The Importance of Indirect Costs to Universities, Hospitals, and Non-profits

The importance of indirect costs to Universities, Hospitals, and Non-profits

The NIH 2018 budget was cut 18% for research by claiming that there was a lot of fraud in University use of the funds, justifying the drastic cut of indirect costs from 30% down to 10%.  We will see that the justified indirect costs range in the 30% level, and cannot seriously be cut without damaging the Universities.  The industry indirect cost rate was claimed to be 10%, but for non-profits, it was much higher than the Universities rate.

The University researchers us graduate students, who work for a fraction of what industry workers get paid.  They are also trained in classes and on the job, lowering their starting salaries from what industry must pay their already trained workers.  The faculty is mostly paid for by the University.  If a 9-month faculty gets 2 months’ salary on the grant, then only 2/11 or 22% of their salary is paid for by the grant.  For non-profits, their whole salary can be on the grant.

Nature Magazine did a survey of 2013 indirect cost data that was reported on by Heidi Ledford on Nov. 19, 2014.  That contrasted the average negotiated rate of 53%, with the later justified average reimbursed rate of 34%, across Universities, Hospitals, and non-profits.  The average reimbursed rate for Universities was 31%, for Non-profits 38%, and for Hospitals, 38%.  We see that Universities had the lowest rate among the three.

Using the Stanford case, for every contract dollar, 31 cents went to indirect costs, consisting of 15 cents administration support, 7 cents for facilities, 1 cent for equipment, and 2 cents for libraries, among other costs.

The non-profits had negotiated rates in the range of 60-90 percent, with the average reimbursement of 38%.

In the NIH grants, the dollar amount is given to the awardee, and the added indirect costs are given to the university.

In NSF grants, the indirect costs come out of the award, which results in about 60% of the award going to the grantee.

Japan has established a flat rate for its indirect costs at 30%.   The European Union has adopted a flat rate of 25%.

In universities, the indirect costs, having many facets, are put into the general fund.  It is hard to point out that they are fraudulently used, since the university functions as a complex and highly efficient combination of education, training, and relatively inexpensive research.

The claim of a low indirect cost of 10% for industry seems to be a myth of the Trump administration Office of Management and Budget.  Their calling the 30% indirect cost for Universities as fraud, is an insult to all universities, and to those who dedicate their careers to them, and who invest their education years in them.

About Dennis SILVERMAN

I am a retired Professor of Physics and Astronomy at U C Irvine. For a decade I have been active in learning about energy and the environment, and in lecturing and attending classes at the Osher Lifelong Learning Institute (OLLI) at UC Irvine.
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