Direct vs Indirect Costs

Apples and oranges.  Direct and indirect.  There are two kinds of costs but sometimes it is hard to determine when elements of expense are able to be directly charged to a project and when the costs are contained in the indirect base for the university. The following information will help you determine which elements of your proposed budget may be directly charged to the project and which must be considered part of the "indirect".

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. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or F&A costs. Where an institution treats a particular type of cost as a direct cost of sponsored agreements, all costs incurred for the same purpose in like circumstances shall be treated as direct costs of all activities of the institution.

Identification with the sponsored work rather than the nature of the goods and services involved is the determining factor in distinguishing direct from F&A costs of sponsored agreements. Typical costs charged directly to a sponsored agreement are the compensation of employees for performance of work under the sponsored agreement, including related fringe benefit costs to the extent they are consistently treated, in like circumstances, by the institution as direct rather than F&A costs; the costs of materials consumed or expended in the performance of the work; and other items of expense incurred for the sponsored agreement, including extraordinary utility consumption. The cost of materials supplied from stock or services rendered by specialized facilities or other institutional service operations may be included as direct costs of sponsored agreements, provided such items are consistently treated, in like circumstances, by the institution as direct rather than F&A costs, and are charged under a recognized method of computing actual costs, and conform to generally accepted cost accounting practices consistently followed by the institution.

Direct costs generally include:

  1. Salaries are wages (including vacations, holidays, sick leave, and other excused absences of employees working specifically on objectives of a grant or contract – i.e, direct labor costs).

  2. Other employee fringe benefits allocable on direct labor employees.

  3. Consultant services contracted to accomplish specific grant/contract objectives.

  4. Travel of (direct labor) employees.

  5. Materials, supplies and equipment purchased directly for use on a specific grant or contract.

  6. Communication costs such as long distance telephone calls or telegrams identifiable with a specific award or activity.

Section J of OMB Circular A21 (2 CFR 220) describes how certain cost elements should be considered when preparing a proposal budget.

J. General provisions for selected items of cost.

Sections 1 through 54 provide principles to be applied in establishing the allowability of certain items involved in determining cost. These principles should apply irrespective of whether a particular item of cost is properly treated as direct cost or F&A cost. Failure to mention a particular item of cost is not intended to imply that it is either allowable or unallowable; rather, determination as to allowability in each case should be based on the treatment provided for similar or related items of cost. In case of a discrepancy between the provisions of a specific sponsored agreement and the provisions below, the agreement should govern.

Indirect costs are those costs that are not classified as direct. Examples of indirect costs are :

  1. Salaries of administrative and clerical staff providing normal support activities in the department, college or school
  2. Office supplies including postage
  3. Local telephone calls
  4. Memberships

Effective July 1, 1997, OMB Circular A-21 stated that salaries and fringe benefits of administrative and clerical staff and certain general administrative expenses, such as office supplies, postage, local telephone costs, and memberships, should be charged as F&A costs (formerly known as "indirect costs") when they are associated with general University functions that do not result from specifically identifiable requirements.

However OMB Circular A-21 does allow these expenses to be charged directly to a sponsored project in certain circumstances. "Direct charging may be appropriate where a major project or activity explicitly budgets for administrative or clerical services and individuals involved can be specifically identified with the project or activity. "Major project" is defined as a project that requires an extensive amount of administrative or clerical support, which is significantly greater than the routine level of such services provided by academic departments." (Section F.6.b(2))

OMB Circular A-21 (Exhibit C) provides examples of "major projects:"

  • Large, complex programs, such as General Clinical Research Centers, primate centers, program projects, environmental research centers, engineering research centers, and other grants and contracts that entail assembling and managing teams of investigators from a number of institutions.
  • Projects which involve extensive data accumulation, analysis and entry, surveying, tabulation, cataloging, searching literature, and reporting (such as epidemiological studies, clinical trials, and retrospective studies of clinical records).
  • Projects that require making travel and meeting arrangements for large numbers of participants, such as conferences and seminars.
  • Projects where the principal focus is the preparation and production of manuals and large reports, books, or monographs (excluding routine progress and technical reports).
  • Projects that are geographically inaccessible to normal departmental administrative services, such as research vessels, radio astronomy projects, and other field research remote from campus.
  • Individual projects requiring significant amounts of project-specific database management; individualized graphics or manuscript preparation; human or animal protocols, and multiple project-related investigator coordination and communications.

Cost Accounting Standards DS-2 Disclosure Statement for UAA

The DS-2 Statement for UAA has been submitted to DCAA for review.  It has not yet been accepted.  It details how UAA will classify all elements of expense.  We are required to have a consistent treatment of costs in like circumstances.

If a proposal has a scope of work or circumstances that require direct charging of items of expense that are normally considered part of the F&A Pools, a Cost Accounting Standards (CAS) Exemption Form is required at the time of OSP (pre-award) review.  Adequate documentation of the costs that are being treated differently due to unlike circumstances must accompany this form.  The final signature on this form is the University of Alaska Controller who is the arbiter of who will and who will not be granted an exemption.

Are the costs direct or indirect?

This additional information may assist you in budgeting a cost as directly charged or included as part of the "F&A" base.