What in the World are Indirect Costs?
Confused about indirect costs? No wonder, it is one of the most misunderstood elements of budget creation - and it isn't hard to see why - it's complicated! Yet indirect cost recovery provides about $11 million to the College of Medicine each year to support programs and projects. So, it is important that researchers and administrators understand what they are, how they are calculated, and how they are used to support the goals of the institution.
Approximately two-thirds of the funds the University receives for sponsored projects come from the federal government. It is important that we comply with federal cost principles, specifically cost accounting standards set forth in federal OMB Circular A-21; therefore, university policies reflect these federal requirements.
Indirect costs are defined as "those costs that are incurred for common or joint objectives"; therefore they are costs that cannot be specifically attributed to an individual project. Indirect costs are also referred to as facilities & administration (F&A) costs or overhead costs. For example, a principal investigator may use lab space for multiple projects. We know the different projects being conducted in the space, but how can we tell how much electricity is used for an individual project? The answer is to use formulae that spread the costs of the whole lab across all the projects conducted there. This same basic principle assigns indirect costs across all projects.
Indirect costs directly support research, they are just calculated indirectly.
Important categories for calculating indirect costs are: