Indirects, Overhead, and Fringe, Oh My: The False Morality of Low Indirect Rates

So the Boston Globe had an article about overheads in science which has worked people into high dudgeon (never sure what low dudgeon would look like. But I digress). One issue is to what extent research agencies should be paying for anything other than research expenses, which they do to around the tune of ten billions per year. One thing to keep in mind that, if those billions disappear, they’ll have to be made up somehow–and not all of that money is going to overpaid, do-nothing administrators. In other words, students will end up paying more. Also worth noting that many government agencies have multiple missions:

NIH has never been solely concerned with research output. It has always had other missions, the most obvious of which is to funnel money to universities and local communities (politicians recognize this even if most scientists don’t or won’t–there’s a reason why NIH’s RePORTER system breaks down grants by congressional district). To put this another way, the overheads and indirect charges on grants at many institutions add another forty percent to the cost of a grant, so that a $250,000 ‘modular’ R01 grant (the bread-and-butter grant that academic labs receive from NIH) typically yields the university an additional $100,000. Does anyone really think that entire $100,000 is required to pay for the costs of doing research, especially when the labor, much of the equipment, and supplies are already paid for by the direct budget of the grant?

So NIH has never simply been about funding research. It has had other missions, including the funneling billions of dollars to academic institutions, which supports those universities’ other activities (science and other) as well as providing local, non-science jobs. That is part of its governance role, just as defense contracting (in principle, anyway) isn’t just about building weapons, but also maintaining technological infrastructure and expertise (analogous to support for universities), as well as providing decent jobs and economic stimulus for local communities.

But this isn’t what I want to get into here, though it’s an important issue.

The article, to be blunt, doesn’t accurately describe how the indirects work. In the article there’s a “ZOMG!! HARVARD EATED ALL TEH OVERHEDZ!!” tone to it, while others are held up as honest folk. Not exactly. What the article misses is how all of these charges accrue when personnel costs–which typically account for fifty to eighty percent of an NIH grant–are accounted.

First, you take your salaries, along with benefits and so on, and multiply that by the fringe rate, which can range between thirty to fifty percent (the rate will also vary based on the type of position). So if you have $100,000 of salary with a fringe rate of fifty percent, you bump that up to $150,000. Next you multiply that number by the indirect rate. What’s interesting is this little bit:

“Harvard is taking the government to the cleaners,” said Richard Vedder, director of the Washington-based Center for College Affordability and an economics professor at Ohio University, a public college that receives overhead compensation at the rate of 48.5 percent.

Yes, OU’s indirects are lower than Harvard’s, but OU‘s fringe rate is substantially higher. And when budgets are heavily weighted towards salaries it’s all about the fringe rate, baby. Specific numbers will obviously differ between grants–some grants will be full of items that don’t receive any indirects, while others will be salary-heavy. But if we assume a grant with sixty percent salary, thirty percent recoverable indirects and ten percent ‘unrecoverable’ (no indirects may be charged), the difference between a 50/50 ‘plain folks’ strategy and a 30/70 ‘Harvard’ strategy is negligible: the ‘Harvard’ strategy costs about one percent more (it’s worth noting that I’ve probably overestimated the non-salary, recoverable portion of the grant, which would only weaken the ‘Harvard’ strategy).

Like I stated at the outset, we can argue over how much research budgets should be spent on things other than direct research (if at all). But if you hear a ‘poor’ school moralizing about how low their indirect rate is, be assured they are not leaving any money on the table (Don’t lay no boogie woogie on the King of Rock and Roll…).

It’s also worth noting that my informal, incomplete survey of fringe rates at different institutions–consider this ‘artisanal data’–suggests that schools have figured this out, and are cranking up fringe rates while lowering indirect rates, possibly for the PR value.

Now, if journalists only knew to ask about fringe rates…

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2 Responses to Indirects, Overhead, and Fringe, Oh My: The False Morality of Low Indirect Rates

  1. Don Atkinson says:

    I’m in the process of cleaning out a molecular biology laboratory of a long-retired NIH/NSF/military funded professor. It was one of those painfully long phased retirements and when he finally left this earthly realm there was ~3000 sq ft of hazardous waste dating back to the late 60s left behind. No one wanted to deal with it so they just locked up the space for close to a decade. Now I get to deal with it. The University is going to have to eat the cost of disposing of >600 bottles of chemicals in all states of decomposition. It’s going to cost a freaking fortune. That’s one of the places those mysterious overheads seem to vanish because the state legislature doesn’t give the University one thin dime to dispose of hazardous wastes.

    Did you know that those white plastic bottles with the red lids that Sigma Chemical used in the 1980’s are more brittle than an eggshell after sitting on the shelf for 25 years…

  2. Pingback: Overheads, the Good and the Bad | Mike the Mad Biologist

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