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

Letter

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

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.

NSF Guidance for Setting Indirect Cost Rates Has Not Been Consistently Implemented and Does Not Include Certain Details

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.

GAO Contact and Staff Acknowledgments

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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