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Contract Accord 12: Budgeting

Accord Revision Date: December 2019
Page Updated: January 2020
©2020 University-Industry Demonstration Partnership (UIDP). Please refer to the copyright and disclosure statement for UIDP Contract Accords usage and rights.

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OVERVIEW AND BACKGROUND

Establishing the Budget is a key step in determining whether it is feasible to proceed with a sponsored project. The University’s project Budget must clearly articulate the funding required to successfully undertake the proposed project and allow the industry sponsor (Company) to assess whether the Budget is consistent with the funds they have available.[1] If the University‘s Budget exceeds the Company’s available funds, the University and Company should assess whether it is possible for either party to seek additional funds from other sources such as another Company with complimentary goals, cost-sharing from the University, or other third-party sources such as a non-profit organization, a state government, or the federal government.[2]  Alternatively, the parties could modify the Statement of Work (SOW) to fit within the available funds.

The Budget should cover total costs of the project, including both direct and indirect costs. (Indirect costs are also called Facilities and Administrative [F&A] costs, especially in the University context.) The Budget should also provide sufficient detail to satisfy the Company’s need to ensure that the Budget correlates with the SOW and the University’s need to cover its costs. Generally, for cost-reimbursable projects, both direct and indirect cost Budget components should be identified. Fixed price project Budgets may not require any detail other than the total cost. The presentation of the Budget, the inclusion of Budget detail, and provisions for monitoring and making changes in Budget line items should be discussed and addressed in the sponsored project agreement as applicable to the needs of the parties.

DIRECT COSTS

Direct costs are the costs that can be readily and specifically allocated to a particular sponsored project with a high degree of accuracy. The direct costs will vary widely depending on the type of project being proposed, e.g., animal research, clinical research, prototype development, literature review, or routine testing. Other factors will affect direct costs as well, such as:

  • the collaborative nature of the project;
  • the level of expertise required;
  • the need to purchase or pay to access equipment;
  • the inclusion of student research assistants; and
  • the duration of the project.

For projects supported in whole or in part by the federal government, Universities must comply with Uniform Guidance,[3] which prescribes the allowability of certain costs and the assignment of those allowable costs as direct or indirect costs. By policy (and in order to assure consistency across financial systems), many Universities extend the principles in the Uniform Guidance to other sponsors, including industry sponsors (Companies).

Budgeting of personnel is very different between Universities and most Companies. Universities usually state the amount of time required for faculty and research staff to perform the work on a project as a percentage of their overall effort rather than as an hourly rate. Related salary expenses may include fringe benefits, though for some Universities these are indirect costs. Calculation of fringe benefits is often determined from past experience of the University and can be expressed as a percentage of salary or as a line item with or without further details about of each component of the benefits.

Salary for other personnel—Including postdoctoral and other students, technical staff, and dedicated administrative support needed for the project—would be included and calculated either as a percentage of overall effort for academic staff or as an hourly rate. Note that salary costs for administrators require particular Budget justification if the funds are ultimately being charged by the Companies to the federal government, since these costs are generally included in and recovered by the University as indirect costs. (See Indirect (F&A) Costs below.)

The Budget may include a line item for purchase of equipment. However, it should be noted that many Companies are attracted to certain Universities because they already have the type of equipment necessary to undertake the proposed project and such equipment is not available at the Company. Since the acquisition of equipment may be a big-ticket item, the University and Company should discuss the need to purchase new equipment versus alternatives, such as using less up-to-date equipment or providing the University with access to the Company’s or a third party’s equipment, leasing, or borrowing equipment. Title to any budgeted equipment is generally retained by the University after completion of the project, although this should be discussed and clearly stated in the sponsored project agreement.

The costs of travel associated with the project performance or presentation of results may be included in the Budget, such as travel to the Company’s site to collaborate, access equipment, provide project updates, or attend professional meetings.

When graduate students are paid a salary to perform work on a sponsored project, tuition is often included as part of the student’s overall compensation package. Depending on the University’s policies, tuition may be shown as a benefit or separate line item.

Other direct costs, such as software, subject reimbursement, materials, and supplies required for performance of the project, may also be included.

INDIRECT (F&A) COSTS[4]

In addition to the direct costs, University Budgets will include facilities and administrative (F&A) costs (commonly referred to as indirect costs in the industry context).  These are real costs to the University, but they can’t be easily associated with or allocated to a specific project. Some common examples of University indirect costs include facility operation and maintenance costs, Internet, data transmission and storage, compliance costs, central administrative office costs, general office supplies, and library operation expenses.

Generally, the F&A rate will be calculated as a percentage of the modified total direct costs (MTDC). This is a base that includes most budgeted direct costs but excludes others (i.e., equipment, capital expenditures, charges for patient care, tuition remission, scholarships, and fellowships), as well as the portion of each subgrant and subcontract in excess of $25,000.

Universities are obligated to treat like costs consistently and are governed by the principles in the Uniform Guidance when determining what costs are direct versus those that are part of their F&A rate.

To better understand the calculation of a particular University’s indirect costs charged to a project, the Company can ask for a copy of the University’s negotiated rate agreement. The negotiated rate agreement is a written document mutually agreed upon by a University and its cognizant federal agency that records the F&A rate the University can charge the federal government over a defined period. This agreement is re-negotiated periodically. The negotiated rate does not necessarily reflect all allowable costs and is generally several percentage points below the University’s actual F&A rate.

Some Universities have higher rates for Companies than for federal sponsors. This higher rate includes allowable costs that the government does not agree to cover in the negotiation of the F&A rate or that they are prohibited from recovering by federal law.[5]

University F&A rates are different for various types of projects. For instance, projects that are determined to be mostly performed in facilities that are not owned or rented by a University (i.e., off-campus) generally have a lower F&A rate than those that are performed mostly on-campus. Projects that are not research but are categorized as instruction, routine testing,[6] or clinical trials, also have different F&A rates.

Using an F&A rate to allocate indirect costs to projects enables the University to recover these indirect costs in a consistent manner that distributes the recovery of these costs across projects and reflects the University’s total cost of doing business.

BUDGET AND PAYMENT TERMS IN A SPONSORED PROJECT AGREEMENT

Though often considered “boilerplate” parts of an agreement, provisions related to Budgets and payments are critical parts of a sponsored project agreement and require careful review and consideration. Some common issues and terms to address include:

 

  1. Upfront Costs. If it is necessary to buy equipment or incur other expenses for the project to begin, the Budget should identify those costs and the agreement should describe who will be paid if any portions of them are non-refundable.

 

  1. Fixed Price. If the cost of the project will be fixed and not dependent on the actual expenditures incurred in performance of the project, the parties should decide and describe in the agreement what triggers payments, e.g., execution of the agreement, achievement of specific milestones, or equal installments.

 

  1. Cost Reimbursement. If the Company will pay the University up to a pre-agreed amount specified in the Budget, based on expenditures as they are made, the agreement should include an invoicing provision—format, recipient, frequency of invoicing, length of time after invoice that payment is due, and penalties (if any). If payments are based on something other than invoiced expenditure, the agreement may contain a provision requiring the University to reconcile the final invoice to actual expenditures and to invoice the remaining amount due or return the overpaid amount to the Company.

 

  1. Deviations from Budget. If the Company reviewed and approved a project Budget, it may or may not allow deviations from the Budget. (Universities prefer some Budget flexibility since sponsored projects are often somewhat unpredictable.) The agreement should address whether and what Budget deviations are allowed and specify the degree of deviation, usually as a percentage of the total Budget or a percentage of the direct costs Budget.

 

  1. Preapprovals. The agreement should specify if the Company requires preapproval before it agrees to reimburse the University for certain costs. These costs often include equipment, subcontracts consultant, and travel costs.

 

  1. Fair Market Value. A representation by the University conducting a clinical trial should demonstrate that the costs are consistent with the fair market value of the services being performed by the University.[7]

 

  1. Cost-Sharing. The agreement should describe any requirements for the University to contribute funds or make in-kind contributions to the project. Note that University cost-sharing or in-kind contributions to Company-funded sponsored projects are relatively rare.

 

  1. Purchase Order or Other Referenced Terms. The agreement should state if the Company is going to issue a purchase order (PO) in addition to a negotiated sponsored project agreement. In these cases, the agreement should:
    • Include the PO number;
    • specify whether the terms contained in the PO apply to the project; and
    • state which terms take precedence in the event of a conflict between them.

Similarly, if the Company needs to include referenced terms, such as via an Internet citation, the agreement should include the website address and version date and should specify which terms take precedence if there is a conflict between the agreement and those terms.

 

  1. Termination. The agreement should address what happens in the event of termination before the project is completed or the agreement terms ends. The University would expect to be reimbursed for actual costs and non-cancelable obligations incurred prior to the date of termination. The Company will likely require an accounting and a pre-agreed mechanism to determine the maximum the Company is obligated to pay. Termination provisions will be different depending on (a) whether payment under the project agreement was based on fixed price or cost-reimbursable terms, and (b) whether the early termination occurred without cause or because one of the parties breached the agreement.

 

  1. Audit. If the Company needs to be able to audit the University to determine if the project charges are consistent with the Budget and terms of the agreement and used for project purposes, the agreement will contain an audit provision. The provision should address the scope of the audit (e.g., personnel costs, travel costs), how the audit is to be arranged (e.g., notice to the University, during business hours), and which party is responsible for the cost of the audit.

 

  1. Other conditions of payment. Some Companies have payment systems that require the University to invoice via an online system or that require that payment be made via wire transfer. Since these details may require involvement of University parties other than the office negotiating the agreement, the University should be notified of these requirements well in advance of the start of the project. These requirements are often included in the Budget or invoicing provisions of the agreement.

 

PRINCIPLES

  1. Payment terms can be negotiated and may be tied to milestones and deliverables that are defined in the SOW or in the parties’ agreement terms.

 

  1. The University’s proposed Budget should be the best estimate of the component costs needed to successfully perform a project.

 

  1. Budgets may be renegotiated if there are significant modifications to the SOW, but the changes should be agreed to in an amendment or formal modification of the sponsored project agreement.

 

  1. The Company should have a clear understanding of what funds are being requested for each Budget item but may not be entitled to non-public information.

 

  1. When negotiating the Budget, the Company should focus on the potential value of the project and compare this value to the requested cost and the Company’s available funds.

 

  1. The Company should not rely on the principal investigator (PI) to provide Budget information or approval unless properly authorized to do so by the University.

 

  1. The University should not rely on the Company’s scientists or unauthorized individuals to approve funding on behalf of the Company.

 

  1. Universities should be given appropriate flexibility to make changes among the line items of a Budget during the proposed project period as necessary in order to increase the likelihood of success.

 

  1. Since research possesses significant uncertainty, the University PI should regularly communicate with the Company on the project’s progress and explain any significant modifications to the SOW that may have Budget implications.

 

  1. Internal funding from the University as cost sharing is unusual for Company projects and must be documented and approved by an authorized official of the University.

 

  1. The Company and the University should agree in advance on how payment will affect ongoing performance, e.g., whether the University will require upfront payment or cash in reserve in order to proceed, or whether it will continue to perform if the Company’s payment is delayed.

 

  1. The University and the Company should determine in advance and formalize in the agreement whether the project costs will be recovered based on cost reimbursement or fixed price.

 

  1. University researchers frequently request an extension of the project period without asking for additional funds; these no-cost time extensions must be agreed to by the Company and an authorized representative of the University.

 

OUTLIERS

The following topics are not covered in this Contract Accord:

  • Consulting arrangements with individual researchers;
  • Dedicated user facilities that have an established cost structure (menu) for services (See UIDP Contract Accord 13: Specialized Services/Testing Agreements.);
  • Projects that are funded by a third party and incorporate terms that set conditions on the Budget, e.g., government subcontracts; and
  • Costs that are regulated by the government, e.g., Stark Law, Medicare Secondary Payer regulations, OFAC.

FOOTNOTES

[1] See UIDP Contract Accord 1: Statement of Work.

[2] For the purpose of this Contract Accord, federal government refers to the U.S. Federal Government and the agencies and departments that are a part of it.

[3] U.S. Office of Management and Budget (OMB) Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (commonly called “Uniform Guidance” and also known as the Omni Circular) 2 CFR 200

[4] For more information about how research is funded at Universities see Excellence in Research: The Funding Model, F&A Reimbursement, and Why the System Works April 2019, Council on Governmental Relations, retrieved from https://www.cogr.edu/sites/default/files/ExcellenceInResearch4_12_19_0.pdf

[5] Since 1991 the administrative cost portion of a University’s Negotiated Rate Agreement is capped at 26% regardless of the University’s actual costs.

[6] See UIDP Contract Accord 13: Specialized Services/Testing Agreements.

[7] See Burke, D. What’s Fair about Fair Market Value in Research? “The Centers for Medicare and Medicaid Services (CMS) defines [Fair Market Value] as “The value in arm’s-length transactions, consistent with the general market value. ‘General Market Value’ means the price that an asset would bring as the result of bona fide bargaining between well informed buyers and sellers who are not otherwise in a position to generate business for the other party…Usually, the fair market value price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition…” (42 CFR 411.351)” retrieved from https://forteresearch.com/news/whats-fair-about-fair-market-value-in-research/