Understanding Cost Policy
DOR-1101
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1.3 University Policy and Federal Regulations
1. Sponsored Projects
Sponsored projects are externally funded activities governed by terms and conditions specified in a written agreement between the sponsor and Stanford, and account for the largest single source of revenue to the University.
- Federal and non-federal sponsored projects are a source of both restricted and unrestricted funds.
- Sponsored projects are comprised of both direct and F&A (facilities & administrative) costs.
- Everyone at Stanford, regardless of whether they work with sponsored projects, must understand the impact of sponsored projects on operating budgets through F&A (facilities & administrative) cost recovery.
- All University expenses (costs), regardless of fund source, are sorted and categorized, according to federal regulations, so the calculation of the F&A cost rate can be correctly determined.
2. Definition: Direct Costs
According to Stanford policy and federal regulations, an expense qualifies as a direct cost for a sponsored project when it meets all four of the following criteria.
- Allowable - as defined in OMB Circular A-21, the Uniform Guidance, Stanford Policy an in the terms & conditions of specific awards
- Allocable - only those expenses that benefit a project may be charged to that project
- Reasonable - Costs must reflect what a prudent person would pay
- Consistent - costs must be handled consistently across the University by following Stanford policy
Everyone who authorizes expenses at Stanford for any purpose must confirm prior to approving a transaction that the expenditures are:
- reasonable and necessary
- consistent with established Stanford policy and practices, as well as sponsor or donor terms & conditions
- applicable to the work of Stanford, which includes; instruction, research, and public service
Direct costs are those costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Direct costs include, but are not limited to:
- salaries
- travel
- equipment
- material and supplies directly benefiting the sponsored project or activity
3. Definition: F&A (Facilities and Administrative) Costs
Indirect costs also termed F&A (Facilities and Administrative) costs are those costs incurred for a common or joint purpose benefiting more than one cost objective, and not readily assignable to the cost objectives of one project. They represent costs related to expenses incurred in conducting or supporting research and other University activities, but are not directly attributable to one specific activity. Some examples of indirect costs are:
- Buildings and grounds
- Utilities
- Equipment (can also be a direct cost)
- Library expenses
- General Administration
- Sponsored Projects Administration
- Departmental Administration
For example, utilities are an indirect cost because they benefit many activities in a building. Separate utility meters could be installed in every room in the building to track power and water use, but that would be extremely expensive and impractical. Instead, we allocate the utilities via a burden rate in the expenditure statement. Sponsors are charged their fair share through the indirect cost rate (also known as Facilities and Administration or F&A rate).
4. Your Role
You have an important role in implementing Stanford University policy and federal regulations. Whenever you order supplies, authorize the payment of salaries, reimburse a student, fill out an expense report, receive cash or checks, or do any of the many tasks involving Stanford finances, you provide financial data to the University. The University uses this information to manage its budget and to recover F&A costs from our sponsors.
5. About Indirect (F&A) Costs
The University receives over $1 billion each year from our federal sponsors to support the direct costs of sponsored projects. Stanford also recovered over $180 million from federal sponsors to pay for the indirect costs(IDC) associated with those projects.
The federal government provides specific regulations regarding what costs are allowable and unallowable for reimbursement through direct and IDC recovery. Many of the University's fiscal policies mirror federal cost regulations.
All University expenses (costs), regardless of fund source, are sorted and categorized, according to federal regulations, so the calculation of the IDC rate can be correctly determined.
To do your part correctly, you must classify and code expenses properly according to the four cost principles (outlined below), which are incorporated in:
- University policy
- Federal regulations (OMB A-21 and the Uniform Guidance) which have been incorporated into University policy
- The specific terms & conditions of each grant or contract
6. Cost Principles
A. Allowable
A cost is allowable when:
- It is not prohibited by University policy
- It serves a University business purpose, such as instruction, research, or public service
- It is identified and coded correctly according to Stanford policy and federal regulations (regardless of whether or not it's a sponsored project)
- It is incurred on a sponsored project according to the terms & conditions (and OMB Circular A-21 and the Uniform Guidance)
B. Allocable
A cost is allocable if it relates to the purpose of the fund. For a sponsored project the cost must provide “benefit.” In the case of a gift, it must correspond to the intent of the donor.
The allocability cost principle stipulates that any expense paid by a project must benefit that project. For example, a conference is held in Seattle that focuses on the "El Niño" effect on global climate. Jane, a postdoc working on a related sponsored project, will present her paper and interact with colleagues from other academic institutions. The trip will benefit the project, and the travel costs are therefore allocable to the project. It's important to point out that, without some documentation, Stanford's central administrative offices would not know whether the expense of this trip was allocable to Jane’s project or not. Individuals directly involved with a project, particularly the PI, determine whether or not a cost is allocable to that project. In a case like this, when Jane’s department submits expense reports for reimbursement, the package should include the conference agenda or other documentation to support the relationship between the travel and the project which paid for it.
C. Reasonable
A cost is reasonable if a prudent person would purchase the item at that price. Determine whether a cost is reasonable by considering whether:
- The cost is necessary for the performance of the activity
- Incurrence of the cost is consistent with established institutional policies and practices
Jane was feeling rather good after her presentation and decided to celebrate in a BIG way. She brings back receipts showing that the cost of her final dinner in Seattle, exclusive of the wine, was $147 per person. Even though the trip was allowable and allocable, that cost is not reasonable. The cost principle of reasonableness stipulates that costs will be reimbursed only if a prudent person would have paid this amount. If not, the expense may not be charged to the project.
Since Stanford also has an "actual and reasonable" requirement for travel expenses (where a traveler is not using "per diem" reimbursement), Jane is probably not eligible for full reimbursement of this expense from Stanford either, although she can be reimbursed for a lesser, reasonable amount.
Questions as to whether a particular expense is reasonable or not may be referred to a cognizant Dean's Office staff member.
D. Consistent
A cost is consistent when like expenses are treated the same manner under like circumstances. You can assure that you treat costs consistently by following Stanford policy.
Federal Regulations require colleges and universities to treat like expenses to be charged to the Federal Government consistently in like circumstances, i.e., if one department charges a type of expense directly to the Government, then all similar expenses for the same purpose and under the same circumstances must also be charged directly across the entire University.
If the same types of costs under the same circumstances are charged in some departments as direct costs on a sponsored project, and in other departments to accounts which end up in indirect cost pools, then some projects would, in effect, be paying twice for the same thing - once by paying the direct charges, and again when the University's F&A rate is applied to that project's expenses.
How does an organization as complex as Stanford assure that expenses are being charged consistently? The answer lies in the translation of Government regulations into University policy, communicated throughout the organization and supported by necessary training and informational resources. Consistency is achieved when everyone follows University policy.
7. Discussion of Direct and Indirect (F&A) Costs
How much does it cost to conduct a research project at Stanford University?
Of course, the answer to that question will depend on the nature of the project. But in all cases, the answer will include both direct and indirect costs.
Direct Cost Example
Consider the costs of conducting a laboratory project to study the genetic composition of certain human chromosomes. In this hypothetical example, a Stanford faculty member will conduct a series of experiments over one year, working with a postdoctoral scholar. They will learn more about the structure, organization and function of human DNA, leading eventually to improvements in human health. It is relatively easy to identify several DIRECT costs of conducting this project. They include:
- A percentage of the faculty member's annual salary (plus benefits)
- A percentage of the postdoc’s salary (plus benefits)
- The cost of the material and supplies necessary to perform the work
In our example, these direct project costs total $100,000 per year.Facilities and Administrative Cost Example
The project will be carried out in Stanford's new Center for Clinical Sciences Research. The expense of operating the lab includes the costs of water and utilities. This project also requires an administrative infrastructure, including staff that support research operations within the School of Medicine and in the central offices of Stanford University.
How much should the sponsor pay for the F&A (Facilities & Administrative) of this particular project?
We could try to answer that question by measuring precisely how much electricity this project uses, and then charge that amount directly to the sponsor. We would also have to calculate how much effort the Human Resources Manager spent processing staff salary information and bill that amount of his salary to the sponsor. The same would be true for portions of the salaries of individuals in Procurement & Contracts, Accounts Payable, Facilities, etc. It would quickly become impossible to calculate these costs with any precision.
Instead, universities calculate the costs of F&A (facilities and administrative services needed to conduct sponsored projects, and then recover those costs by applying an F&A rate to a portion of the DIRECT costs of projects. Federal regulations require us to exclude certain specific direct costs, including equipment, tuition and stipends from this analysis, and F&A costs are, therefore, NOT applied to them. The analysis of costs and negotiation of rates is very complex, encompassing the entire scope of University activity. At Stanford, that task is carried out by the Research Administration in the Cost and Management Analysis (CMA) Office. All rates can be viewed on the rates section of this website.
So how much will our hypothetical project cost?
F&A rates vary from year to year. In this example, we will use an indirect cost rate of 60% and apply it to a base of $100,000. The F&A (Facilities & Administrative) cost would be $60,000. The budget for this one-year project would then total $160,000:
- $100,000 Direct project costs
- $ 60,000 F&A (Facilities & Administrative)
- $160,000 Total costs
In this example, the $60,000 of F&A (Facilities & Administrative) will be used by Stanford to pay for building and land depreciation; interest; operations and maintenance; library costs; and the costs of general, departmental and sponsored project administration.
