How F&A Recovery Works, and Where the Dollars Go
Facilities and administrative (F&A) cost recovery is more than an accounting mechanism. It is one of the few recurring revenue streams generated by sponsored activity that can be intentionally reinvested back into the research enterprise. The strategic question is therefore not necessarily how much F&A an institution or individual department recovers, but how those dollars are used to create the most advantageous conditions for research growth. Before those dollars can be reinvested, it helps to understand how they are generated. This post explains how F&A recovery works and where the recovered dollars go.
A Common Misnomer: What Counts in the MTDC Base
“A 42% F&A rate means 42% of the award goes to overhead.” It does not. A negotiated F&A rate is applied to a defined cost base. In this example, the university’s negotiated rate is 42% of modified total direct costs (MTDC). Costs excluded from MTDC do not generate F&A. As a result, the amount of F&A recovered from a $100,000 award depends on the composition of the award—not simply its total value.
The better question is: What portion of the award is in the applicable F&A base, how much F&A is actually recovered, and how is that recovery reinvested to strengthen the research enterprise?
MTDC generally includes salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $50,000 of each subaward. It excludes categories such as equipment and other capital expenditures, charges for patient care, rental costs of off-site facilities, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward above $50,000. The institution’s negotiated agreement and the specific award must always be consulted when building an actual budget.
How Recovery Works in Practice
Example 1: A $100,000 Award at 42% of MTDC
To see how this works in practice, consider a single $100,000 award at an institution with a 42% negotiated rate. The assumptions are illustrative. The sponsor provides a fixed $100,000 total award. Of the direct-cost budget, $20,000 consists of costs excluded from the MTDC base. The remaining eligible direct costs and the F&A they generate must fit inside the same $100,000 ceiling.
An illustrative budget: how F&A recovery works under MTDC
Direct costs excluded from MTDC: $20,000. These direct costs are part of the project but do not generate F&A in this example.
Direct costs included in MTDC: $56,338. This is the base to which the 42% negotiated rate is applied.
F&A recovery (42% × $56,338): $23,662. This is the amount actually recovered, not $42,000.
Total award: $100,000. Direct costs plus recovered F&A equal the sponsor's fixed total award.
Two $100,000 awards can therefore generate different F&A recovery. An award with substantial equipment, tuition remission, participant support, or other excluded costs may have a smaller MTDC base than an award dominated by faculty salaries, fringe, supplies, services, and travel. The negotiated rate can be identical while the recovered dollars differ substantially.
A crucial point to understand before looking at where the money goes: Indirect costs are ONLY accrued IF the funds are expended!!
Where the $23,662 Goes
Using the current distribution model provided for this analysis, recovered F&A is distributed 10% to faculty, 10% to departments, 10% to deans, 55% to the Office of Research, and 15% to Finance and Business. The percentages below are percentages of F&A actually recovered—not percentage points of the 42% negotiated rate and not percentages of the total award.
Illustrative distribution of $23,662 in recovered F&A
Faculty: 10%, or $2,366
Department: 10%, or $2,366
Dean: 10%, or $2,366
Office of Research: 55%, or $13,014
Finance & Business: 15%, or $3,549
Total: 100%, or $23,662
Amounts are rounded to the nearest dollar, so individual figures may not sum exactly to the total. The full recovery can be understood as a portfolio of reinvestments rather than a single pool of “overhead.”
Example 2: De Minimis Rate (Non-Negotiated Flat Rate)
The picture changes at an institution without a negotiated rate since not all institutions have a negotiated F&A rate. Using the same award, here is what a flat de minimis rate does to recovery and to the amounts each unit receives. Organizations that do not have a formally approved or current negotiated federal rate can choose a standard, flat-percentage rate up to 15% (for most federal agencies). If we use the same $100,000 total award and the same $20,000 of excluded direct costs are held constant, this would be the difference.
Comparing a 42% negotiated MTDC rate with a 15% illustrative rate on thesame $100,000 award
Excluded direct costs: $20,000 at both rates, so there is no difference.
MTDC-eligible direct costs: $56,338 at 42% and $69,565 at 15%, which leaves $13,227 more room for direct costs at the lower rate.
F&A recovered: $23,662 at 42% and $10,435 at 15%, which means $13,227 less recovery at the lower rate.
Total award: $100,000 at both rates.
The lower rate creates more direct-cost room inside a fixed award, but it also reduces the recurring resources available for research infrastructure and reinvestment. If the lower rate is required by the sponsor, the institution is making a decision about whether the opportunity is worth the unrecovered cost. If the university voluntarily chooses the lower rate when a higher rate is allowable, it is making an institutional subsidy decision. In either case, the underlying shared costs of supporting the research do not automatically decline because reimbursement declines.
If the same F&A negotiated distribution were applied to the illustrative $10,435 recovery, the amounts available for reinvestment would fall accordingly: approximately $1,043 each to the faculty member, department, and dean; $5,739 to the Office of Research; and $1,565 to Finance and Business. The policy consequence is therefore not confined to a central budget—it changes resources available throughout the research ecosystem.
From Recovery to Reinvestment
The distribution formula answers who receives recovered F&A; it does not, by itself, answer what the institution gains from that distribution. Part 2 takes up that question, connecting each allocation to a purpose and an intended outcome, and to the institution’s pathway toward R2.
Selected References
Electronic Code of Federal Regulations. 2 CFR § 200.1, Definitions: Modified Total Direct Cost (MTDC). Available online
Electronic Code of Federal Regulations. 2 CFR § 200.414, Indirect costs. Available online
Electronic Code of Federal Regulations. Appendix III to 2 CFR Part 200, Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Institutions of Higher Education. Available online