Assuring Reasonableness of Rising Indirect Costs on NIH Research Grants--A Difficult Problem

HRD-84-3: Published: Mar 16, 1984. Publicly Released: Mar 16, 1984.

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In response to a congressional request, GAO reviewed the process followed by the Department of Health and Human Services (HHS) in establishing indirect cost rates for health research and development activities to: (1) identify HHS efforts to contain the growth of indirect costs; (2) assess HHS accountability over indirect costs; and (3) determine how often indirect cost audits are made and how the audit reports are used by HHS indirect cost negotiators.

HHS has proposed several policy options to simplify the indirect cost reimbursement process and reduce indirect cost payments made on National Institutes of Health (NIH) grants. However, GAO found that the process followed by HHS in negotiating indirect cost reimbursements does not ensure that negotiated indirect cost rates are reasonable. This is particularly true for administrative expenses, which constitute about 35 percent of the indirect cost rates at large institutions. Office of Management and Budget (OMB) Circular A-21 permits large institutions to be reimbursed on the basis of personnel activity reporting systems which are subjective and difficult to verify. However, small institutions may compute their allowable administrative costs on the basis of 20 percent of the salaries and expenses of deans and department heads. GAO found that few indirect cost audits have been performed by HHS auditors. However, in cases where indirect cost audits have been made, significant amounts of grantee-proposed indirect costs have been questioned and HHS negotiators sustained $13.9 million of $16.7 million questioned by HHS auditors over a 4.5-year period and have reduced indirect cost rates accordingly. Finally, GAO found that 49 of 69 NIH grantee negotiation files contained no written explanation of the reasons for significant increases in indirect costs from the previous years.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: This report received credit in the Federal Register for identifying the action needed to resolve the controversy this issue raises among researchers, institutions, and the federal funding and auditing agencies. An accomplishment report will be prepared as soon as HHS gives an estimate of financial savings and other nonfinancial benefits which will occur due to the OMB Circular revision.

    Recommendation: The Director, OMB, should revise Circular A-21 to establish a fixed allowance for large institutions' departmental administration expenses to replace the cost reimbursement method now used. Such an allowance could be computed in a manner similar to that permitted by OMB Circular A-21 for small institutions. The allowance could vary, if necessary, on an institution-by-institution basis, depending on individual circumstances. Such an allowance should represent a reasonable amount needed for effective research administration at the departmental level and, to the extent possible, be both relatively simple to compute and not result in disproportionate annual fluctuations compared to the direct costs of research.

    Agency Affected: Executive Office of the President: Office of Management and Budget


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