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GAO's Definition of MIT's Indirect Rate Off by $36M

A correct, brief definition of indirect cost rates continues to befuddle the nation's auditors, legislators, and reporters.

A top-ranking official of the General Accounting Office, in his prepared statement released at last month's Congressional hearing of the House of Representatives Subcommittee on Oversight and Investigations, repeated an error made by many officials and news reporters when he gave this incorrect definition:

"MIT's fiscal year 1990 proposed rate is 62 percent. This means that, for every $100,000 awarded to cover the direct cost of a research project, another $62,000 is added for indirect costs."

Wrong, Mr. GAO. Don't confuse percentage and dollar and cents figures-they aren't the same. The fact you have to know is, 62 percent of what? For MIT, it was 62 percent of $71,000-not $100,000-because Federal rules require universities to exclude from the overhead recovery formula certain direct costs for such things as long-term equipment and major subcontracts.

With an indirect cost recovery rate of 62 percent of $71,000 of direct costs, MIT recovered $44,000, not $62,000. The GAO definition would indicate MIT should have recovered $18,000 more.

The GAO's $18,000 error, extrapolated to MIT's FY 1990 campus research base of $203 million of direct costs, would become a $36 million error!

The correct answer is:

MIT's fiscal year 1990 budgeted indirect cost rate was 62 percent, which resulted in reimbursement of 44 cents in overhead costs (buildings, heat, light, libraries and administration) for every dollar of direct research costs (researchers' salaries and project expenses).

How this works for a research project with $100,000 direct cost is as follows: the 62 percent rate was applied to about $71,000, because the other costs (subcontracts and long-term equipment) are excluded from the formula. The result is reimbursement of $44,000 for MIT's overhead costs. The total research grant was, therefore, $144,000: $100,000 of direct cost and $44,000 of indirect cost.

MIT's 1990 indirect cost recovery dollar figure-$44,000 per $100,000 of direct cost-is below the national average, which (according to figures from the National Institutes of Health) was $46,000 per $100,000 of direct costs.

A version of this article appeared in the February 26, 1992 issue of MIT Tech Talk (Volume 36, Number 21).

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