance with applicable  federal guidance. The Office of Management and Budget’s (OMB)  Uniform Administrative Requirements, Cost Principles, and Audit  Requirements for Federal Awards (Uniform Guidance) and NSF  implementing policy govern how NSF is to reimburse indirect costs.
For an organization to be reimbursed for indirect costs on an award under  the Uniform Guidance and federal regulations, the entity generally must  have a negotiated and approved indirect cost rate (ICR) agreement with  either the federal agency that funded the award or with another federal  agency. The negotiation and approval process begins when an  organization submits an ICR proposal and supporting documentation  such as audited financial statements and a cost policy statement.  Generally, to calculate the proposed rate, an organization divides its total  indirect costs by the total direct costs across all of the organization’s  federal awards for a particular time period. After receiving a rate proposal,  the federal agency reviews it, determines the reasonableness of  proposed costs, and negotiates a formal ICR agreement with the  organization. This agreement sets the rate for a 1-to-4-year period. The  ICR is then applied to each of an organization’s federal awards for the  period to allocate its indirect costs for those awards. For example, an  organization with direct costs of $800,000 for an award and an ICR of 25  percent would get an additional $200,000 for indirect costs, for a total  award of $1 million. The rate applies to all of the organization’s federal  awards that are eligible for indirect costs during the period, even if some  of the awards are made by agencies other than the one that negotiated  the ICR.
Under the Uniform Guidance, the federal agency that negotiates and  approves an ICR agreement with an organization is designated as the  cognizant agency. For nonprofit organizations, the Uniform Guidance  assigns cognizance to the federal agency with the largest dollar value of federal awards to an organization unless different arrangements are  agreed to by the federal agencies concerned. As of February 2017, NSF  had cognizance over about 110 organizations, mostly nonprofit and  professional societies, museums, and operators of large shared-use  facilities (such as accelerators, telescopes, and research vessels) that get  the largest dollar value of their federal awards from NSF. However, NSF  does not have cognizance for universities. For universities, the Uniform  Guidance assigns cognizance to the Department of Health and Human  Services (HHS) or the Department of Defense (DOD), depending on  whether HHS or DOD provided more funds to the university for the most  recent 3 years.
Within NSF, the Cost Analysis and Audit Resolution Branch (CAAR) has  the primary responsibility for reviewing ICR proposals and negotiating  ICR agreements with organizations for which NSF has cognizance. In  addition, in fiscal year 2009 NSF entered into an interagency agreement  with the Department of Interior’s (Interior) Business Center. Under this  agreement, the Business Center reviews proposals and negotiates ICR  agreements for selected organizations for which NSF has cognizance.  According to an NSF official, NSF entered into the agreement because  the agency was behind on rate negotiations and needed assistance in  addressing the backlog, while Interior had established processes and  procedures, as well as staff trained to negotiate the ICRs on behalf of  other federal agencies.
In prior reports, we have raised concerns about the growth of indirect  costs and the process for setting ICRs at the National Institutes of Health  (NIH) within HHS. In September 2013, we found that reimbursements for  indirect costs increased faster than those for direct costs on NIH research  grants awarded to universities for fiscal years 2002 through 2012. We  recommended that NIH assess the impact of growth in indirect costs on  its mission, including, as necessary, planning for how to deal with  potential future increases in indirect costs that could limit the amount of  funding available for total research. HHS agreed with our  recommendation and has provided information on actions taken by NIH to  implement it; however, the actions have not fully addressed the  recommendation. In September 2016, we identified deficiencies in  cognizant agencies’ design of internal controls for setting ICRs for  organizations that received NIH awards. These deficiencies increased the  risk that rates used by NIH would include inappropriate indirect costs and  result in federal agencies paying more than their share of the  organizations’ indirect costs. We recommended improving controls over  NIH’s ICR process, such as developing detailed procedures for the  completion and documentation of supervisory review of the ICR  negotiation process. NIH concurred with our recommendations and  described ongoing and planned actions to implement them.
You asked us to review the amount of NSF funding for science research  and education that goes to indirect costs and NSF’s processes for  negotiating ICRs. In May 2017, we issued a testimony on our preliminary  observations. This report, which updates our preliminary observations,  examines (1) what is known about indirect costs on NSF awards over  time and (2) the extent to which NSF has implemented guidance for  setting ICRs for organizations over which it has cognizance.
To examine what is known about indirect costs on NSF awards over time,  we analyzed summary indirect cost data from the NSF Office of Budget,  Finance, and Award Management for all NSF awards budgeted for fiscal  years 2000 through 2016 and all new and renewed awards obligated for  fiscal year 2016. Our analyses of indirect costs were based on budgeted  indirect cost data because NSF does not collect data from awardees  about their actual indirect costs on awards.
To assess the reliability of the data, we traced a selection of summary- level data elements for fiscal year 2016 (e.g., summary indirect and direct  costs) back to the record-level data on individual NSF awards and  determined that the data were consistent between the two sources,  including confirming that the data contained no outliers in the data fields  we used. We interviewed NSF officials knowledgeable about the  budgetary management system used to generate the indirect cost data  provided to us, discussed variations in and the reliability of the data, and  reviewed available documentation. We determined that the data were  sufficiently reliable for purposes of presenting data on the total amount of  NSF awards that were budgeted for indirect costs over time.
To further analyze what is known about indirect costs on NSF awards  over time, we interviewed NSF officials about factors that can cause  variation in indirect costs from year to year. We also analyzed the record- level data on individual awards from fiscal year 2016 to determine the  extent of differences, if any, in the indirect costs of awards for different  disciplinary fields and types of organizations receiving the awards. Finally,  we reviewed NSF’s Proposal and Award Policies and Procedures Guide  and other agency documents on its policies and procedures for indirect  costs.
To determine the extent to which NSF has implemented guidance for  setting ICRs for organizations over which it has cognizance, we  interviewed NSF officials and reviewed the Uniform Guidance related to  the setting of ICRs. Using the Uniform Guidance, we identified key control  activities that agencies are to use for determining allowable, allocable,  and reasonable indirect costs and methods for allocating such costs to  federally funded research grants in the ICR setting process. We  compared the control activities identified in the Uniform Guidance to  NSF’s internal guidance, such as the Indirect Cost Rate Proposal Review  Standing Operating Guidance (May 2013).
To examine how NSF has applied its internal guidance, we reviewed  reports from NSF’s Monitoring Tracking Database (MTD) and selected a  nongeneralizable sample of 9 out of 22 rate agreement case files—7 files  that were negotiated by NSF and 2 by Interior. To select the  nongeneralizable sample, we identified the total population of rate  proposals received and closed in fiscal year 2016 and stratified the  population by amount of award funding (i.e., high, medium, and low). We  then selected three rate agreement case files from each of the  populations. To understand the extent to which NSF applied its internal  guidance, we reviewed documentation contained in the rate agreement  case files, such as ICR proposals, rate agreements, and trend analysis. In  doing so, we determined whether NSF staff had performed the following  key control activities: (1) verifying that the proposal contained the  required documentation and was submitted on time; (2) validating and  recalculating the ICR information; and, (3) reviewing and approving the  negotiated rates. After our review of the nine rate agreement case files,  we interviewed NSF and Interior staff to clarify our understanding of the  rate setting process and how the process is documented in the rate  agreement case files. Our findings are not generalizable to those rate  agreements we did not review, although they provide illustrative examples  of rate agreement case files.
We conducted this performance audit from May 2016 to September 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: OMB’s Uniform Guidance was issued on December 26, 2013, and  became effective on December 26, 2014. The Uniform Guidance  establishes the principles for defining, calculating, and negotiating ICRs  for federally funded research. The guidance describes  the classification and types of allowable indirect costs; methods of allocating such costs;  reasonableness of claimed costs; and exclusions and descriptions of unallowable cost elements, such as  alcohol and bad debt.
The Uniform Guidance also provides the basis for OMB to systematically  collect information from federal agencies on all their federal financial  assistance programs and establishes federal policies for providing this  information to the public.
NSF implements the Uniform Guidance using its Proposal and Award  Policies and Procedures Guide and Grant General Conditions. The  guide consists of NSF’s proposal preparation and submission guidelines  as well as NSF’s policy and procedures used to award, administer, and  monitor grants and cooperative agreements. NSF awards are subject to  the Grant General Conditions, which list awardee responsibilities,  obligations, and rights, and other conditions for awards.
In addition, NSF’s CAAR staff use the Indirect Cost Rate Proposal  Review Standing Operating Guidance as a guide for reviewing and  negotiating indirect cost proposals from the awardees for which NSF has  cognizance. The internal guidance includes descriptions of the three  stages of ICR proposal review. Briefly these stages are:  1.  Intake and Adequacy Review: This stage consists of steps for  processing an incoming proposal including verifying that NSF has rate  cognizance for the awardee and entering the proposal into the MTD,  conducting initial reviews, and assigning the proposal to staff for  review and rate negotiation.  2.  Proposal Analysis and Rate Negotiation: This stage consists of  steps for reconciling total expenditures in the financial statements with  the total expenditures in the indirect cost proposal, reviewing indirect  costs, verifying unallowable costs, preparing a trend analysis  (including the organization’s indirect costs and rates for the previous 2  years, if available), and negotiating the indirect rate with the awardee.  3.  Rate Approval and Issuance: This stage consists of steps for  approving the indirect rate, preparing and transmitting the rate  agreement to the awardee for signature, and closing out the proposal  review by updating the MTD and filing working papers in appropriate  files.
Additionally, NSF’s internal guidance includes tools to assist awardees in  preparing ICR proposals and to expedite NSF’s review process. These  tools, as explained in further detail later in the report, are to be used in  coordination with federal regulation and NSF guidance.
section_title: Budgeted Indirect Costs on NSF Awards Varied Based on the Composition of NSF’s Awards Portfolio
paragraphs: For fiscal year 2000 through fiscal year 2016, the percentage of total  annual award funding that NSF budgeted for indirect costs varied from  year to year. This variation was based on various factors, such as by the  types of activities supported by the awards and the types of organizations  receiving the awards.
subsections: section_title: Budgeted Indirect Costs on NSF Awards Varied from Year to Year
paragraphs: Budgeted indirect costs on NSF awards ranged from 16 to 24 percent of  the total annual amounts the agency awarded for fiscal years 2000  through 2016. The percentage fluctuated during this period, though it has  generally increased since reaching a low point in 2010. In fiscal year  2016, NSF awards included approximately $1.3 billion budgeted for  indirect costs, or about 22 percent of the total $5.8 billion that NSF  awarded. Budgeted indirect costs were 16 percent of total annual  amounts twice during the 17-year period—in fiscal years 2002 and  2010—and reached their highest point of 24 percent of total annual  amounts in fiscal year 2015. Figure 1 illustrates annual funding for direct  and indirect costs over the 17-year period.
Indirect costs on individual awards within a given year varied more widely  than the year-to-year variation for all NSF awards. Most NSF awards  included indirect costs in their budgets—for example, the budgets for  about 90 percent of the 12,013 awards that NSF made in fiscal year 2016  included indirect costs. Our analysis indicated that the funding for indirect  costs ranged from less than 1 percent to 59 percent of the total award.  Among the organizations whose ICR files we examined at NSF, examples  of awards with indirect costs of less than 1 percent included awards to  organizations that provided funding for (1) student travel to a networking  workshop for women on computer and network systems and (2) a  university workshop on modeling magnetic interactions between stars and  planets. In contrast, examples of awards with indirect costs that ranged  from 50 to 59 percent included awards to (1) a small business to study  the atmosphere and improve current models of air quality and climate  change and (2) a policy research organization to study how to broaden  participation of underrepresented groups in the academic disciplines of  science, technology, engineering, and mathematics.
section_title: Variation in Indirect Costs from Year to Year Reflects Variation in the Composition of NSF’s Awards Portfolio
paragraphs: NSF officials told us that the overall composition of NSF’s awards  portfolio varies from year to year and that indirect costs as a percentage  of budgeted total award costs for any given year will reflect that variation.  In particular, officials said that variation in indirect costs among individual  awards—and thus variation in total award costs from year to year—can  be due to several factors:
Type of award supported activity: NSF’s awards support various  types of activities, and NSF allows awardees to budget for indirect  costs on these activities to varying degrees. For example, it does not  allow indirect costs on its awards for stipends and travel of  participants in NSF-sponsored conferences or training projects. In  contrast, NSF allows administrative and clerical salaries to be allowed  as indirect costs. However, these salaries may be considered direct  costs if, for example, administrative or clerical services are integral to  an activity or the costs are not recovered as an indirect costs.
Type of research: NSF supports a range of research activities, some  of which require investment in expensive infrastructure such as a  telescope to study the universe. Which research activities are funded  each year depends on a variety of considerations including the types  of proposals submitted, the objectives of scientific research, the  outcome of the merit review process, and available funding.
Type of disciplinary field: NSF supports research in biological  sciences, engineering, and social sciences, among others, and the  level of indirect costs associated with awards in these fields can vary,  according to NSF officials. In our analysis of awards made in fiscal  year 2016, we found that the indirect costs varied among the NSF  directorates that focus on different disciplinary fields. For example,  budgeted indirect costs as a percentage of total annual amounts of  awards were 22.5 percent in the directorate for engineering and 26.3  percent in the directorate for geosciences.
Type of organization: NSF’s data categorized awardees as federal,  industry, small business, university, or other—a category that includes  nonprofits and individual researchers. Figure 2 illustrates our  analysis on the average percentage of total awards budgeted for  indirect costs in fiscal year 2016, by type of awardee. As shown in the  figure, university awardees had the highest average indirect costs— about 27 percent of the total amount of awards—and federal  awardees had the lowest average indirect costs—about 8 percent of  the total amount of awards. According to NSF officials, certain types  of projects, such as those carried out at universities, typically involve  more indirect costs than others. They said that this outcome is  because, for example, of the universities’ expense for maintaining  scientific research facilities, which may be included as an indirect cost  in awards. Universities accounted for about 91 percent of the  approximately $1.3 billion NSF budgeted for indirect costs in fiscal  year 2016.
Awards to organizations for which NSF had cognizance (e.g., non-profits,  professional societies, museums, and operators of large shared-use  facilities) averaged lower budgeted indirect costs than awards to  organizations for which other federal agencies had cognizance (e.g.,  universities for which HHS or DOD have cognizance). According to NSF  officials, this variance resulted from differences in the organizations and  the types of awards they receive and does not reflect differences in how  agencies negotiate ICRs. As shown in figure 3, our analysis of NSF data  indicates that on average, NSF budgeted about 23 percent of award  amounts for indirect costs on awards to organizations for which NSF did  not have indirect cost cognizance and about 11 percent for indirect costs  on awards to organizations for which NSF had cognizance. In fiscal year  2016, NSF made over 90 percent ($5.4 billion of $5.8 billion) of its awards  to organizations for which it did not have cognizance.
section_title: NSF Has Not Consistently Implemented Guidance for Setting Indirect Cost Rates and Has Not Included Certain Details and Procedures
paragraphs: NSF has developed internal guidance for setting ICRs, but NSF staff have  not consistently followed it. In addition, the internal guidance on  supervisory review does not include certain details and procedures.  Specifically, the guidance does not include the criteria to be used by the  supervisor for risk assessment and mitigation and the steps for reviewing  and documenting the work performed by NSF staff when setting ICRs. It  also does not include procedures for implementing new provisions issued  under the Uniform Guidance and for performing oversight of the ICRs set  by Interior on NSF’s behalf.
subsections: section_title: NSF Staff Have Not Consistently Followed the Guidance for Setting Indirect Cost Rates
paragraphs: Standards for Internal Control in the Federal Government states that  management should design control activities, such as controls to ensure  the accuracy and completeness of an entity’s data, and implement the  controls through guidance, including guidance on each office’s  responsibility for an agency’s operational processes. NSF has designed  control activities for setting ICRs and has implemented them through  internal guidance, such as Indirect Cost Rate Proposal Review Standing  Operating Guidance. Our review of a nongeneralizable sample of seven  NSF ICR agreement files showed that NSF staff followed many parts of  the agency’s internal guidance. For example, as required by the internal  guidance, NSF staff reviewed awardees’ cost policy statements to obtain  an understanding of awardees’ accounting systems, cost allocation  methods, and types of costs charged as either direct or indirect prior to  setting ICRs.
However, NSF staff did not follow two aspects of NFS’s internal guidance  for setting ICRs:
Use of tools and templates for setting ICRs: In accordance with  NSF’s internal guidance, NSF has developed tools and templates  along with procedures for using these tools to help staff conduct  consistent reviews of the ICR proposals. For example, NSF’s internal  guidance includes procedures for NSF staff to use a standard  document checklist to verify that the awardee’s ICR proposal package  is complete and that all required documents have been submitted.  However, in our review of seven NSF ICR agreement files, we found  that in all cases, staff did not use the standard document checklist to  verify that the awardee had submitted all required documents.  Instead, NSF staff used five different versions of the document  checklist to track the receipt of the documents. Although these five  versions of the document checklist contained similar awardee  documentation, we also identified differences. For example, some  checklists required certifications of lobbying costs and indirect costs,  and others did not. According to the Uniform Guidance, awardees are  required to submit these certifications with their proposals for ICRs.  The staff were not consistently using the tools and templates NSF had  developed because, according to NSF officials, NSF had not yet  required them to do so. Without fully implementing this aspect of their  guidance by requiring staff to use the standard tools and templates,  the agency does not have assurance that NSF staff are consistently  collecting required documentation from awardees and that ICRs are  being set in accordance with federal requirements.
Updating the Monitoring Tracking Database with current  information: We identified instances where NSF staff did not  consistently follow internal guidance for updating the MTD with current  data about (1) the awardees for which NSF has cognizance and (2)  the status of ICR proposals. NSF’s internal guidance requires staff to  verify in the MTD that NSF has cognizance over the awardee prior to  negotiating an ICR and to update information such as the date of  receipt of the ICR proposal. In reviewing MTD reports, we identified 6  of 102 awardees for which NSF was the cognizant agency that were  not included on a list of awardees for which NSF had cognizance.  NSF officials confirmed that NSF was the cognizant agency for the six  awardees and that the MTD had not been updated, which resulted in  the awardees being incorrectly omitted from the database report.  Additionally, we identified instances where NSF staff had not followed  guidance to update the current status of awardees’ proposals,  including instances where the MTD was missing either the received  date or both the received and closed dates. NSF officials said that  such errors resulted from either the agency’s incomplete reconciliation  of the database, which NSF normally conducts on an annual basis  after the end of the fiscal year, or from data entry errors. In order to  achieve the agency’s objectives and adhere to requirements in federal  internal control standards, it is essential for management to have  accurate and complete ICR operational data. With accurate  operational data for management to use in their decision making  process, NSF could better ensure that it is managing the process for  setting ICRs efficiently and in accordance with its internal guidance.
section_title: NSF’s Internal Guidance Does Not Include Sufficient Details for Carrying Out Supervisory Activities
paragraphs: NSF’s internal guidance includes various details on its control activities  for setting ICRs, such as details on confirming the mathematical accuracy  of the rates proposed and reconciling the total costs in the proposal, both  allowable and unallowable, to the total costs shown on audited financial  statements. As described in Standards for Internal Control in the Federal  Government, including an appropriate level of such details allows for  effective monitoring of an organization’s control activities. Specifically,  through monitoring, management can assess the quality of work  performed and promptly resolve any issues identified.
However, we identified two areas of supervisory activities in which the  procedures established by NSF did not include this level of detail. In  particular, NSF’s existing internal guidance on supervisory activities,  which are a key part of the agency’s control activities for setting ICRs, did  not include details on (1) the criteria to be used by the supervisor to  assess the risk level of a proposal and determine the types of review  steps to be performed by staff for each risk level and (2) the steps that the  supervisor needs to take when reviewing and documenting the work  performed by NSF staff to set ICRs.
According to NSF officials, risk assessments are typically performed by  the supervisor for each proposal submitted and are intended to provide  the basis for determining the scope of the ICR review, including the steps  to be performed to mitigate the identified risks. NSF’s internal guidance  includes procedures for performing risk assessment, such as reviewing  past issues in the ICR negotiation for an awardee and changes in the  awardee’s accounting system. According to NSF officials, part of  conducting the risk assessment includes the supervisor’s categorizing the  identified risk in levels of high, medium, or low and determining steps for  staff to perform to mitigate risks at each level. In our sample of seven  NSF ICR agreement files we reviewed, the supervisor used various  criteria for assessing risks, such as NSF’s funding levels and the  awardee’s rate history. Depending on the risk level, the supervisor  directed staff to perform additional review steps, such as transaction  testing. However, NSF’s internal guidance does not include these details  on the criteria for the supervisor to use when categorizing the level of risk  and the steps for mitigating the risks at each level.
Supervisory review is a type of control activity that aids in providing  reasonable assurance that staff follow agency procedures for setting  ICRs. NSF’s internal guidance includes broad procedures for supervisory  review, such as requiring the supervisor to review the staff’s completed  proposal package and the applicable rates and document any concerns  identified during the review; however, the guidance does not include  details on what steps the supervisor needs to perform when (1) reviewing  the completed proposal package and applicable rates, and (2) annotating  the results of the review in the working papers. For example, the internal  guidance does not include procedures requiring the supervisor to ensure  that staff have adequately performed and documented key controls  identified in the internal guidance, such as analyzing trends in awardees  indirect costs. In our review of seven NSF ICR agreement files, we found  that the files included documents supporting key controls such as trend  analysis; however, we did not find any documentation that the supervisor  had reviewed the work performed by staff and annotated the results of the  reviews. In a September 2016 report, we identified similar issues in which  agencies lacked detailed supervisory procedures, resulting in supervisors  approving rates that were set by staff who did not perform control  activities required by agencies’ internal guidance.
NSF officials explained that the office that sets ICRs is relatively small— consisting of a single supervisor and several staff who review ICR  proposals—and that as a result, supervisory activities are not as fully  documented in guidance as they would be in a larger office. Additionally,  the officials stated that because of the complexity of the ICR setting  process, the supervisor directly discusses any concerns about a  completed proposal package with the staff instead of documenting such  concerns. However, more detailed internal guidance on supervisory  activities could help NSF management ensure that ICRs are set  consistently and in accordance with federal guidance and decrease the  risk that the supervisor could approve rates that were not properly  executed by staff—for example, when a new person assumes the  supervisory position, as occurred in 2016.
section_title: NSF Internal Guidance Does Not Include Certain Procedures
paragraphs: We found that NSF internal guidance does not include (1) procedures for  implementing new provisions issued under the Uniform Guidance and (2)  procedures in its internal guidance for performing oversight of the ICRs  set by Interior on NSF’s behalf.
subsections: section_title: Procedures for Implementing the Uniform Guidance
paragraphs: The Uniform Guidance became effective for grants awarded on or after  December 26, 2014, and NSF implemented the Uniform Guidance  through its policies and procedures. The Uniform Guidance included  several new provisions for research organizations, such as an option to  apply for a onetime extension of an ICR for up to 4 years and an option to  use a de minimis ICR of 10 percent if the organization has not previously  had a negotiated ICR with the cognizant agency.
However, NSF’s internal guidance for setting ICRs does not include  specific procedures that NSF staff should perform to implement certain  aspects of the Uniform Guidance’s new provisions. For example, the  internal guidance does not specify criteria for determining whether an  awardee is eligible for an extension.
NSF officials stated that they updated the internal guidance to include  Internet links to the Uniform Guidance and that they expect NSF staff to  speak to a supervisor for clarification on questions about applying the  new provisions. However, the links in the internal guidance directed staff  to outdated OMB guidance rather than to the Uniform Guidance. NSF  officials stated that they had incorrectly added links in the guidance. By  adding procedures in its internal guidance for implementing the new  provisions, NSF could better ensure that NSF staff will apply the  provisions correctly in accordance with the Uniform Guidance.
section_title: Procedures for Monitoring Indirect Cost Rates Set by Interior
paragraphs: Standards for Internal Control in the Federal Government states that  management should establish and operate monitoring activities for its  internal control system and evaluate the results. In addition, when an  entity engages an external party to perform certain operational processes,  management retains responsibility for monitoring the effectiveness of  internal control activities performed by the external party. NSF has  engaged an external party to provide assistance in negotiating ICRs.  Specifically, in 2009, NSF entered into an interagency agreement with  Interior to negotiate ICRs for a portion of the awardees for which NSF has  cognizance. For the first 10 months of fiscal year 2017, Interior had  negotiated ICRs for approximately 33 percent of the awardees for which  NSF had cognizance. According to NSF officials, Interior, acting as an  agent for NSF, has the responsibility for reviewing ICR proposals and  setting ICRs directly with awardees, following OMB requirements. In addition, NSF’s internal guidance states that Interior will set ICRs in  accordance with NSF protocols.
However, according to NSF officials and internal guidance, Interior’s  approval and signing of ICRs are largely independent of NSF, and in  addition, NSF conducts limited monitoring of the ICRs that Interior  negotiates. For example, NSF officials said that they review monthly  summaries of rates negotiated by Interior and completed rate agreements  and that on request, they meet with Interior’s supervisors and participate  in problem resolution. However, they do not review Interior’s ICR files,  such as checking the adequacy of documentation submitted by awardees  or the accuracy and reasonableness of the calculations and resulting  rates proposed by the awardee.
NSF officials stated that it was their understanding that by entering into  the interagency agreement, they delegated the authority for performing  ICR proposal reviews and setting ICRs to Interior. However, under  Standards for Internal Control in the Federal Government, NSF still  retains cognizance and oversight responsibilities for the ICRs set by  Interior. By including procedures in its internal guidance for overseeing  work performed by Interior, NSF could ensure that the ICRs set by Interior  comply with federal guidance and NSF protocols.
section_title: Conclusions
paragraphs: Setting ICRs in accordance with federal guidance is important to ensuring  that federal agencies do not pay more than their share of awardees’  indirect costs. NSF has developed internal guidance to help ensure that  ICRs are set appropriately, and NSF staff follow many parts of the  guidance. However, staff have not consistently followed the guidance for  using certain tools and templates for setting ICRs or guidance for  updating the agency’s database to reflect the status of awardees and  their ICR proposals—for example, because NSF has not yet required  them to do so. Details on supervisory activities are also not included in  the guidance, including the criteria used by the supervisor for assessing  the risk level of a proposal and determining specific steps for mitigating  risks, and steps supervisors take for their reviews of work performed to  set ICRs. Additionally, the guidance does not include procedures  necessary to carry out new provisions of the Uniform Guidance and to  monitor the ICRs set by Interior on NSF’s behalf to ensure that they  comply with federal guidance and NSF protocols. NSF officials described  ways that staff implement these procedures even though the procedures  are not fully detailed or included in guidance. However, including the  missing details and procedures in NSF’s internal guidance, and requiring  staff to follow the guidance, could help NSF ensure that staff properly and  consistently negotiate ICRs and that the rates negotiated comply with  applicable federal guidance, which in turn would help ensure that the  funding provided for indirect costs does not unnecessarily limit the  amount available for research.
section_title: Recommendations for Executive Action
paragraphs: We are making the following three recommendations to NSF:  The Director of NSF should require staff to follow written internal  guidance for (1) using tools and templates NSF has developed for the  process for setting indirect cost rates and (2) updating the agency’s  database to reflect the status of awardees for which NSF has cognizance  and of indirect cost rate proposals. (Recommendation 1)
The Director of NSF should add details to NSF’s internal guidance for  setting indirect cost rates specifying (1) the criteria to be used by the  supervisor for assessing the level of risk and steps for mitigating the risks  at each level and (2) the steps for supervisory review of the process for  setting indirect cost rates and documentation of the results of the review.  (Recommendation 2)
The Director of NSF should add procedures to NSF’s internal guidance  for (1) implementing the applicable new provisions of the Uniform  Guidance, including updating links to OMB guidance, and (2) monitoring  the indirect cost rates that the Department of Interior sets on NSF’s  behalf. (Recommendation 3)
section_title: Agency Comments
paragraphs: We provided a draft of this report to NSF and Interior for review and  comment. In its comments, reproduced in appendix I, NSF concurred with  our recommendations and described actions it would take to address  them. These actions include updating and adding details and procedures  to its internal guidance for setting ICRs, reviewing and updating the  tracking database on a quarterly basis, and working with Interior to  establish procedures for monitoring ICRs set by Interior on NSF’s behalf.  NSF stated that these actions will improve NSF’s protocols for negotiating  ICRs. Interior stated that it did not have comments on our draft report.
We are sending copies of this report to the appropriate congressional  committees; the Director of the National Science Foundation; Secretary of  the Department of the Interior; and other interested parties. In addition,  the report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact John Neumann at (202) 512-3841 or neumannj@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report. GAO staff who made  key contributions to this report are listed in appendix II.
section_title: Appendix I: Comments from the National Science Foundation
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, key contributors to this report  were Joseph Cook, Assistant Director; Kim McGatlin, Assistant Director;  Rathi Bose; Ellen Fried; Cindy Gilbert; Ruben Gzirian; Terrance Horner,  Jr.; Diana Lee; David Messman; Kathryn Smith; and Sara Sullivan.
section_title: Related GAO Products
paragraphs: NIH Biomedical Research: Agencies Involved in the Indirect Cost Rate- Setting Process Need to Improve Controls. GAO-16-616. Washington,  D.C.: September 2016.
Federal Research Grants: Opportunities Remain for Agencies to  Streamline Administrative Requirements. GAO-16-573. Washington,  D.C.: June 2016.
Grants Management: Programs at HHS and HUD Collect Administrative  Cost Information but Differences in Cost Caps and Definitions Create  Challenges. GAO-15-118. Washington, D.C.: December 2014.
Biomedical Research: NIH Should Assess the Impact of Growth in  Indirect Costs on Its Mission. GAO-13-760. Washington, D.C.: September  2013.
University Research: Policies for the Reimbursement of Indirect Costs  Need to be Updated. GAO-10-937. Washington, D.C.: September 2010.
National Institutes of Health Extramural Research Grants: Oversight of  Cost Reimbursements to Universities. GAO-07-294R. Washington, D.C.:  January 2007.