“Direct” costs pay for the resources that can clearly be linked to one sponsored project. Examples of direct costs are salaries for re­searchers or airline tickets to get to a research destination. F&A costs are the “indirect” costs associated with running a sponsored project. F&A stands for “Facilities & Administration.”

For example, if a PI is using on-campus lab space, there is no easy way to determine what the electricity costs or maintenance costs are for the PI’s work in the lab on any particular sponsored project. The same problem exists when a piece of equipment is shared by a number of PIs or projects; there is no way to determine the cost attributable to each PI or project. These are examples of the “facilities” costs or “F” costs in F&A.

Administrative costs (the “A” in F&A) include both departmental and central office support of a sponsored project. Again there is no way to track how much time the administrative staff in all the service units on campus (e.g., payroll or human resources) spend on any particular sponsored project.

The problem is that F&A costs are “real” costs to the University, but we cannot charge any individual sponsor for the exact costs for the facilities used and administrative services associated with the sponsor’s project because there is no way to allocate these costs directly to the project.

We therefore negotiate an F&A rate with the federal government that can be charged across all of the University’s sponsored projects. UC Berkeley negotiates our F&A rate with the U.S. Department of Health and Human Services (DHHS) because we receive the most federal funds from this agency. In our case we negotiate an on-campus and an off-campus rate for (a) research projects, (b) instruction projects, and (c) other types of sponsored projects. See Facilities and Administrative (Indirect Cost) Rates for our current rates for each of these.

UC Berkeley applies the appropriate F&A rate against every dollar of direct cost that is spent on the sponsored project. This means that the University only recovers F&A when the PI spends the funds budgeted for direct costs. For example, if Prof. X receives a grant for $100,000 with an on campus F&A rate of 53.5%, the University is eligible to receive $53,500 in F&A costs. However, if Prof. X only spends $75,000 in direct costs the University will recover over time only $40,125 in F&A.

There also are cost categories that are exempt for F&A charges. For example, equipment costs are not burdened with F&A. In the example above, if the PI received a grant for $100,000 and $25,000 of this award was to purchase equipment, the University would still recover on $40,125 in F&A even if the PI spent all of the funds.

Another wrinkle: The University only charges its F&A rate against the first $25,000 of any subaward. So if the sponsored project budget included a subaward of $50,000 to another organization, the University would only collect $13,375 in F&A on the $50,000 funds going to the subrecipient instead of $26,750. Meanwhile the subrecipient can charge UC Berkeley with its full F&A rate on all of the funds it receives!

After the University recovers the F&A funds, the funds are treated as University funds. This means that the sponsor no longer has any say over what the University decides to do with these funds once they are moved to a University fund. While it might seem logical to reimburse the facilities and administrative cost areas that created the F&A in the first place, this is not a requirement. Most universities follow a specific plan for distributing F&A costs. (Note: It has been University of California policy to return the majority of the F&A generated by each campus to the Office of the President for redistribution. However, as of July 1, 2011, the majority of the F&A generated by each campus will be returned to each campus.)

Most agencies of the federal government will honor the F&A rate UC Berkeley has negotiated with DHHS. However, some agencies and programs within the federal government pay a lesser rate. For example, federal training grants typically carry only an 8% F&A rate. Many state and non-profit agencies also pay a lesser amount of F&A than the University’s negotiated rate. When this occurs, SPO must go through a formal process to determine if a lesser rate is allowable and obtain an “indirect cost waiver.” This process is described at Facilities and Administrative (Indirect Cost) Waivers.

When the University receives less than its negotiated F&A rate, the University ends up subsidizing the sponsor’s sponsored project. This is typically not allowed for projects funded by foreign sponsors or for-profit groups since this would be a gift of public funds for private benefit.

Although many researchers feel that any recovered F&A should be returned to them. In truth, even sponsored projects that carry the University’s full F&A rate do not completely cover the University’s costs. For some time now the administrative component of the F&A rate has been capped by the federal government at 26% despite the fact that administrative costs to the University have risen above that over time. It therefore costs the University money to support any sponsored projects activity. This is why it is critical that the University recover what it is eligible to recover for its F&A costs.

The UC Office of the President Contract and Grant Manual, Chapter 8, Indirect Cost provides a more thorough review of this topic.