February 28, 2008

FY 2008 DoD Indirect Cost Policy

The fiscal year 2008 Department of Defense (DoD) appropriation includes a one-year limit, or cap, of 35 percent on indirect costs (i.e., facilities and administrative or F&A) of DoD-sponsored basic research. This bill capped the amount of indirect costs the prime contractor can receive under certain DoD contracts, grants, and cooperative agreements to 35 percent of Total Cost (TC). The limitation applies to an award at the prime level only and does not flow down to subcontractors.

UC Berkeley investigators and staff preparing DoD proposal budgets should continue to use the negotiated campus Facilities and Administrative (Indirect Cost) Rates of 53.5 percent for on-campus sponsored research and 26 percent for off-campus sponsored research.

Upon award, the DoD awarding agency will be responsible for any adjustments to the budget proposal. In those situations where the budget proposal included F&A costs that exceeded the cap, the agency may adjust the award. However, a university that has a negotiated F&A rate of 53.8 percent or less should not incur a loss of indirect cost recovery.

The Council on Governmental Relations provides an explanation of the math involved in determining if an institution is affected by the 35-percent limit:
Institutions that have a negotiated F&A rate of 53.8 percent, or less, will be financially unaffected (i.e., F&A can not exceed 35 cents for every $1 expended; therefore a ratio of 35 cents of F&A to 65 cents of direct costs is the conversion ratio to the “standard” F&A rate based on modified total direct costs. In situations where all direct costs on an award are F&A eligible, 53.8 percent is effectively the F&A rate cap).

Example one:
  • On a $100,000 award, $35,000 in indirect costs is the maximum allowed ($100,000 x 35%)
  • If $35,000 is the indirect cost, $65,000 is the direct cost ($100,000 - $35,000 = $65,000)
  • So, $35,000/ $65,000 = 53.846%
  • Thus, 35% Total Cost = 53.846% of Direct Costs
Example two:
  • $100,000 MTDC x 53% IDC = $53,000
  • $153,000 Total Costs
  • $153,000 x 35% = $53,550
  • $53,000 < $53,550 so full indirect cost rate can be applied
University of California Office of the President Research Administration Office guidance is available at http://www.ucop.edu/raohome/cgmemos/08-03.pdf.

DoD guidance on the limit is available at http://www.dod.mil/ddre/doc/LABS_Memo_indirect_cost_limitation.pdf.