The federal government reimburses both direct and indirect costs  associated with federally funded research. Another source of variation was that schools eligible for a rate  increase of 1.3 percent to account for the cost of utilities, known as the  utility cost adjustment, both proposed and negotiated higher rates than  those not receiving the adjustment. The Difference between Proposed and Negotiated Rates was Larger for Schools Negotiating with HHS Than Schools Negotiating with DOD

The difference between a school’s proposed and negotiated rates varied  significantly based on the cognizant rate-setting agency with which a  school negotiated. The cap was established in 1991 with the intent of limiting federal  reimbursement for schools’ indirect costs. OMB has  not formally reexamined this cap since its implementation in 1991. For  example, unlike for the administrative cap, the DOD basic research cap’s  impact cannot be determined up front on an institution-wide basis because  its limitation on indirect costs depends on the types of costs included in  each individual award. The Cap on Indirect Costs for DOD Basic Research May Limit Reimbursement for Some Schools, but the Extent That Reimbursement Is Limited Is Difficult to Determine

Approximately 22 percent of schools had a fiscal year 2008 indirect cost  rate high enough for awards to be potentially limited by the 35 percent cap  on indirect costs of DOD basic research awards. The Three Methods DOD Uses to Oversee Reimbursement of Indirect Costs to Schools Have Weaknesses

DOD identified three methods it uses to oversee indirect cost  reimbursement for research grants awarded to schools: the annual single  audit, the award closeout process, and agency audits, performed by DCAA  or by cognizant agencies for audit. At least  one of the three methods was used in fiscal year 2008 at 25 of the 32  schools we reviewed. However, 4 schools were not covered by any of the  three methods, indicating a gap in coverage (see table 3). In our discussions with cognizant agencies for audit, we learned that HHS  has increased the audits of research awards to schools in recent years,  which have led to some significant findings of improper billings of indirect  costs. Conclusions

Inconsistencies in the rate-setting and reimbursement processes lead to  perceived and actual differences in the treatment of schools performing  DOD basic research. As a result,  DOD lacks assurance that it is reimbursing indirect costs appropriately. Appendix I: Objectives, Scope, and Methodology

The objectives of this study were to examine the following issues related  to higher education institutions performing basic research for the  Department of Defense (DOD): (1) the variation in proposed and  negotiated indirect cost rates and factors that may contribute to  variations; (2) how and to what extent the administrative cap and the DOD  basic research cap limit reimbursement of indirect costs; and (3) the  methods DOD uses for overseeing compliance with indirect cost  reimbursement for grants and the extent to which each method was used. To identify the proposed and negotiated indirect cost rates of schools  performing basic research for DOD and factors that may contribute to  variation in the rates, we collected and analyzed information from a  probability sample of schools that performed basic research for DOD in  fiscal year 2007, according to DOD-provided data. We also interviewed officials at DOD, OMB, HHS, the National  Science Foundation and the Department of Education, as well as  independent public accounting firm representatives and higher education  representatives.
Why GAO Did This Study

In fiscal year 2007, the majority of the Department of Defense's (DOD) basic research obligations were provided to higher education institutions. DOD reimburses these institutions for both direct and indirect costs for research. Two federal agencies, DOD and the Department of Health and Human Services (HHS), negotiate indirect cost rates used to reimburse higher education institutions for indirect costs on federally funded research awards, including DOD awards. GAO was asked to examine the following issues related to higher education institutions performing basic research for DOD: (1) the variation in proposed and negotiated indirect cost rates and factors that may contribute to variations; (2) how and to what extent the administrative cap and the DOD basic research cap limit reimbursement of indirect costs; and (3) the methods DOD uses for overseeing compliance with indirect cost reimbursement for grants. GAO surveyed a generalizable sample of higher education institutions performing basic research for DOD; reviewed agency guidance and policies; and interviewed officials from federal agencies, independent public accounting firms, and higher education institutions.

What GAO Found

GAO identified wide variation in indirect cost rates at schools receiving DOD funding in fiscal year 2007, which may be related to a number of factors. For example, the average difference between a school's proposed and its negotiated rate was much larger for schools with HHS as the cognizant rate-setting agency than for those with DOD, in part due to the agencies' differing approaches to negotiation. GAO also found that schools receiving a 1.3 percent add-on to their rate to assist with the cost of utilities both proposed and negotiated higher rates than those without the adjustment. Contrary to guidance to periodically review school eligibility, the fixed list of schools eligible to receive this add-on has not been revisited since established in 1998. The cap on the administrative portion of the indirect cost rate limited fiscal year 2007 reimbursement for about 83 percent of schools. The cap was established nearly 20 years ago with the intent of limiting federal reimbursement for schools' administrative costs, and OMB has not reexamined this cap since its implementation. We estimate the DOD basic research cap might have limited fiscal year 2008 reimbursement for some awards at about 22 percent of schools, but the limitation depends on the types of costs included in each individual award and is difficult to determine up front on a schoolwide basis until total costs for each award are tallied. GAO identified weaknesses in the three methods DOD says it uses to oversee that indirect costs for research grants are reimbursed appropriately: the single audit, the closeout process, and audits by DOD's Defense Contract Audit Agency or by cognizant agencies for audit. At least one of the three methods was used at most of the schools we reviewed, but four schools were not covered by any of the methods, indicating a gap in coverage. In our discussions with cognizant agencies for audit, we learned that recent audits of research awards to schools at HHS have led to some significant findings of improper billings of indirect costs. Inconsistencies in rate-setting and reimbursement processes lead to perceived and actual differences in the treatment of schools. Moreover, because of the weaknesses in its oversight methods, DOD lacks assurance that it is reimbursing indirect costs appropriately.

What GAO Recommends

GAO is making recommendations to address consistency in rate-setting and to improve oversight of indirect cost reimbursement. The agencies generally agreed with these recommendations.