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Monitoring indirect cost encumbrances of sponsored projects is a critical component of the indirect cost recovery process. Indirect cost recovery is integral to funding the infrastructure required for the operation of research intensive institutions.  Monitoring these costs provides administrators the visibility into funding that will be available in the near term.

In today’s article, we start a two part blog series discussing the accounting processes and calculations required for monitoring indirect cost encumbrances.

What is Indirect Costs Recovery?

Indirect costs, aka IDC, F&A, or Facilities and Administration, are costs that are not directly allocable to a specific sponsored project but are incurred for the joint benefit of multiple projects or activities. Examples of indirect costs include:

  • Executive and administrative staff
  • Office space used by those staff
  • Shared services such as janitorial, technology, etc.
  • Shared equipment such as copiers, phone systems, servers, etc.
  • Managerial functions such as audits, training, etc.
monitoring indirect cost encumbrances

Monitoring Indirect Cost Encumbrances on Sponsored Projects

The budgets for most sponsored projects allow for a portion of these indirect costs, as defined in an institutional indirect cost rate agreement. This portion is computed by multiplying the amount of certain direct costs by a predetermined (negotiated) indirect cost rate and the cost then become available for “recovery” once those direct costs are incurred. We use the word “recovery” because, in many cases, the indirect costs associated with a sponsored project are incurred and then reimbursed by the project sponsor.

While an in-depth discussion of definition of indirect costs and their rates is far beyond the scope of this article, additional information regarding them can be found at the NIH Office of Management website.

Monitoring Indirect Cost Encumbrances

  • Monitoring indirect cost encumbrances involves five steps:
  • Tracking outstanding encumbrance transactions by sponsored project
  • Identifying which transactions generate indirect costs for recovery
  • Multiplying the encumbrance by the appropriate indirect cost rate
  • Applying an indirect cost cap if necessary
  • Creating usable report formats

Applying these four steps in a streamlined manor requires either a sophisticated spreadsheet or a grant accounting software system. When spreadsheets are used, a separate spreadsheet is typically used for each sponsored project and direct vs. indirect costs are recorded in separate columns. Some of the challenges of automating these steps with spreadsheets include recording and liquidating encumbrance transactions and identifying which ones generate indirect costs. For these and other reasons, an accounting software solution is usually a better alternative, particularly at larger research intensive institutions.

Software for Monitoring Indirect Cost Encumbrances for Sponsored Projects

While ERP, general ledger, and purchasing systems used by research intensive institutions usually provide accurate information with respect to computing indirect cost expenditures, the same cannot be said of indirect cost encumbrances. In many cases, either the system was not originally designed for this purpose or the functionality was not implemented for the institution. Thus, a separate grant accounting solution, is employed for this purpose.   In cases where a grant accounting solution is interfaced to the primary accounting system via a recurring import process, the grant accounting system is often referred to as a parallel system or data warehouse. When accounting transactions are manually keyed into the grant accounting solution, it is often known as a shadow accounting system.

Because the management of indirect costs are a fundamental part of grant accounting, computing indirect cost encumbrances is a key feature in the design of most grant accounting software solutions.

These systems track outstanding direct cost encumbrances, calculate the associated indirect cost encumbrances and present the results in multiple report formats to meet the need of grant and research administrators. Most of these systems include functionality for monitoring indirect cost encumbrances for multiple indirect types and rates. Examples of different indirect cost types include: Total Direct, Modified Total Direct, Salary and Wages, and others.

In the next blog in this series, we will provide more detailed information regarding how indirect costs are calculated and how data is typically organized in grant accounting systems designed for this purpose.

We will also present examples of reports used in the analysis of indirect cost encumbrances.

Examples of grant accounting software solutions frequently used in research intensive institutions include the Department Manager, College Administrator, and Research Administrator products provided by IT Works. For more information regarding these products, contact the IT Works team.