LIMITATION ON INDIRECT COSTS IN RESEARCH

GRANTS

MONDAY, JULY 30, 1962

HOUSE OF REPRESENTATIVES,

COMMITTEE ON SCIENCE AND ASTRONAUTICS,

Washington, D.C. The committee met at 10 a.m., Hon. George P. Miller (chairman) presiding.

The CHAIRMAN. The committee will be in order.

Monday morning is always a bad day for a committee meeting. But we felt it highly desirable to have one today because of the interest in the limitation on amounts for indirect costs in grants to universities for research that is contained in the independent offices appropriation bill.

We have witnesses from the National Aeronautics and Space Administration and the National Science Foundation.

We will start out with Dr. John Clark, Associate Director and Chief Scientist of the Office of Space Sciences.

Will you proceed, sir?

STATEMENT OF DR. JOHN F. CLARK, CHIEF SCIENTIST AND ASSOCIATE DIRECTOR, OFFICE OF SPACE SCIENCES; ACCOMPANIED BY DR. T. L. K. SMULL, DIRECTOR OF GRANTS AND RESEARCH CONTRACTS, OFFICE OF SPACE SCIENCES, AND RAYMOND EINHORN, DIRECTOR OF AUDITS

Dr. CLARK. I should like first to introduce my colleagues from NASA.

On my left is Dr. Thomas L. K. Smull, who is Director of Grants and Research Contracts, and on my right, Mr. Ray Einhorn, who is Director of Audits of NASA.

I should also like to express Dr. Newell's regrets that he is unable to attend the hearing this morning. This is a subject which is, as you know, rather close to his heart. He is engaged in rather extensive efforts in the Space Science Board summer study of the NASA space sciences program at the University of Iowa at the present time.

I believe Mr. Karth is quite familiar with this study. I have no prepared statement, Mr. Chairman. We are available for any questions that the committee might care to place.

The CHAIRMAN. Do you know the background of this 20 percent that is put into this bill or into the other bills?

Dr. CLARK. Yes, sir.

The CHAIRMAN. Tell us what you will about this.

1

Dr. CLARK. All right.

The understanding of NASA at the present time of this situation is that we feel that the President's position in his letter of May 23 to the Congress is a reasonable course for the Government as a whole to follow in dealing with the universities. This letter, as you may recall, is in opposition to the imposition of any rigid ceiling in terms of any given percentage.

We feel that a uniform limitation as planned by the Congress will undoubtedly stimulate some revision and standardization of the methods of accounting for costs on the university campuses. It should result in a more specific identification of costs directly chargeable to individual projects. This, NASA understands, is one of the principal objectives which Congress expects the legislation will achieve in connection with the DOD appropriations bill.

We feel that this limitation will probably not achieve any major savings in Federal funds. It is unlikely that there can be a major shift of indirect costs on current Government grants over to a costsharing arrangement requiring, of course, the use of non-Federal resources of schools, because if this should become necessary, then we feel the schools will probably conserve their non-Federal funds by taking a smaller amount of Federal grants.

I should point out this certainly would hurt us at this time, when NASA is requesting a rather significant expansion in university effort of the type which is most appropriately supported by means of the grant mechanism.

Our current position with regard to our grant program is that while NASA is reluctant to see this approach taken on the grant problem on a Government-wide basis, we do not contend that our grant relationship to the universities is particularly unique as compared with other agencies in the Government that are supporting such work, such as the Department of Defense and the National Science Foundation.

Some universities may slow up their undertaking new work for NASA until they see how, under this proposed 20-percent limitation, they can finance existing good research on Federal grants, and only experience can demonstrate whether this will have an adverse effect on NASA plans to set up its university research and training effort. So in summary, under the current circumstances NASA does not recommend that the House Committee on Science and Astronautics seek to make NASA grants an exception to the general limitation if this limitation is otherwise going to be made across the board to all other major Government grant programs.

The CHAIRMAN. Mr. Teague?

Mr. TEAGUE. Dr. Clark, I understand this problem has been worked on over and over through the Bureau of Budget and General Accounting Office since 1940..

Dr. CLARK. Yes.

Mr. TEAGUE. Do you know anything about the history of Circular A-21?

Dr. CLARK. I am not as familiar with the history as Mr. Einhorn, who was with the General Accounting Office at the time this was prepared.

Mr. TEAGUE. Would you discuss it for us?

Mr. EINHORN. Surely.

I was with the General Accounting Office at the time A-21 was developed and I represented the General Accounting Office to a large extent in the sessions with the Bureau of the Budget.

A-21 was developed as a Government-wide endeavor, with all major agencies represented.

The predecessor instruction, you may say, of the Department of Defense, under the Armed Services Procurement Regulation, was based on some arrangements arrived at in about 1947, the so-called Blue Book. This was later incorporated in part 3 of section XV of the Armed Services Procurement Regulation, the cost principles for research grants and contracts with educational institutions.

Other agencies had differing principles and rules, for example, AEC. NASA was rather new then and I suppose it was following Defense rules back in 1958. The National Science Foundation was pretty closely adhering, as I recall, to the procedures of HEW with a note of 15 percent of direct costs. HEW, as you know, had a 15percent statutory limitation.

The various agencies got together with the Bureau of the Budget in order to develop a uniform set of guidelines.

One of the big problems that existed with respect to the 1947 guidelines was that there had been some horse trades or compromises in the dealings with the universities back in 1947 as to which costs could be considered allowable and which unallowable.

All of these, practically speaking, were in the area of indirect cost, but there was some shading over, because some costs can be treated as direct or indirect. Depending on the accounting practices of the particular institution, it can be one way or the other. It is not a matter of shifting.

One of the big problems back in the 1947 to 1958 days was that certain expenses; for example, the salaries of certain educational officials of the university, such as the dean of men and the registrar, were under the compromise considered applicable to university research work done for the Government.

On the other side of the fence, as though it were a balance wheel, there were some expenses; for example, the salaries of the deans of the particular colleges which were doing the research, that were not considered allocable to the Government research work at the universities. The basis for allocation of indirect costs was a problem area also. After considerable discussion for a period of, I think, 2 or 3 years, in which the universities participated in great detail, the Government developed, under the leadership of the Bureau of the Budget, a set of principles which made good accounting more applicable, and good accounting principles more applicable to the diversified circumstances, different accounting methods followed by the universities, different types of research work, and different situations in which overhead would be applied.

A good example is, if you were doing research for a project that required an electric furnace, you certainly would not allocate the utilities on the same basis as you would for research which was done in the lab where the amount of current used might be just a normal amount of lights and a little power.

All of these factors were taken into consideration and a set of principles were developed for costing research under grants and contracts with educational institutions.

The Circular A-21 principles are for the determination of costs and are not the principles for the reimbursement of cost.

Once the costs are determined, an agency may decide with the university which part of those costs it will reimburse.

The CHAIRMAN. Let me get that. A-21, you say, is for the determination of costs?

Mr. EINHORN. Yes, sir.

The CHAIRMAN. And not the application of costs between the Government and the institution. This is the place you start the argument. Mr. EINHORN. You could start there.

The CHAIRMAN. Yes.

Mr. EINHORN. If I may say it the way I said it a moment ago, to make sure it is clear:

Bureau of Budget Circular A-21 is a circular on the method for the determination of costs, including the indirect costs.

It does not prescribe that full costs must be paid. As a matter of fact, one of the basic principles is that cost sharing may be entered into under Bureau of Budget Circular A-21. The university may request less than full overhead or an agency-a buyer, if I may use a somewhat awkward term with respect to research-a buyer may decide not to pay for full overhead and negotiate for something less than full overhead.

The circular did have some principles with respect to other factors. For example, it states you should not have a fee, or profit, buried in the overhead. What should be determined is the actual overhead. The agencies then went forward in determining how much overhead they would pay under these principles, which were Governmentwide, and the big benefit to the universities, although they differ with some in the detail in A-21, is that all agencies were presumably going to use Circular A-21.

There were some exceptions-because of the arrangements which the HEW apparently had with its congressional committee to limit their payment for overhead. I am not intimately familiar with that subject, but familiar enough to say there was a difference there. Other agencies had other differences, too.

In the case of Defense, which was a big user of university facilities, and NASA, and some others, the decision was made to determine overhead in accordance with Circular A-21 and generally to pay the full amount of overhead when requested.

A-21 applies to both contracts and grants. It is not limited to one or the other.

The agencies which participated, I think I have covered pretty well, were all the major agencies plus Bureau of Budget, GAO, and to some extent the Treasury Department.

Mr. TEAGUE. Is it possible for a university to switch from a grant to a contract and this limitation not apply?

Mr. EINHORN. Yes. To give you a short direct answer, yes, it is possible. I would say the only thing that would prevent the shift would be if the buying agency, the Government agency, had so clearly labeled this type of work as being a grant and not a contract, that the university could not do it.