Indirect Cost Recovery Rates: Why Do They Differ?

This paper reviews the history of the federal government's indirect cost recovery system and empirically examines the determinants of IRC rates. We find that, ceteris paribas schools in the Northeast have higher ICR rates, as do schools with high administrative expenses, a disproportionate number of graduate students, and larger expenditures on physical plant. Private research universities have higher ICR rates than do public research universities, but other factors turn out to explain most of this difference. Institutional characteristics relating to the mix of operations, financial characteristics, and location all play an important role in the determination of this rate, implying that there are good economic reasons for much of the observed variation in ICR rates both between and within sectors.