November 21, 1996
by Pierre R. Bélanger
Vice-Principal Research Pierre Bélanger
"These overhead charges are outrageous!"
I've heard that. So have the staff in the Research Grants Office, the Office of Technology Transfer and the Office of International Research. They have their orders: make sure that indirect costs are included in project budgets. We charge the private sector 15% for a grant, 40% for a contract; federal government contracts are assessed 65% of salaries and benefits.
The only exceptions are for grants that are "accredited," i.e., recognized by the Quebec government as peer-adjudicated. For these, Quebec allocates 15% (10% in the medical sector) to us in its funding formula (still the only province to take account of research funding in its grants).
Professors complain the University is raking off money that might otherwise have supported their research. How can we risk offending a generous donor who has given so selflessly to research by taking 15% off the top? One owner of a small company was incensed at being charged 40% "for processing a few pieces of paper."
The imposition of overhead charges must be one of the most misunderstood policies, which is why I have chosen to write about it. Every research project has direct costs, which cover the labour and materials used to do the work. There are also other costs that are just as real, but can't be billed directly, such as: heating and building maintenance, books, accounting services. "But," a researcher might say, "the building is already heated, the lights are on anyway, the books are in the library; my project adds nothing to these costs."
Sure. I suppose an undergraduate could argue that "the course is given anyway, the only extra cost needed to cover my presence is the time to mark my assignments and exam; is that worth $1,600 per year?" Probably not.
The fallacy in both cases is the notion that costs are charged on a marginal basis. If we did that, we'd go broke, because no one would cover the cost of the infrastructure that exists in order for teaching and research to take place.
What are these costs? Although we have analyzed overheads for academic programs, we have not recently done the analysis for research. But I can indicate how such an analysis might be done. The idea is to try to identify costs that are incurred because we do research, and that would not be there otherwise.
We can start with the research units of Graduate Faculty, and with Special Funds, the accounting and purchasing units that handle research accounts. Next, consider the fact that professors spend a significant portion of their time, say between 25% and 50%, doing research.
If we did no research, we could handle the present teaching load with many fewer professors, which would save a large chunk of the salary budget. Fewer secretaries and technicians would be needed, so there would be savings there as well. The need for offices and labs would greatly diminish and so cut down on heating and maintenance costs. We would no longer have PhD students, so we could scrap a few more offices, and reduce Graduate Admissions and Fellowships to skeleton staffs, and get rid of more offices. There are also indirect costs incurred at the local level. Research facilities must be operated and maintained, not only in peak periods when users can be charged, but in idle periods as well.
The analysis is not simple. Fortunately, there have been several studies, most of them American, to shed light on the question of indirect costs. The results are invariably the same: in the university milieu, indirect costs run from 40% to 50% of direct costs, with about 1/4 to 1/3 of the indirect costs being incurred at the level of the laboratory.
Our policy of taking 40% on private-sector contracts is a bit on the low side, but certainly reasonable. The 15% we require on grants seems low, but reflects the fact that a grant--because it leaves the researcher free to choose his or her topics and to dispose of the intellectual property--supports activities that are close to our core mission.
Such activities are covered by the basic government grant, whereas contract research, with its precise deliverables and intellectual property clauses, is somewhat further away from the core, and so must therefore properly draw a greater proportion of outside funding. The 15-40 formula is in force in all Quebec universities, so no one has a competitive advantage from charging less for overheads.
The policy at McGill on the distribution of overhead income is to return one-third to the dean of the originating faculty. In principle, the faculty portion is meant to cover overhead expenses, most of which are incurred at the level of the academic unit. That one-third is on the generous side, based on U.S. studies indicating that only 25% are incurred at the laboratory level.
By virtue of a recent agreement with the Budget Planning Group, the administration retains two-thirds of the overhead income from contracts and unaccredited grants until the overhead total reaches $2,601,000; for any overhead income over that threshold, the University's two-thirds is split between the administration and the Faculty of Graduate Studies and Research.
Some of that Graduate Faculty income is spent on infrastructure costs. If it grows, it will be used strategically to support technology transfer, international activities and the development of new grant opportunities.
Some of the income will also go to fund research--in effect replacing and augmenting University funding. These funds will be allocated through the normal channels used by Graduate Faculty, which are accessible to all, regardless of discipline. In that way, contract work is of benefit to all. Neither faculties where projects originate nor Graduate Faculty directly share in the indirect costs generated from the provincial government ($11.6 million for 1995-96).
The imposition of indirect costs is certainly not excessive. It is the only way for the University to recover a small portion of the cost of the research infrastructure that it must maintain to be a research university. I hope that all researchers will agree, and explain to external sponsors of their research that indirect costs are real -- and must be recovered.