The 1991 Revisions Reduced Government Spending for Administrative Costs and Made Rates More Uniform

The 26-percent administrative cap has reduced government spending for universities’ administrative costs by about $104 million per year and has made universities’ overall indirect cost rates more uniform. The cap affected 37 public and 32 private universities. The Effect of the 1993 Revisions Is Unclear

The effect of the 1993 changes on universities’ ability to recover costs is unclear because federal agencies are implementing the changes only when each university renegotiates its multiyear rate agreement. In particular, the following alternatives would control indirect cost growth, improve consistency in the way that universities treat costs, and/or streamline cost accounting procedures:
Overall indirect cost rates could be capped through a system of flat rates. Effect of the 26-Percent Administrative Cap

Alternatives for Revising OMB Circular A-21

Office of Management and Budget (OMB) Circular A-21 is designed to provide that the federal government bear its fair share of universities’ costs for performing federally funded research, determined in accordance with generally accepted accounting principles. They stated that limiting cost recovery for facilities would adversely affect universities’ ability to provide modern laboratory facilities and equipment needed to perform advanced scientific research. A university can be reimbursed for a major share of the study’s cost because it is an allowable indirect cost. We also were asked to identify alternatives for further revising Circular A-21 to control the growth of indirect costs, improve consistency in the way that universities treat costs, and/or streamline indirect cost accounting procedures. This review follows up on our August 1992 report on universities’ indirect costs.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the government's regulations that allow universities to recover indirect costs associated with federally funded research, focusing on the effects of the Office of Management and Budget (OMB) revisions that: (1) established a 26-percent cap on federal reimbursements for universities' administrative costs; (2) further clarified and tightened certain indirect cost accounting procedures; and (3) control indirect cost growth, improve the consistency of cost treatments, and streamline indirect cost accounting procedures.

What GAO Found

GAO found that: (1) the 26-percent administrative cost cap affected 69 to 82 of the 140 universities surveyed and reduced annual administrative costs reimbursements by about $104 million; (2) the cap also lead to more uniform indirect cost rates among the universities; (3) the 1991 revisions eliminated or reduced some previously allowable indirect costs; (4) the effects of the 1993 revisions are not fully known because federal agencies are implementing them through renegotiated multiyear rate agreements; (5) the change in the treatment of tuition remission costs could reduce the number of science and engineering doctoral candidates at 4 universities; (6) OMB has proposed several revisions to its indirect cost principles to control indirect cost growth and improve accounting procedures; and (7) federal and university officials oppose a total cap on indirect cost rates because it could adversely affect the universities' ability to provide modern laboratory facilities and equipment.