What Does F&A Mean in Accounting and Finance?

Facilities & Administrative (F&A) costs are a significant aspect of financial management for organizations, especially those with sponsored activities. These costs are necessary expenses an entity incurs to support its primary functions, yet they cannot be directly attributed to a single project or output. Understanding F&A is important because these costs allow organizations to maintain essential infrastructure and services for their operations, especially with grants or contracts. Accounting for these expenses accurately helps ensure the financial health and operational continuity of institutions.

Understanding F&A Costs

F&A costs are commonly referred to as “indirect” or “overhead” costs. While essential for an organization’s functioning, they are not easily traceable to a specific product, service, or project. Direct costs, in contrast, are expenses that can be specifically identified with a particular project, such as salaries for project personnel or the cost of materials used directly in a specific endeavor.

The purpose of F&A costs is to cover the general infrastructure and support services that benefit multiple activities across an organization. These include operating facilities, maintaining information technology systems, and providing central administrative support. Organizations incur these costs to create an environment where direct project activities can successfully take place.

Components of F&A Rates

F&A rates are composed of two primary categories: Facilities costs and Administrative costs. Each category encompasses expenses that contribute to the organization’s indirect cost burden, meticulously tracked to form the basis for F&A rate calculations.

Facilities costs include expenses related to the physical infrastructure and its maintenance. This category covers depreciation on buildings and equipment. It also includes interest on debt associated with financing facilities, along with operation and maintenance expenses such as utilities, custodial services, security, and environmental health and safety. Costs for maintaining and operating library services are also included.

Administrative costs encompass a broad range of general management and support functions. This includes general administration, covering executive management, accounting, human resources, and purchasing departments. Departmental administration, which involves support staff within specific academic or research departments, also falls into this category. Lastly, sponsored project administration, related to offices that manage grants and contracts, contributes to administrative costs. Federal guidance imposes a cap, typically 26%, on the administrative component of the F&A rate.

Application and Determination of F&A Rates

F&A rates are primarily applied in organizations that receive federal grants or contracts, such as universities, non-profits, and research institutions. These rates are expressed as a percentage and applied to a specific cost base, most commonly Modified Total Direct Costs (MTDC). The MTDC base includes direct salaries and wages, fringe benefits, materials, supplies, services, travel, and the initial $25,000 of each subaward.

Certain direct costs are excluded from the MTDC base for F&A calculation purposes. These exclusions generally include:

• Equipment purchases
• Capital expenditures
• Patient care costs
• Rental costs for off-site facilities
• Tuition remission
• Scholarships
• Fellowships

Scholarships and fellowships are also typically excluded, ensuring that the F&A rate is applied only to the portion of direct costs that truly benefit from the indirect support.

The determination of F&A rates involves a formal negotiation process between the organization and a cognizant federal agency. Agencies such as the Department of Health and Human Services (DHHS) or the Office of Naval Research (ONR) are responsible for reviewing detailed cost studies submitted by institutions. This negotiation, typically occurring every two to four years, results in an agreed-upon F&A rate that remains in effect for a specified period, either as a predetermined or provisional rate. The application of these negotiated F&A rates allows organizations to recover a portion of their essential indirect costs incurred while performing sponsored activities, thereby supporting the sustainability of their operational infrastructure.