University Business Policies and Procedures Manual

2420
INDIRECT COST RATE PROPOSAL FOR SPONSORED PROJECTS
Effective Date: April 1, 1993
Revised: 04/05/93, 08/01/06
Subject to Change Without Notice

Authorized by Regents' Policy 5.9 "Sponsored Research"

1. General

The University is appropriately reimbursed for indirect costs incurred in support of projects sponsored by federal and most non-federal sources, along with direct costs charged to the sponsoring agency for each project. Indirect costs are real costs that cannot be easily identified with a specific University activity or sponsored project, but instead are incurred in providing resources and support to many or all activities. This policy documents the methodology used by the University of New Mexico to develop indirect cost rates. This methodology is in compliance with the federal regulations and requirements defined in the Office of Management and Budget Circular A-21, Sections E, F, and G.

Indirect costs are allocated to the University's activities in proportion to the extent to which each activity uses the University's resources, based on procedures prescribed in Circular A-21. The purpose of the indirect cost rate analysis process is to establish a rate for allocating such costs to the functional cost centers. The University of New Mexico establishes separate indirect cost rates for the following categories of University functions:

• Main Campus Sponsored Research: On-Campus
• Main Campus Sponsored Research: Off-Campus
• Main Campus Sponsored Instruction: On-Campus
• Main Campus Sponsored Instruction: Off-Campus
• Other Main Campus Sponsored Activities (Public Service): On-Campus
• Other Main Campus Sponsored Activities (Public Service): Off-Campus
• Main Campus Clinic Drug Studies
• Medical Center Sponsored Research: On-Campus
• Medical Center Sponsored Research: Off-Campus
• Medical Center Sponsored Instruction: On-Campus
• Other Medical Center Sponsored Activities (Public Service): On-Campus
• Other Medical Center Sponsored Activities (Public Service): Off-Campus
• Medical Center Clinic Drug Studies
• Mental Health Center
• New Mexico Engineering Research Institute (NMERI): CERF Contract
• New Mexico Engineering Research Institute (NMERI): Other Contracts

The rate established for each functional area is used to assess indirect costs for individual sponsored projects within that function.

2. Summary of Indirect Cost Rate Calculation

The process of calculating indirect cost rates is summarized below. This process is for calculation purposes only, as part of the development of the indirect cost rate proposal; no entries are made to the University accounting system.

2.1. Cost Centers

A cost center is a specific University function or activity for which costs are accumulated. Direct cost centers are cost centers that directly support one (1) or more of the University's primary functions (instruction, research, and public service). Indirect cost centers provide indirect support to these functions. The latter type accumulates costs in pools on an intermediate basis in the calculation process; such costs are allocated to the direct cost centers. Cost centers with common functional purposes and objectives are grouped together. Cost centers at the University of New Mexico are categorized as follows:

2.1.1. Main Campus

2.1.1.1. Direct Cost Centers

• Instruction (including Departmental Research)
• Sponsored Research
• Sponsored Instruction
• Other Sponsored Activities
• Other Main Campus Activities
• NMERI

2.1.1.2. Indirect Cost Pools

• Building Usage Allowance
• Equipment Usage Allowance
• Operation and Maintenance
• General and Administration
• Library
• Departmental Administration
• Sponsored Programs Administration
• Student Services Administration
• NMERI Administration

2.1.2. Medical Center

2.1.2.1. Direct Cost Centers

• Instruction
• Sponsored Research
• Sponsored Instruction
• Other Sponsored Activities
• Mental Health Center
• Patient Care
• Other Medical Center Activities

2.1.2.2. Indirect Cost Pools

• Building Usage Allowance
• Equipment Usage Allowance
• Operation and Maintenance
• General and Administration
• Library
• Departmental Administration
• Sponsored Programs Administration
• Student Services Administration

2.2. Allowable Costs

Only allowable costs, as defined by federal regulations, are accumulated in indirect cost pools. Refer to "Accounting for Federally-Defined Allowable and Unallowable Costs," Policy 2410, UBP, for a complete definition of allowable costs.

2.3. Allocation of Indirect Costs

Amounts in indirect cost pools are fully allocated to the direct cost centers at fiscal year-end. The purpose of the allocation process is to allocate indirect costs to the major University functions in proportion to their use of the University's resources. In this process, indirect costs are for calculation purposes only, as part of the development of the indirect cost rate proposal; no entries are made to the University accounting system.

2.3.1. Allocable Cost

A cost is allocable to a cost center if the goods or services involved benefit that cost center.

2.3.2. Allocation Base

A common measurable base is used to allocate the amounts in each indirect cost pool to other cost centers. The allocation base appropriate for each indirect cost pool is selected to ensure an equitable distribution in accordance with OMB Circular A-21 guidelines. An example is the allocation of Operation and Maintenance costs on the basis of square feet of space used by each cost center category. The allocation bases used by The University of New Mexico to allocate each indirect cost pool is described in Section 4. herein.

2.4. Calculation of Indirect Cost Rates

After indirect costs have been allocated to the primary functions, a mechanism for charging indirect costs to individual sponsored projects is needed. For this purpose, a rate is computed for each primary University function to which indirect costs are assessed. The rate results from the process of converting a fraction to a percentage. In simplified terms, the components of the fraction are as follows:

• The numerator is the total dollar amount of allowable indirect costs allocated to that direct cost center category.
• The denominator is the total dollar amount of allowable direct costs of that direct cost center category.

The actual calculation process, as outlined in Section 6. herein, is considerably more complex.

2.5. Proposal and Negotiation

Calculated indirect cost rates are presented in the form of a proposal. The indirect cost rate proposal is prepared by the University Financial Services' organizations at required intervals. The proposal is submitted by the Executive Vice President for Administration to the cognizant federal agency, which may subsequently audit the proposal and supporting documentation. Finally, the actual rates to be used are negotiated by University officials and federal representatives.

3. Required Data

Since required indirect cost pools do not coincide with the standard University expenditure categories; cost analysis and regrouping are required. Various data are required for this cost analysis.

3.1. Modified Total Direct Costs

The modified total direct costs (MTDC) of each cost center must be computed. MTDC, as defined by federal regulations, consists of the following cost items:

• Salaries and wages
• Fringe benefits
• Materials and supplies
• Services
• Travel
• Subcontracts up to $25,000 each

A cost center's MTDC are determined as follows:

Total Direct Costs (excluding Cost of Goods Sold)

Less Exclusions:
(per rate agreement)

Cost of capital equipment
Subcontract costs which exceed $25,000
Stipends
Patient care costs

Plus: Mandatory cost sharing

= Modified Total Direct Costs

3.1.1. Net Cost

Only net costs, as defined by federal regulations, may be considered in computing MTDC, as well as in computing the cost of capital items. Net costs are determined by:

• excluding any capital expenditures made from federal funds, and
• applying any credits, such as discounts or refunds, that offset or reduce expenditures.

3.1.2. Classified Expenditure Summary

The Classified Expenditure Summary report is produced as required. For each unrestricted account, this report allocates MTDC to the various University functions, and also provides the following information:

• Total Direct Costs
• Adjustments to Total Direct Costs (such as addition of fringe benefits)
• Exclusions
• Modified Total Direct Costs

3.1.2.1. Departmental Administration Allowance

The MTDC associated with faculty salaries and benefits in the instructional departments are allocated to administrative functions using the Direct Cost Equivalent formulas. These formulas must be approved by the cognizant audit agency.

3.1.3. Cost Sharing

Mandatory cost sharing associated with sponsored projects must be identified for each fiscal year, on a project-by-project basis.

3.2. Space Usage

One allocation base used in allocating indirect costs is the amount of square feet of University building space used by cost centers. The Plant Fund Accounting Office maintains a space usage survey to capture the use of University building space on a room-by-room basis. At regular intervals, survey forms are sent to departmental administrators for completion. Using the completed survey forms, the Plant Fund Accounting Office computes the amount of Net Assignable Square Feet used by each department and cost center category:

• for each University building, and
• in total.

4. Indirect Cost Pools and Allocation Bases

Costs accumulated in each indirect cost pool are described in this section. In addition, the allocation base used to allocate costs from each pool is identified.

4.1. Usage Allowances

The University is compensated for providing buildings and equipment for use by sponsored projects by charging a portion of building and improvement usage allowances and equipment depreciation to sponsored projects.

4.1.1. Building Usage Allowance

The Building Usage Allowance pool consists of two (2) cost components: the allowance for use of University buildings and the allowance for use of University land improvements.

4.1.1.1. Allowance for Use of University Buildings

The University Plant Fund Accounting Office maintains cost records on each University building, including the total cost of buildings and fixed equipment, and provides cumulative capital costs paid from federal funds. Using this data, the allowance for use of University buildings is calculated and allocated to each applicable cost center category as of the end of each fiscal year as follows:

(1) The net cost (excluding costs paid by federal funds) of each building plus fixed equipment as of the beginning of the fiscal year is allocated by cost center category, based on the percent of square feet used in that building.

(2) The net cost of all buildings allocated to each cost center category is totalled.

(3) The net cost of additions to campus buildings incurred during the fiscal year is allocated by cost center category, based on the percent of square feet used in each addition.

(4) The net cost of all additions to campus buildings allocated to each cost center category is totalled.

(5) Usage allowances for each cost center category are calculated as follows:

(a) Two percent (2%) of the net cost of campus buildings and fixed equipment as of the beginning of the fiscal year, plus
(b) One percent (1%) of the net cost of additions to campus buildings and fixed equipment during the fiscal year.

4.1.1.2. Allowance for Use of University Land Improvements

Land improvements include the Utilities Tunnel, Electrical System, Water System, and other land improvements such as parking lots, sidewalks, fences, etc. The allowance for use of University land improvements to be assessed to each applicable cost center category is calculated as of the end of each fiscal year as follows:

(1) (a) Five percent (5%) of the net cost of land improvements as of the beginning of the fiscal year, plus
(b) Two and one half percent (2 1/2%) of the net cost of land improvements during the fiscal year.

(2) The total use allowance for the fiscal year is apportioned between the Main Campus and Medical Center on the basis of full-time equivalent employees plus students in each of the two (2) locations.

(3) Main Campus and Medical Center costs are then allocated to applicable cost center categories on the basis of salary and wages.

4.1.1.3. Total Building Usage Allowance

The total Building Usage Allowance allocated to each cost center category is the sum of the respective allowances for use of University buildings and land improvements.

4.1.2. Equipment Usage/Depreciation

The Plant Fund Accounting Office maintains cost records on each piece of movable equipment costing $500 or more. Using this data, the equipment depreciation expense is calculated as of the end of each fiscal year according to the "Depreciation" Policy 8020, UBP. Equipment depreciation expense is allocated to cost center categories based on the usage of total square feet of space.

4.2. Operation and Maintenance Expenses

Included in this pool are the net costs of operating and maintaining the University's physical plant. Operation and maintenance costs include, but are not limited to, expenses incurred for janitorial service; grounds maintenance; campus security; property insurance; repairs to buildings, equipment, and vehicles; utilities; rent; and Physical Plant Department administration. Operation and maintenance costs are allocated to the applicable cost center categories on the basis of total square feet of space used.

4.3. Administrative Costs

Administrative costs are segregated into three (3) groups: general administration expenses, departmental administration expenses, and sponsored programs administration expenses.

4.3.1. General and Administrative Expenses

G&A expenses are those that have been incurred for the general executive and administrative offices of the University and those expenses of a general nature which do not relate solely to any major University function. For example, these costs include, but are not limited to, expenses incurred by the University of New Mexico Board of Regents, President's Office, Office of the Executive Vice President for Administration, Financial Services' Office (excluding Contract and Grant Accounting), and Department of Human Resources. General and administrative costs are allocated to the applicable cost center categories as follows:

(1) Where applicable, costs for the Main Campus and Medical Center are segregated on the following basis:

• Human resource costs are segregated on the basis of staff/faculty FTE.
• Public information costs and the costs incurred by central administration offices are segregated on the basis of MTDC allocation.
• Purchasing, accounts payable, and materials management costs are segregated on the basis of number of Purchase Requisitions processed.

(2) Other costs are allocated in total to Main Campus.

(3) A portion of general and administrative expenses are allocated to the Mental Health Center (from Main Campus) on the basis of a percentage determined as follows:

• Numerator = MTDC for the Mental Health Center
• Denominator = MTDC, excluding usage allowances and depreciation, for Main Campus and Medical Center

(4) A portion of general and administrative expenses are assessed to NMERI (from Main Campus) on the basis of total NMERI salaries and wages.

(5) For each location (Main Campus and Medical Center), general and administrative costs are allocated to each remaining applicable cost center category, on the basis of each category's modified total direct costs. For each location, the MTDC for each cost center category is expressed as a percentage of the MTDC for all cost centers, and that percentage is applied to that location's total General and Administrative cost pool.

4.3.2. Departmental Administration Expenses

Included in this pool are administrative expenses incurred in academic units (departments, colleges, and divisions), which benefit common or joint activities. These costs include, but are not limited to, expenses incurred by the:

• Office of Academic Affairs;
• Deans of the colleges and schools and their staff (excluding non-administrative faculty costs); and
• Departmental chairpersons and their staff.

A portion of salaries and fringe benefits for faculty assigned administrative work (Departmental Administration Allowance) is also allocated, up to a maximum of three and six tenths percent (3.6%) of MTDC. The amount of such faculty salary/benefit expense is determined by the Direct Cost Equivalent formulas.

Modified total direct costs of departmental administration are allocated to applicable cost center categories, department-by-department, on the basis of the MTDC allocation of the direct cost center categories. The exception is the allocation to NMERI, which is based on total NMERI salaries and wages.

4.3.3. Sponsored Programs Administration Expenses

Included in this pool are expenses of separate organizations established to administer sponsored projects. These expenses include, but are not limited to, administrative expenses incurred by the:

• Office of Research Administration,
• Contract and Grant Accounting Office, and
• Other centers and institutes.

Modified total direct costs of sponsored programs administration are allocated to applicable cost center categories on the basis of the MTDC allocation of the appropriate direct cost center categories. The exception is the allocation to NMERI, which is based on total NMERI salaries and wages.

4.4. Library Expenses

Included in this pool are expenses incurred for the operation of the University libraries, including the cost of books and library materials. Modified total direct library costs are apportioned on the basis of the population of library users, between three (3) groups, (faculty/professional staff/graduate assistants, students, and other users of the Library), on the basis of the full-time equivalent population of each group. The costs that are apportioned to the staff group are then allocated to the applicable direct cost center categories. The allocation basis is the salary expense attributable to faculty, professional staff and graduate assistants in each of these cost center categories.

4.5. Student Services Administration Expenses

Included in this pool are expenses incurred for the administration of student affairs and for services to students outside the classroom. These expenses include, but are not limited to, costs incurred by the:

• Office of the Vice President for Student Affairs,
• Dean of Students,
• Admissions Office,
• Registrar,
• Student Financial Aid Office,
• Career Services,
• Student Health Center,
• A portion of Bursar's Office, and
• Branches (student services administration expenses).

Modified total direct costs of student services administration are allocated to the applicable cost center categories for both the Main Campus and Medical Center, on the basis of student credit hours.

4.6. NMERI Administration Expenses

Included in this pool are expenses incurred by the NMERI central administration offices. These costs are allocated to the NMERI cost center on the basis of total NMERI salaries and wages.

5. The Step-Down Allocation Process

Indirect cost pools are allocated to direct cost center categories and other indirect cost pools as described below. Each indirect cost pool is fully allocated. Indirect costs are allocated only to cost center categories which benefit from the resources provided by the IDC pool.

5.1. Allocation of Indirect Cost Pools to Cost Center Categories

Indirect cost pools are allocated to the Main Campus and Medical Center cost center categories indicated in Tables 5.1.1. and 5.1.2.

TABLE 5.1.1.

ALLOCATION OF INDIRECT COST POOLS TO COST CENTER CATEGORIES
MAIN CAMPUS

X = Indirect Cost Pool indicated is allocated to this Cost Center Category

TABLE 5.1.2
ALLOCATION OF INDIRECT COST POOLS TO COST CENTER CATEGORIES
MEDICAL CENTER

X = Indirect Cost Pool indicated is allocated to this Cost Center Category

5.2. Order of Distribution

Indirect cost pools are allocated in the following sequence:

(1) Building Usage Allowance
(2) Equipment Usage Allowance
(3) Operation and Maintenance Expenses
(4) General and Administrative Expenses
(5) Library Expenses
(6) Departmental Administration Expenses
(7) Sponsored Programs Administration Expenses
(8) Student Services Administration Expenses
(9) NMERI Administration Expenses

 6. Determining Proposed Indirect Cost Rates

An indirect cost rate is determined for each functional area for which a rate is needed (identified in Section 1. herein), as described below.

(1) An indirect cost rate is calculated for each IDC component allocated to each of the primary functional areas. The rate results from the conversion of a fraction to a percentage. The components of the fraction are:

• The numerator is the total dollar amount of indirect costs allocated to that direct cost center category.
• The denominator is the total dollar amount of the appropriate MTDC of that direct cost center category.

To determine the appropriate MTDC's to be included in the base (denominator), each rate component (numerator) is paired with the appropriate MTDC base for that function, as follows:

(2) For each primary functional area, the percentages computed in Step (1) are totalled. The total is the proposed indirect cost rate for that functional area.

Percentages for the following components are excluded from the total rate for Off-Campus activities:

Building Usage Allowance
Equipment Usage Allowance
Operation and Maintenance Expenses
Library Costs

(3) The administrative portion of indirect cost rates cannot exceed twenty six percent (26%) of Modified Total Direct Costs. The administrative portion includes the General and Administrative, Sponsored Programs Administration, and Departmental Administration cost components.

7. Indirect Cost Rate for NMERI

There are two (2) rates applicable to the New Mexico Engineering Research Institute (NMERI). One (1) rate is calculated and applied only to the CERF contract, and includes the total of percentages computed for General and Administrative, Library, Departmental Administration, and Sponsored Programs Administration. For other contracts the NMERI rate includes these indirect cost components plus a rate component that reflects NMERI's administrative expenses.

8. Internal Review Process

Before proposed indirect cost rates are submitted to the Federal Government, a final review is required. The final review of the indirect cost rate analysis includes the following actions:

• Verify data and calculations.
• Verify that unallowable charges have been excluded.
• Reconcile schedules and spreadsheets with audited financial statements.
• Test check details in individual accounts.
• Test for reasonableness.
• Compare results of calculations with the prior year and analyze any major variations. Prepare a written justification for any increase greater than ten percent (10%) in any rate component of ten (10) points or more.
• Maintain audit trails and keep complete work papers.

9. Certification of Proposed Indirect Cost Rates

Each proposal to establish indirect cost rates must be certified, using the Certificate of Indirect Costs format in OMB Circular A-21, Section K (2)(b). The Vice President for Business and Finance signs the Certificate on behalf of the University, certifying that all costs included in the proposed rates are allowable and properly allocable to federally-sponsored agreements.

10. Negotiation of Indirect Cost Rates

Final indirect cost rates are negotiated with representatives of the U. S. Department of Health and Human Services. A set of rates is negotiated for a future year or period based on the indirect rate analysis conducted with data from the most recent complete fiscal year. The results of such negotiations are reflected in a Negotiation Agreement which defines the indirect cost rates which the University will use for a given period.

11. Application of Indirect Cost Rates to Sponsored Programs

The negotiated indirect cost rate for each functional area is used to distribute indirect costs to individual federally-sponsored projects within that function. The appropriate indirect cost rate is applied to each sponsored project on a monthly basis, to determine the amount to be charged to the sponsoring agency for indirect cost recovery.

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