Tuesday, April 25, 2017

Administration's Plans to Cut Indirect Costs from Research Budgets

Earlier this month, PBS ran a story about the high cost of university research, noting specifically that indirect costs add appreciably to those costs. According to PBS, the President proposed a $7 billion budget cut for the National Institutes of Health (NIH) over the next 18 months while Tom Price, the President's Secretary of Health and Human Services said that he may find those savings in indirect expenses that funds the purchase of lab equipment and paying the electric bills.

The story goes on to describe how the NIH spent $16.9 billion in direct research last year and another $6.4 billion to cover overhead costs (i.e. indirect expenses). That means on average, for every dollar that universities receive for research, they receive another 38 cents to keep the lights on and for other indirect expenses.

Understandably, universities are a little nervous. The University of Pennsylvania called it unthinkable. MIT wrote to employees warning of staffing cuts if the President's plan were enacted. The University of Washington (UW) president went to Washington DC to lobby on behalf of the university stating that the proposed cuts would be devastating to the university. Last year, UW received $247 million in indirect costs including $138 million from the NIH. A large part of the balance was funded by the Office of Naval Research (ONR).

It is well known among those familiar with Government procurement regulations that the cost principles applicable to Universities are very generous. For example, universities can depreciate donated assets. So you have instances where Stanford University receives a $100 million donation from Hewlitt Packard for an engineering building is allowed to depreciate that $100 million against Government research. So in effect, the University receives a double donation, one from Hewlitt Packard and the other from the Government.

Or consider libraries. The cost principle allow universities to allocate the cost of libraries to Government grants on the premise that researchers use those libraries to further their research activities. In some cases, research activities absorb more than half the cost of those libraries. But wouldn't the universities incur the same library expense irrespective of the research activities being performed on their campuses?

Expect to hear more on the administration's plans to cut indirect expenses out of research budgets in the coming months.

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