Direct and Indirect Costs

One of the key objectives in applying for research funding is to obtain funding sufficient to cover all costs of the proposed research - both direct and indirect costs.

Accordingly, in preparing the budget which accompanies the award application, it is important to:

• identify all direct costs
• include an appropriate provision for indirect costs.

This provision is generally expressed as an overhead rate applied to all direct costs or to a specific category of direct costs.

The University practice is to request an overhead provision of 40% of total direct costs on research contracts, 15% of total direct costs on corporate/industrial consortia research grants, and 10% of total direct costs on research grants from foundations, unless the sponsoring agency has a prescribed rate(s).

A copy of the policy on Research Agreements and the Recovery of Indirect Costs of Research is available on the Research and Innovation website.

The Indirect Costs (Overhead) section is devoted to this important topic in order to promote a clear understanding of those costs which are expected to be covered indirectly, i.e. by the provision for indirect costs, and those which are to be covered directly, i.e. direct costs.

The distinction is particularly relevant to applications to funding agencies which restrict support to the direct costs of research. A faulty understanding of what constitutes a direct cost may lead to understating these costs.

Specific Costs

• Salaries - Salaries must be within the range for the appropriate University position classification.
• Salary increases
• Allowance must be made for upcoming salary increases effective July 1st of each year.
• A salary increase may include an across-the-board (economic) increase, and an appropriate merit/step increase in accordance with University guidelines.
• If upcoming increases have not been established at the time of proposal preparation, consult with the Human Resources Department with respect to appropriate estimates.
• Vacation pay - add vacation pay of 4% for casual and term employees
• Benefits - A standard benefit rate representing the full employer cost of benefits will be charged to the award. The current rate as a percentage of salary for appointed staff and non-appointed staff can be found on the Standard Benefits Rates page of Financial Services website.
• Computing costs - Ensure that the cost of computing services is considered. Consult Computing Services for advice.
• Travel costs - The sponsoring agency may have guidelines or limits with respect to travel costs. Refer to Travel and Other Reimbursable Expenses for University regulations with respect to eligible and ineligible travel costs.
• Supplies and Equipment - Specific supply and equipment requirements should be identified and costed using the best available information, e.g. supplier's price lists.  In the case of significant and specialized items, consult with Procurement Services.

Harmonized Sales Tax (HST)

• HST included in costs - This relates to the HST included in the goods and services which the researcher purchases to carry out the research. The majority of goods and services purchased are subject to HST (the notable exceptions are salaries and wages). Research activity is not exempted and, therefore, HST must be considered when estimating costs of research. The University, however, is part of the MUSH group of organizations (municipalities, universities, schools, and hospitals), which receive a partial rebate of HST. The rebate to universities is 67% for the GST portion of the HST and 78% for the provincial (OVAT) portion of the HST. The net HST cost after the rebate is 3.41% and, therefore, the cost of goods and services will be 1.0341 times the supplier's before-tax price. If the supplier's price includes HST, the cost to the researcher after the rebate can be calculated as: supplier's price x 0.91513.
• HST to be collected - This relates to the HST which the University must collect from the sponsor in respect to the results of research transferred to the sponsor. The question here is whether the research activity funded by specific grants and contracts constitutes a taxable sale to the sponsor for which the University must collect HST?

The answer is NO with one exception: Contracts which require delivery to the sponsor of a prototype of a value equal to, or greater than, 51% of the total contract price. In these cases the University must collect HST from the sponsor and remit to the Canada Revenue Agency (CRA). If the value of the prototype is less than 51% of the contract, it is considered to be incidental to the research.

Example:
If estimated direct and indirect costs of a research contract total $30,000, the cost to the sponsor will be $33,900 (30,000 x 1.13). The $3,900 will be placed in the University's HST remit account and paid to CRA, or netted with the HST rebate receivable from CRA.