Allocation of indirect costs/research overhead in the Faculty of Applied Health Sciences (not Tri-Council)

The Chairs, Director, Executive Officer, and Interim Dean of Applied Health Sciences (AHS) have reviewed our Faculty’s practices and policies with regard to overhead charged on research contracts in support of indirect costs of research. This was done with an aim of applying more consistent practices to handling AHS research contracts, and in light of budget model changes in which many research-related costs previously funded by the Provost’s office are now the responsibility of the Faculties. As part of this review, the current practices of other University of Waterloo Faculties were considered.

Consensus was reached on the following points related to contract overhead in AHS:

  • Overhead policies of the funding organization related to allowable overhead charges will be respected if these are existing policies that are explicitly stated and documented by the funder. The investigator must supply evidence (formal policies from website, etc.) when the coversheet is submitted for approval.
  • Unless otherwise specified in policies of the funding organization, a 30% overhead cost rate will be consistently applied to industry contracts as stated in the Office of Research overhead policy.
  • Overhead funds will be allocated on the following basis:
    • 75% will be retained in the Dean’s Office to pay for expenses such as: ERAs, CRCs, RIFs, CFI, URI, starter grants, Diversity and Equity Council; as well as severance, maternity/parental leave, short-term disability, and tuition expenses related to regular research staff positions that are contingent on funding.
    • 25% will be retained in the academic unit for indirect costs related to research (that are not covered by the Dean’s office) at the Chair/Director’s discretion.
    • The academic unit may allocate funds to a faculty member in response to a specific application for expenses related to indirect costs.
    • Funds are allocated from previous year on a slip year basis.

The following is a note on indirect and direct costs provided by Mike Szarka from the Office of Research (June 21, 2018):

Indirect costs vs. direct costs in University contracts

Unlike other organizations that perform contract work, universities provide contract quotations which specify only a portion of the costs of research. This is because university research administration is set up to manage government grants, where only certain types of research costs can be charged directly to the grant. As a result, most university contract budgets show only actual salaries, materials and travel costs, which are usually termed as “direct costs”.  There are many other costs of research related to facilities and administration that the university pays for, but which it is not possible or practical to ascribe to individual projects. These are typically known as “indirect costs,” although from the University’s standpoint they are direct as well (utilities, library costs, contract and financial administration, instrument and building maintenance and depreciation, etc.). 

The University recovers a small portion of these costs by adding a fixed percentage to the direct costs, which is shown on the project budget as “overhead” or indirect costs. In a private sector contract, these costs would simply be built into the bill-out rate for labour, along with a mark-up for profit.  No organization can survive without recovering these costs, but universities show them differently in a contract proposal. The rate used for industry contracts at Waterloo (30%) is designed to recover only a portion of these costs, and as a result is far lower than the corresponding mark-up used in the private sector (compare the shop rate at a garage to the hourly wage of a mechanic) or by the indirect cost rates used by universities in the United States, typically in the range of 50-70%. Other rates are occasionally used by Waterloo for different types of contracts or sponsors. Contact the Research Partnerships office for more information.

The revenues from indirect cost recovery at Waterloo are managed by the relevant Dean, and are used to support a variety of research, maintenance and administrative functions, which will vary year-to-year.

June 17, 2019