Empirical Investigation of Overhead Rate Determinants

The U.S. government funds approximately $15 billion in primary research each year, conducted mainly at colleges and universities. Since universities are charged with the dual purpose of conducting research and educating students, many facilities and functions support both purposes. In recognition of the need to reimburse for the full cost of research, U.S. agencies have developed a complex set of guidelines for developing individual reimbursement rates designed to capture the differences in cost and reimburse universities accordingly. Currently, universities that do research have no choice except to participate in the very costly process of individual rate setting. However, there has long been doubt whether the rate-setting process resulted in a rate that adequately reflected the actual cost of research. This study empirically examines individual characteristics of 163 individual universities and the relationship between these characteristics and the applicable rate. These results suggest that the process of determining the rates may be failing to capture the actual cost of providing these services. Since the entire cumbersome, costly process is justified on the basis that these costs of inputs are different for different institutions and thus should be negotiated individually, we must consider the possibility that the variability in rates is not actually due to difference to cost but rather can be explained by some other element