The Story of Indirects

Bob Summers and David Carroll

N/QTL

Universities are increasingly becoming the targets of misinformation and uniformed attacks with regards to costs. Much of this is driven by the high costs of everything today including the cost to do science and development. So, what really goes into the costs of running an academic laboratory and how does this compare to industrial labs? Is indirect charged on university grants REALLY too high? Let's take a look and you be the judge.

So what is the story with university indirects? There are opinions expressed by some (and very loudly we might add) that indirect rates at the research universities in the U.S. are unfairly high, and that universities are "getting rich" off taxpayers. But is this true? Indirects are actually negotiated with the federal government and this negotiation is supposed to take into account several factors, cost to run the facilities, costs of personnel and their benefits, costs of insurance, and more. It also takes into account the costs of the local markets. By design, universities are not supposed to compete with local businesses or real estate operations because they receive a special tax exempt status. In other words they work in trust for the taxpayers and so it isnt a good idea to have them kill off local businesses by offering services for well below market prices.

So did you catch that? The negotiations for indirect should include what BUSINESS costs for the same services. The idea that business can do the same thing but for less money should be examined closely. The system is designed to raise the costs of doing things through the university so businesses are not hurt! Not the other way around.

However, many business owners will state unequivocally that their indirect rate is only 15% - 25% while that of the university is (at WFU) 45%. However, these two things do not compare apples to apples as the saying goes. The details of the accounting methods must be taken into account. Universities put all operational costs into one pot - the indirect pot. Whereas businesses use taxable business expenses to separate out their "pots." This makes it harder to see the total costs per person. Let's see how this works in an example:

Let's take a company that wishes to develop something and they have a choice, they can rent laboratory space or do the development with a university nearby. Which should they choose? We will look at this on a per person basis for the development.

At the University we have a postdoc salary: (50K) + benefits (15K) + Indirect (45% or about 30K) + supplies (on average 10K /year person) + indirect on that (4.5K) and typically some internal user fees for the equipment (5K + 2K indirect). In total we get: $116,500.

At the Company we must pay a bit more because the employee is not getting additional training for their trouble - so there is no value added compensation. Lets say we pay them 80K (a little low for a PhD. in research) + benefits (24K using same rates) supplies (10K + taxes) User fees generally double the internal rates to make them competitive with the outside world (10K + taxes)

+ rent

Rent is hard to predict here because it depends on what kind of lab and where you are. Typically, per person we require 100 sq ft of bench space for chemistry or biology work with fume hoods. Any other fit-out must be purchased. Across the U.S. this ranges from about $70/sf to 110/sf per month. The average is about $90/sq ft making your rent per person $9k/person per month or 108K/year. Fit out costs above this averaged $850 per sf so another $8500 but this is not just a one time cost. Maintenance of specialty equipment typically doesnt come in the rent. So you have to pay to change HEPA fliters, inspect fume hoods, keep fire and safety equipment up to spec, filters for the DI water system, replace refrigerant for the water chillers, etc. The average in the U.S. depends on the kind of lab. For a typical chemistry lab this isnt so bad at $1K per month. 120K per year.

Another option is to make a really good deal on suitable office space and fit out your own "minilab using ebay equipment." Office-type space across the U.S. with suitable size seems to average $3K/month and utilities of roughly 1K/month. Thats 48K/year and this may or may not includes taxes. Note that utilities will need to include power, internet, access to libraries, software support, etc. But you are left only with an office that is converted into a makeshift lab assuming the local zoning ordinances allow. Upfit is more expensive (now about 20K) and you will have to purchase all the small equipment that you usually get access to in a university lab or incubator setting (as above) - spectrometers, ellipsometers, alpha steppers, gloveboxes and so forth. This is the stuff no one is charged for. This chemistry lab still has the 1K per month to pay for maintenence. So we are at about 60K per year plus upfit and taxes if they apply.

+ insurances

Regardless of which way you go, you still have indemnity insurance to pay (10K), and unemployment insurance for the employees (5K on the above salary).

+ accounting services

Finally someone has to do support: accounting, ordering and receiving, inventory, overseeing safety equipment, etc. Some of this is required by federal law and it costs about 5K per person per year.

At the company (not counting tax liability) costs are at: $204K. From the university's perspective the miminum per person cost is $124K over that person's salary. That is about 61% of the money went into something other than the person's salary. At the university the cost was $66.5K over their salary or about 57%. And this is being the absolute most generous with the Company - no taxes are counted and an office converted into a small lab is used. No one time upfit costs and management costs are left out of the company estimates (in other words the CEO, COO, CTO all work for free.) You read that right, the real indirect rate is higher for companies, and the total cost is higher for companies. Indirect at a university essentially covers the cost of rent, utilities, access to specialty services and management. And, to make it fair to outside interests, the grant takes some of the funder's autonomy away - meaning you only get what is in the SOW of the grant, nothing more.

Now the argument might be made that this doesnt scale linearly whereas the University pricing does. So a company can cram more people into the same space so if I go from 1 person to 5 people my rent prices dont go up, so it becomes cheaper and cheaper. But we did this calc on a per sq ft basis. Putting more and more people into the same sq. ft. reaches a point of dimensishing returns and so pretty quickly you reach a saturation and more space is required to do the work. Moreover, maintenance costs go up with users as does insurance and safety and management costs. Taxes and unemployment will go up and stratification of base salaries (management class incorporation) will increase payroll. Cost of medical benefits etc. will go down with more subscribers but only once the numbers have gotten large. From a careful analysis of these factors it would seem that for companies below about 10 employees, the growth in cost is quite linear, and tracks the unviersity well. This of course still depends on the type of work you do. Note that for companies engaged in the highest levels of technology development, due to the expertise required and the type of equipment being used, they find it cost effective to engage universities even when their employee needs are above 30 personnel.

This is of course, a first pass in analysis. But even such a simple estimate clearly suggests the cost conscious company developing technologies should save its money by paying its costs in the form of unviersity indirect as opposed to direct spend. This is reflected by the many larger companies who work with universities where it is widely recognized that working with a university is a cost effective way of bootstrapping the development of early stage technology. But due to rampant misinformation and a lack of knowledge of how accounting practices differ, this "golden rule" of company development is coming under fire. And, it should be stated that there is always a point at which the company must pull its operations into its own facilities. When should this occur? The conditions indicating such a move is the subject of the next in this series of articles.

Until next time...