National Science Foundation: Preliminary Observations on Indirect Costs for Research
Published: 2017-05-24T00:00:00

Fast Facts:
The National Science Foundation makes awards to universities and other organizations to support research and education. NSF reimburses these organizations for direct costs, such as salaries and equipment, as well as indirect costs like rent and utilities—which are not necessarily tied to specific awards.
We testified that indirect costs for NSF awards ranged from 16 to 24 percent of total annual award funding from fiscal years 2000-2016. NSF has developed guidance for setting indirect cost rates, which determine the amounts that an organization may be reimbursed for indirect costs, but staff didn't consistently use this guidance.

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 research 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 are not directly attributable to a specific project but are necessary for the general operation of an awardee organization, such as the costs of operating and maintaining facilities. For certain organizations, NSF also negotiates indirect cost rate agreements, which are then used for calculating reimbursements for indirect costs. Indirect cost rate negotiations and reimbursements are to be made in accordance with federal guidance and regulation and NSF policy.
This testimony reflects GAO's preliminary observations from its ongoing review that examines (1) what is known about NSF's indirect costs for its awards over time, and (2) the extent to which NSF has implemented guidance for setting indirect cost rates for organizations. GAO reviewed relevant regulation, guidance, and agency documents; analyzed budget data, a nongeneralizable sample of nine indirect cost rate files from fiscal year 2016 selected based on award funding; and interviewed NSF officials.
section_title: What GAO Found
paragraphs: GAO's preliminary analysis of National Science Foundation (NSF) data indicates that for fiscal years 2000 through 2016, indirect costs on NSF awards ranged from 16 percent to 24 percent of the total annual amounts awarded, though the percentage generally has increased since 2010 (see fig.). NSF officials stated that variation in indirect costs from year to year can be due to a variety of reasons, such as the types of organizations awarded and the disciplinary field of awards. GAO's observations are based on data from planned budgets on individual NSF awards, rather than actual indirect cost expenditures, because NSF does not require awardees to report indirect costs separately from direct costs in their reimbursement requests. According to NSF officials, collecting such information would unnecessarily increase the reporting burden on awardees.
NSF has issued guidance for negotiating indirect cost rate agreements that includes procedures for staff to conduct timely and uniform reviews of indirect cost rate proposals. GAO's preliminary review of NSF's guidance and a sample of nine indirect cost rate files found that (1) NSF staff did not consistently follow guidance for updating the agency's tracking database with current data about some awardees, (2) the guidance did not include specific procedures for how supervisors are to document their review of staff workpapers, and (3) NSF had not updated the guidance to include procedures for implementing certain aspects of Office of Management and Budget guidance that became effective for grants awarded on or after December 26, 2014, such as the circumstances in which NSF can provide an awardee with an extension of indirect cost rates.
section_title: What GAO Recommends
paragraphs: GAO is not making any recommendations in this testimony but will consider making recommendations, as appropriate, as it finalizes its work.

section_title: Letter
paragraphs: I am pleased to be here today to provide some preliminary observations  from our ongoing review of the National Science Foundation’s (NSF)  oversight of indirect costs on awards to promote scientific progress by  supporting research and education. NSF funds billions of dollars in  awards each year to institutions of higher education (universities), K-12  school systems, industry, science associations, and other research  organizations. For example, NSF funds 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, educators, and  people involved in other areas of inquiry.
For most awards, NSF reimburses awardees for both direct and indirect  costs incurred. Direct costs, such as salaries and equipment, can be  attributed to a specific project that receives an NSF award. Indirect costs  are not directly attributable to a specific project but are necessary for the  general operation of an awardee organization. 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); the Federal  Acquisition Regulation; and NSF implementing policy govern how NSF is  to reimburse indirect costs.
Under the Uniform Guidance and federal regulations, for an organization  to be reimbursed for indirect costs, it generally must have a negotiated  indirect cost rate agreement with its cognizant agency for indirect costs— the federal agency that is responsible for reviewing, negotiating, and  approving the organization’s indirect cost rate. Because indirect costs  cannot be specifically attributed to a particular research grant or  cooperative agreement, they are allocated via an indirect cost rate that is  applied to certain direct costs for each awarded grant. Federal agencies  then use the indirect cost rate to reimburse indirect costs to the  organization. The rate applies to all of the organization’s federal awards  that are eligible for indirect costs, even if some awards are made by  agencies other than the cognizant agency.
NSF is the cognizant agency for certain organizations, particularly  nonprofits, but not for universities. For nonprofit organizations, the  Uniform Guidance assigns cognizance to the federal agency with the  largest dollar value of federal awards given to the organization unless  different arrangements are agreed upon by the federal agencies  concerned. As of February 2017, NSF’s Cost Analysis and Audit  Resolution Branch had cognizance over approximately 110 organizations,  mostly nonprofit and professional societies, museums, and operators of  large shared-use facilities (such as accelerators, telescopes, and  research vessels) that receive the largest dollar value of their federal  awards from NSF. For universities, the Uniform Guidance assigns  cognizance to the Department of Health and Human Services (HHS) or  the Department of Defense (DOD), depending on which agency provided  more funds to the university for the most recent 3 years.
To obtain an indirect cost rate, an organization submits a proposal with a  proposed rate and supporting documentation (such as audited financial  statements) to its cognizant agency. Generally, to calculate its proposed  rate, an organization divides its total indirect costs (after adjustments) by  the total direct costs across all of the organization’s federal awards for a  particular time period. The resulting percentage is the proposed rate.  After receiving a rate proposal, the cognizant agency is to verify the  organization’s mathematical accuracy, confirm that unallowable costs  have been excluded in accordance with regulations and agency  guidance, reconcile the cost proposal to the audited financial statements,  and determine the reasonableness of the proposed costs. Once the  proposal has been reviewed, the cognizant agency and the organization  negotiate and finalize a rate. The rate is then documented in a formal  agreement that sets the rate for a period of 1 to 4 years. This rate is used  as a mechanism for determining the proportion of indirect costs that may  be reimbursed for federally funded awards.
In prior reports, we have raised concerns about the growth of indirect  costs and the process for setting indirect cost rates at the National  Institutes of Health (NIH). 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. In September 2016, we found deficiencies in cognizant  agencies’ design of internal controls for setting rates for organizations that  received NIH awards. We found that 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.
My statement today reflects our preliminary observations from our  ongoing review that examines (1) what is known about indirect costs of  NSF awards over time and (2) the extent to which NSF has implemented  guidance for setting indirect cost rates for organizations over which it has  cognizance. The information in this statement on NSF’s indirect costs for  its awards over time is based on our preliminary analysis of data from  NSF award budgets that include the amount of direct and indirect costs  on awards made from fiscal years 2000 through 2016. To assess the  reliability of the data, we performed testing, including confirming that the  data contained no outliers in the data fields we used, and we interviewed  NSF officials. We found the data sufficiently reliable for the purposes of  presenting indirect costs of NSF awards over time. We also interviewed  NSF officials about award budgets and reimbursements, including  budgets and reimbursements for indirect costs. To determine the extent  to which NSF has implemented guidance for setting indirect cost rates for  organizations over which it has cognizance, we reviewed OMB’s Uniform  Guidance, the Federal Acquisition Regulation, and Standards for Internal  Control in the Federal Government; reviewed NSF’s guidance about the  rate-setting process; and interviewed NSF officials. To further examine  how NSF has applied its guidance, we reviewed reports from the  agency’s database for tracking indirect cost rate proposals, and we  selected a nongeneralizable sample of nine rate agreement case files  from the total population of rate proposals received and closed in fiscal  year 2016 and stratified the population by award funding (i.e., high,  medium, and low). In particular, we selected three rate agreement case  files from each of the populations to understand the extent to which NSF  applied its guidance. Our findings are not generalizable to rate  agreements we did not review, though they provide illustrative examples  of rate agreement case files.
We are conducting the work upon which this statement is based 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. We shared the information in  this statement with NSF to obtain its views, and NSF provided technical  comments.
subsections: section_title: Indirect Costs on NSF Awards Ranged From 16 Percent to 24 Percent of Total Annual Award Funding from 2000 through 2016 and Differed by Type of Organization
paragraphs: Our preliminary analysis of NSF data indicates that for fiscal years 2000  through 2016, indirect costs on NSF awards ranged from 16 percent to 24  percent of the total annual amounts the agency awarded, though the  percentage generally has increased since 2010. In fiscal year 2016, for  example, NSF awards included approximately $1.3 billion budgeted for  indirect costs, or about 22 percent of the total $5.8 billion that NSF  awarded. Figure 1 illustrates annual funding for indirect costs over the 17- year period.
NSF officials told us that variation in indirect costs from year to year can  be due to a variety of factors such as (1) differences in the types of  organizations awarded, (2) the types of activities supported by the  individual awards—research vs. individuals or students vs. infrastructure,  (3) the type of research activity, and (4) the disciplinary field of awards.  As part of our ongoing review, we plan to conduct further analysis of  these factors.
The indirect costs on individual awards varied more widely than the year- to-year variations for each award. Most NSF awards included indirect  costs in their budgets—for example, about 90 percent of the 12,013  awards that NSF made in fiscal year 2016 included indirect costs. Our  preliminary analysis of those awards indicated that the proportion of  funding for indirect costs ranged from less than 1 percent to 59 percent of  the total award.
Our preliminary analysis also indicates that average indirect costs  budgeted on awards varied across types of awardees. 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 preliminary 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, our preliminary analysis indicates that 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. The  officials said that this is because, for example, of universities’ expense of  maintaining scientific research facilities, which may be included as an  indirect cost in awards. Because universities receive the bulk of NSF’s  award funding and have relatively high indirect costs, our preliminary  analysis of NSF data indicates that universities accounted for about 91  percent of the approximately $1.3 billion budgeted for indirect costs in  fiscal year 2016. As previously noted, NSF does not set the indirect cost  rate for the universities to which it makes awards, as those rates are set  by HHS or DOD.
Our analysis also showed that awards to organizations for which NSF had  cognizance (e.g., nonprofits, professional societies, museums, and  operators of large shared-use facilities) had lower average budgeted  indirect costs than awards to organizations for which other federal  agencies had cognizance. As shown in figure 3, our preliminary 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.  Our preliminary observations show that in fiscal year 2016, NSF made  most of its awards to organizations for which it did not have cognizance.
Our preliminary observations show that among the approximately 110  organizations for which NSF has cognizance, negotiated indirect cost  rates can vary because of the type of work being funded by awards and  the ways in which different organizations account for their costs. For  example, salaries for administrative or clerical staff may be included as  either an indirect or direct cost, as long as they are consistently treated  across an organization’s awards. Our preliminary analysis of the rate  agreement case files for nine organizations in a nongeneralizable sample  of files we reviewed showed the rates ranged from 5.5 percent to 59.8  percent. An organization may choose to budget indirect costs for an  award at a level close to its negotiated indirect cost rate for the  organization, or it may choose to budget the costs differently. For  example, one of the organizations in our sample had a negotiated indirect  cost rate of 51 percent in fiscal year 2016. In that year, the organization  received one NSF award for $535,277 that budgeted $180,772 for indirect  costs (or about 34 percent of the award)—a calculated indirect cost rate  on the award of about 51 percent. Another organization in our sample  had a negotiated indirect cost rate of 5.5 percent in 2016, and one of its  NSF awards in fiscal year 2016, for $1,541,633, did not budget for any  indirect costs.
We based our preliminary analyses of indirect costs on data from the  budgets of NSF awards—the only available NSF data on indirect costs.  According to NSF officials, prospective awardees are required to provide  direct and indirect costs in their proposed budgets using the  organization’s negotiated indirect cost rate. After an award is made, NSF  does not require awardees to report information about indirect costs when  requesting reimbursements for work done on their awards for projects.  Specifically, NSF’s Award Cash Management $ervice—NSF’s online  approach to award payments and post-award financial processes—does  not collect data about indirect costs, although NSF is permitted to do so  by OMB guidance. According to NSF officials, doing so would  unnecessarily increase the reporting burden on awardees.
section_title: NSF Guidance for Setting Indirect Cost Rates Has Not Been Consistently Implemented and Does Not Include Certain Details
paragraphs: Our preliminary review of NSF’s guidance for setting indirect cost rates  and a nongeneralizable sample of nine indirect cost rate files indicates  that NSF has issued internal guidance that includes procedures for staff  to conduct timely and uniform reviews of indirect cost rate proposals,  collect data, set rates, and issue letters to formalize indirect cost rate  agreements. However, we also found that NSF staff did not consistently  apply the guidance. The guidance also includes tools and templates for  staff to use to consistently set rates and procedures for updating the  agency’s tracking system for indirect cost rate proposals. However, in our  preliminary analysis of NSF guidance, we found that (1) NSF staff did not  consistently follow guidance for updating the tracking system, (2) the  guidance did not include specific procedures for how supervisors are to  document their review of staff workpapers, and (3) NSF had not updated  the guidance to include procedures for implementing new provisions  issued under the Uniform Guidance.
In 2008, NSF created a database to track indirect cost rate proposals and  developed guidance for updating the tracking database with proposal  information. However, our preliminary analysis of reports from the  tracking database indicates that NSF staff have not consistently followed  the guidance for updating the tracking database with current data about  the awardees for which NSF has cognizance and the status of indirect  cost rate proposals. For example, in our preliminary analysis, we  identified eight awardees for which NSF was no longer the cognizant  agency but that still appeared in the tracking database on a list of  agencies from which proposals were overdue. Cognizance for these  awardees had been transferred to other agencies from 2009 through  2014. In addition, we identified 46 instances in which NSF staff had not  followed the guidance to update the tracking database to reflect the  current status of awardees’ proposals, including instances in which the  tracking database was missing either the received date or both the  received and closed dates.
In addition, while NSF’s guidance describes procedures that staff are to  follow for setting indirect cost rates, it only includes broad procedures for  supervisory review—NSF’s primary quality control process for setting  indirect cost rates. The guidance does not describe specific steps that  supervisors need to take when reviewing the work performed by staff  when setting indirect cost rates, nor does it include how supervisors  should annotate the results of their reviews in the workpapers. In our  preliminary review of a nongeneralizable sample of nine NSF rate files,  we did not find any documentation that a supervisor had reviewed the  work performed by staff, such as verifying that staff had checked the  accuracy of the total amount of awards over which an awardee’s indirect  costs were distributed. Such reviews are meant to provide reasonable  assurance that only allowable, allocable, and reasonable indirect costs  have been proposed and that such costs have been appropriately  allocated to federally funded awards.
Moreover, our preliminary observations on NSF’s guidance indicates that  it does not include procedures for implementing certain aspects of OMB’s  Uniform Guidance, which became effective for grants awarded on or after  December 26, 2014. For example, a new provision under the Uniform  Guidance allows research organizations that currently have a negotiated  indirect cost rate to apply for a onetime extension of that rate for a period  of up to 4 years; however, NSF guidance does not specify criteria for NSF  staff to determine the circumstances under which an awardee could be  given an extension.
In closing, I would note that we are continuing our ongoing work to  examine NSF’s data on indirect costs for its awards over time and its  implementation of its guidance for setting indirect cost rates for  organizations over which it has cognizance. NSF awards billions of  dollars to organizations each year and, given the constrained budget  environment, it is essential that NSF ensures efficient and effective use of  federal science funding. We look forward to continuing our work to  determine whether NSF actions may be warranted to promote this  objective. We plan to issue a report in fall 2017.
Chairwoman Comstock, Chairman LaHood, Ranking Members Lipinski  and Beyer, and Members of the Subcommittees, this completes my  prepared statement. I would be pleased to respond to any questions that  you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff members have any questions concerning this  testimony, please contact me 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 statement. Other individuals  who made key contributions to this testimony include Joseph Cook,  Assistant Director; Kim McGatlin, Assistant Director; Rathi Bose; Ellen  Fried; Ruben Gzirian; Terrance Horner, Jr.; David Messman; Lillian  Slodkowski; Kathryn Smith; and Sara Sullivan.
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