But, yes, it is possible. I can't prove this and I am not trying to make a statement that I can prove, but I think that has happened, and I think it will happen. Mr. TEAGUE. The university could switch to a contract and forget about the grant even though both sides determine a grant is easier to handle. Mr. EINHORN. I have to speak for my agency. If my agency thought it was a grant, as NASA's Director of Audits, I hope it would stick to it. If it did not stick to it, it would be part of my job to disclose that they failed to stick to it. Mr. TEAGUE. It is my understanding that Mr. Webb has had completed a very thorough and careful study of the larger universities and what they can contribute to the space program. Dr. CLARK. That is correct. Mr. TEAGUE. It is also my understanding that in the case of NASA, at least, it is a matter of going to the universities and asking them to do the different jobs rather than the university coming to NASA asking to do this work. Dr. CLARK. It would be difficult to say which is predominant at this point in time. Both are important. I think with NASA the more significant distinction as between the grant and the contract instrument has to do with the nature of the work. If the nature of the work is primarily the delivery of hardware to meet a specific flight date of a space probe or satellite, ordinarily this must be carefully controlled with scheduled deadlines and maximum costs and it is normally handled in a contract. In cases where, as in this increased emphasis on participation by a larger segment of the total university community, we are going out to find areas of mutual interest with the university, the grant is often preferable. It is difficult to say where the impetus comes in the final analysis because in seeking for a common interest we try to take into account the desires both of the agencies and the university. It would certainly be an oversimplification to say in general the university comes to us for this type of work at this point of time. Mr. TEAGUE. The point was made on the floor that the Science Foundation follows a policy of allowing 20 percent with a leeway of 5 percent. Another point made by members of the Appropriations Committee is that in 1957 the National Institutes of Health grants were about $80 million annually and with this 15-percent limitation in effect, the grants have been increasing annually to the present figure of $500 million. There has been no intimation it has been detrimental to their program. Would you like to comment on that? Dr. Brown of the Defense Department testified before the committee there is considerable difference in research that might come under Defense or HEW. Mr. EINHORN. The universities, I think, have been complaining about the 15-percent limitation. I think that was your second point. I think they have been complaining, how justifiably and how well, I am not certain. It is true for many, many years universities have lived with the 15-percent limitation in the case of HEW. However, during the A-21 discussions, many universities objected strenuously, in the representation of the committees they sent up to discuss this with Bureau of Budget, to the 15-percent limitation. Mr. TEAGUE. There is no evidence their program was hurt in any way, really. Dr. CLARK. I don't think, as representatives of NASA, we should be asked to comment on this sort of a question with regard to another agency unless we have personal familiarity. I do not. Mr. TEAGUE. I agree. Mr. Chairman, in order that our hearings may be complete, I would like consent for the President's letter to be placed in the record, also the Bureau of the Budget Circular A-21, and that Dr. Brown's testimony before the Appropriations Subcommittee on this matter likewise be included. The CHAIRMAN. Without objection it is so ordered. (The documents referred to follow :) Hon. LYNDON B. JOHNSON, President of the Senate, Washington, D.C. Hon. JOHN W. MCCORMACK, Speaker of the House of Representatives, THE WHITE HOUSE, May 23, 1962. DEAR MR. PRESIDENT (DEAR MR. SPEAKER): I am writing to express my serious concern about the limitation on indirect expenses connected with research grants included in the pending Department of Defense appropriation bill for fiscal 1963. The bill as passed by the House of Representatives would limit the amount which could be included in such grants for indirect expenses to 15 percent of the direct costs of a grant. In my judgment this provision would seriously hamper colleges and universities in the conduct of research supported by the Federal Government. Progress is applied science and technology upon which the country relies for military strength, medical advances, and the development of our civilian economy is heavily dependent upon the continuous flow of new scientific knowledge. Basic research efforts need to keep pace with our rapidly growing applied scientific activities. Universities and technical institutions have been the principal source of this basic knowledge. About half of all basic research is carried out in academic institutions. The Government has also maintained its own research laboratories and has permitted basic research as an overhead item in many industrial contracts. In addition to supporting research, grants to universities are vitally important because of the close relationship which research bears to graduate education and to the development of an adequate supply of trained scientists and engineers. During the next decade it will be necessary to increase our scientific research efforts substantially and to increase the number of engineers and scientists. For this we will also depend heavily upon the interest and support of our educational institutions. This spring I sent to the Congress a message on education which stressed the need to increase the Nation's capabilities in the field of higher education, emphasizing that our colleges and universities do not have the financial resources to meet these growing needs. This problem would be aggravated if the cost limitation on research grants were allowed to stand. These grants are not intended to give general financial support to colleges and universities; rather their purpose is to assist them in carrying out important national programs. In making grants Federal agencies define those costs which are allowable. The indirect costs involved, frequently described as overhead costs, cover such items as plant maintenance, heat and light, and administrative expenses in carrying out federally supported research projects. They represent expense items which must be provided in the budgets of these institutions. They are just as much a part of the cost of research as the salary of the scientist or technician. If the actual cost of these items is greater than a fixed percentage established by the Congress, these institutions must finance the difference. It is the policy of the executive branch that in no case should grants for research include a profit or fee either as a direct or indirect cost. A Bureau of the Budget circular dated January 7, 1961, establishes for all Government agencies a common basis for determining allowable costs for research sponsored by the Federal Government, applying generally accepted cost accounting principles and practices. A statutory limitation is, therefore, unnecessary if the purpose of the Congress is to prevent windfalls to research institutions. A flat statutory limitation on the amount which can be paid for overhead or indirect costs is undesirable for the following reasons: 1. An institution, in an effort to meet the statutory limitation, may be forced to draw funds away from other educational or research programs in order to meet the total cost of federally supported research. I do not believe that the Congress intended that this burden be placed on the colleges and universities. 2. A flat rate does not recognize that research projects differ greatly in character and in the nature of their indirect costs. For example, a research activity involving substantial physical facilities such as animal quarters for biological research or particle accelerators requires considerable space or electrical power with consequent high indirect costs. On the other hand, theoretical studies may require little supporting assistance beyond administrative help. Clearly a single inflexible rate for indirect costs would treat unfairly those institutions whose research work is such as to need substantial indirect services. 3. While total costs for a given project may be the same from one institution to another, the allocation between direct and indirect costs can vary widely. This stems from the fact that institutions do not follow common accounting practices. Therefore, it is not surprising that indirect cost rates vary considerably among institutions. I do not believe it is desirable to force these institutions to conform to a common accounting system otherwise inappropriate to their needs. And it does not follow that work done at an institution with a higher indirect cost rate will necessarily result in higher total cost to the Government or that the institution is less efficient than one with a lower rate. 4. The legislative limitation applies only to research grants and does not apply to research contracts. In many cases grants are more appropriate and simpler to administer than contracts. Therefore we encourage the use of grants particularly for basic research where it is not desirable or profitable to exercise the same degree of detailed supervision as in the case of applied research and development for which contracts are normally used. I do not believe it is desirable to turn to the use of contracts in place of grants in order to avoid such a legislative limitation. A statutory limitation for indirect costs is now in effect for research grants made by the National Institutes of Health and other parts of the Department of Health, Education, and Welfare. The record is clear that this limitation has imposed serious financial difficulties particularly for many of our medical schools. In my health message to the Congress of February 27 of this year I renewed my recommendation of last year "that the current limitation on payment of indirect costs by the National Institutes of Health in connection with research grants to universities and other institutions be removed." I urge the Congress to remove the limitation in the case of the Department of Health, Education, and Welfare and refrain from establishing a similar limitation in the appropriations to the Department of Defense or other agencies. Sincerely, CIRCULAR No. A-21 [Revised] JOHN F. KENNEDY. EXECUTIVE OFFICE OF THE PRESIDENT, To: The heads of executive departments and establishments. 1. Purpose. This circular provides the basis for a uniform approach to determining the costs applicable to research and development performed by educational institutions under grants from and contracts with the Federal Government. The principles and related policy guides provided herein are designed for Govern ment-wide use. All Federal agencies that sponsor research and development work at educational institutions are requested to apply these principles and related policy guides to the fullest extent practicable in determining the amounts to be authorized under grants or contracts for such work and in developing budget estimates therefor. 2. Policy guides.-The following general policy guides are provided for the information of the Federal agencies concerned: (a) Each college and university has its own unique combination of staff, facilities, and experience, and should be encouraged to conduct research in a manner consonant with its academic programs and institutional objectives while fulfilling its contractual responsibilities. (b) The successful application of these principles requires development of mutual understanding between representatives of universities and of the Federal Government as to their scope, applicability, and interpretation. (c) The extent of agency and institution participation in the financing of a particular research or development project is properly the subject of negotiation between the particular agency and the educational institution concerned. (d) It is not intended that the application of these principles should require any significant changes in the generally accepted and established accounting practices of colleges and universities. 3. Cost principles.-The principles and standards to be followed in costing Government-sponsored research and development projects conducted by educational institutions are set forth in the attachments, as follows: (a) Attachment A: Principles for determining applicable costs under research agreements. This document states the general principles to be applied in costing research and in associating indirect costs with particular research agreements. Agencies are requested to promulgate this document without change, where practicable, in order to assure uniformity of approach throughout the Government. (b) Attachment B: General standards for selected items of cost. This document sets forth standards with respect to the allowability of the particular items of cost listed therein. The need for a continuing review of these standards is recognized; individual agencies may find it necessary to request amendments to these standards from time to time. 4. Objectives.-The objective of this circular and its attachments is to provide to educational institutions recognition of their full allocated costs of research under generally accepted cost-accounting principles. Alternative methods are specified as permissible in unusual circumstances or to prevent inequities. No provision for profit or other increment above cost is intended. 5. Revisions.-The revisions introduced in the principles as of this date are limited to the following sections of attachments A and B : 1. This attachment sets forth the general principles which Federal agencies are requested to follow in determining the allowable costs of research and development performed by educational institutions under grants, cost-reimbursement type contracts, and cost-reimbursement type subcontracts. To the extent costs are applicable, these principles may also be used as a guide for the pricing of fixed-price contracts and subcontracts. 2. It is the intent of these principles to provide Government agencies and educational institutions with a common basis for determining the allowable costs of research sponsored by the Federal Government. Application of these principles should enable agencies and institutions to identify the allowable direct costs of such research, plus the allocable portion of the allowable indirect costs, less applicable credits. The tests of allowability of costs applied in these principles are reasonableness and allocability under consistently applied generally accepted cost-accounting principles and practices; however, these provisions are subject to any limitations as to types or amounts of costs set forth in the research agreement. 3. These principles do not attempt to identify the circumstances or dictate the extent of agency and institution participation in the financing of a particular research and development project, but rather are confined to the subject of cost determination. Arrangements concerning financial participation are properly the subject of negotiation between the particular agency and the educational institution concerned. 4. These principles should be applied to all Government-sponsored research at an educational institution, including research conducted at locations other than the main campus of the institution. 5. A negotiated fixed amount in lieu of indirect costs may be appropriate in certain instances for offcampus or segregated research projects where (a) research agreements are charged directly for the cost of many of their administrative or housekeeping services, or (b) the cost of benefits derived from an institution's indirect services cannot be readily determined by use of apportionment or allocation bases normally employed, or (c) the costs of apportioning and allocating expenses to research agreements are excessive. The negotiated amount should not exceed a conservative estimate of anticipated indirect costs. B. Definition of terms 1. For the purposes of this document, the following terms are defined: (a) Research agreements are agreements to perform federally sponsored research through grants, cost-reimbursement type contracts, cost-reimbursement type subcontracts, and fixed price contracts and subcontracts for research. (b) Apportionment is the process by which the indirect costs of the institution are assigned to (1) instruction and research, and (2) other institutional activities. (c) Allocation is the process by which the indirect costs apportioned to instruction and research are distributed to research agreements. (d) Sponsoring agency means the Federal agency for which the institution is performing research. Its use in this document does not imply a change in concept or intent for those agencies that have traditionally used a grant rather than a contractual instrument. (e) Original complement means the complement of equipment initially placed in buildings to perform the functions currently being performed in such buildings. If a permanent change in the function of a building takes place, a redetermination of the original complement of equipment may be made at that time to establish a new original complement. (f) Other institutional activities means all organized activities of an institution not directly related to the instruction and research functions, such as residence halls, dining halls, student hospitals, student unions, intercollegiate athletics, bookstores, faculty housing, student apartments, guesthouses, chapels, theaters, public museums, financial campaigns, and other similar activities or auxiliary enterprises. Also included under this definition is any category of cost treated as "unallowable," provided such category of cost identifies a function or activity to which a portion of the institution's general overhead expenses are properly allocable. C. Direct costs 1. Direct costs are those identified as having been specifically incurred to perform a particular research agreement. The general types of direct costs are: (a) Direct salaries and wages, including employee benefit expenses and pension plan costs (see attachment B) to the extent that they are consistently treated by the educational institution as a direct rather than an indirect cost, are those applicable directly to the performance of a research agreement. Such salaries and wages should be charged at the actual rates paid by the institution. Where professional staff paid on a salary basis work directly part time on a research agreement, current and reasonable estimates of time spent may be used in the absence of actual time records. (b) Direct material costs include raw materials, purchased or supplied from stock, which are directly consumed or expended in the performance of a research agreement, or are otherwise applicable directly to a research agreement. |