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Memo: State Planning and Research Funds Overhead/Indirect Cost Rate Guidance

U.S. Department of Transportation Federal Highway Administration

Research, Development, and Technology Turner-Fairbank Highway Research Center

6300 Georgetown Pike McLean, VA 22101-2298 Tel.: 202-493-3999 Fax :202-493-3478 www.fhwa.dot.gov/research In Reply Refer To: HRT-1

Mr. Dale Peabody
Chair, AASHTO Research Advisory Committee
Director, Transportation Research
Maine Department of Transportation
16 State House Station
Augusta, ME  04333-0016

Dear Mr. Peabody:

With the adoption of new regulations such as 2 CFR 200, commonly known as the Supercircular, several State departments of transportation (DOT) and State universities have made inquiries to the Federal Highway Administration (FHWA) regarding how the overhead/indirect cost rate should be calculated by universities when conducting research for DOTs using FHWA State Planning and Research (SPR) funds. In particular, 2 CFR 200 Appendix III defines the indirect cost rate determination for universities that are approved by the Federal cognizant agency independent of the State DOT sponsored research and activities. Thus, the following question:

Question: When DOTs provide SPR funds to universities to conduct a research project, are the SPR funds considered "pass-through" awards to the universities? Does this affect the overhead/indirect cost rate that State DOTs must pay?

Answer: The status of SPR funds used to pay for State DOT research conducted by universities is determined by the substance of the relationship. The factors used to determine whether funds are being spent under a "pass through" grant, subaward, or a contract are described in detail in 2 CFR 200.330.

1. When a State DOT issues or awards a grant to a university to conduct transportation research where the principle purpose is to carry out a public purpose for the benefit of the university and not to acquire property or services for the State DOT (see 2 CFR 200.330(a)), the prevailing overhead/indirect cost must be applied if the rate exists. See 2 CFR 200.331. The approved indirect cost rate would be recorded in the subrecipient grant agreement. An example that would fall under this scenario would be if the State provides financial support for a university to carry out research at the university's discretion with limited direction from the State DOT.
   
   
2. If a State DOT issues a fee-for-service contract to conduct specific studies, where there is no programmatic discretion for the university, the substantive transaction is generally not considered a "pass-through" grant or "subaward." See 2 CFR 200.330(b). In those instances, the State DOT could negotiate to pay either the prevailing overhead/indirect cost rate or negotiate with the university to pay a lower rate. See 2 CFR 200.317. Most SPR research is conducted as directed by the State DOT under a contractual agreement and therefore would fall under this scenario. Research projects are chosen by and regularly reported to the State DOT.

Discussion

The pass-through determination has an impact on how indirect costs are determined and approved. Many State DOTs have negotiated a lower indirect cost overhead for SPR research contracts, but this rate may be used only for a contract awarded to the entity as described in paragraph 2 above. If the funds utilized to conduct SPR studies are considered "pass-through" grants or "subawards", then the approved, federally recognized indirect cost rate negotiated between the subrecipient and the Federal government must be applied as directed in 2 CFR 200.331(a)(4). The indirect cost rates for Institutions of Higher Education (IHE) are typically negotiated and approved by either the Department of Health and Human Services or the Department of Defense, depending on which of the two agencies provided more funds to the IHE in the most recent three years. If an IHE has never received an indirect cost rate, then the State DOT may either negotiate a rate with the IHE, or the IHE may elect to charge a de minimis indirect cost rate as defined in 2 CFR 200.414(f).

Implementing regulations for the FHWA SPR program state that FHWA will attempt to allow State DOTs and metropolitan planning organizations "[m]aximum possible flexibility in the use of FHWA planning and research funds to meet highway and local public transportation planning and RD&T needs at the national, State, and local levels… (23 CFR 420.105(a)".

Thus, depending on the State's acquisition laws, regulations, and policies, a State DOT may be able to fund work described in the SPR legislative authority (23 U.S.C. 505 (a)) using State DOT staff, State universities, private universities, staff from other public entities, or private-sector contractors. As explained in section 2 CFR 200.330, in determining whether an agreement between a pass-through entity and another non-Federal entity results in a subaward or contract, the substance of the relationship should govern the final determination as opposed to the form of the agreement 23 CFR 200.330(c). The DOT may use either a contract or a grant, in accordance with that section, which describes the process for a DOT to determine whether funds are being provided to a subrecipient or a contractor.

Relevant sections of the Uniform Requirements for Federal Awards are the following:

If there are any questions, please direct them to: Sidney Stecker at (202) 493-3044 sidney.stecker@dot.gov or Jack Jernigan at 202-493-3363 jack.jernigan@dot.gov.