Jennifer Otto, University of Illinois System and Jennifer Smolnik, Maximus
Sponsored Research Administration: A Guide to Effective Strategies and Recommended Practices
Published by the National Council of University Research Administrators (NCURA)
Update No. 80 January 2026
In this article, we look at ways to optimize the allocation of Operation and Maintenance costs as a component of institutional Indirect Cost Rates. The Indirect Cost Rate is calculated based on all institutional expenses over the course of a full fiscal year. Direct and indirect costs of operating are included in a cost study that spans the fiscal year, and costs are classified in line with federal costing principles in order to appropriately estimate the amount of direct and indirect costs that relate to sponsored research.
An indirect cost proposal, submitted to the federal government for review and negotiation, allows an institution to recover a portion of the indirect costs of research that are incurred to support sponsored projects. These costs include facilities, infrastructure, assets, and administrative costs that support university operations and are difficult to allocate directly to a particular project. Operation and Maintenance costs specifically are one of the larger pools of costs that are included in the indirect cost calculations, and these can have a significant and weighty impact on institutional cost recovery.
We will look at the types of costs that fall under the umbrella of Operation and Maintenance (O&M), as well as how to appropriately and reasonably allocate those costs to benefitting cost objectives. The development of unique cost pools that represent separate cost objectives, with the use of federally approved allocation methods, will help an institution to maximize their justifiable cost recovery on sponsored projects.
Uniform Guidance, 2 CFR 200, Appendix III, Section B.4 states that Operations & Maintenance costs include: administration, supervision, operation, maintenance, preservation, and protection of the institution’s physical plant.
What can be included?
A utility cost adjustment (UCA) of up to 1.3 percentage points may also be included in the negotiated indirect cost rate of the institution of higher education for organized research, per the computation alternatives in paragraphs (c)(1) and (2) of this section of the Uniform Guidance.
Within the CAS Best Practices Manual For Reviewing Institutions of Higher Education Long-Form Facilities & Administrative Cost Rate Proposals, January 2017, (BPM), section V (h) on Operation and Maintenance (O&M) Expenses, it states that if there is more than one O&M pool, review of those costs must determine if the allocation base for each pool is reasonable.
Concerns raised regarding allocation methods include:
The main concern to be addressed is that too many cost pools may result in unreasonably detailed allocations that are too specific, focus heavily on allocating costs to research objectives, and may not appropriately include other activities that benefit from the same expenses. Federal reviews by the cognizant agency will focus on the following:
In areas where O&M sub-pools have become more specific in allocating to a narrow selection of benefitting objectives, a federal reviewer will attempt to determine if the allocation is reasonable and will ask for appropriate data to back up the allocation method used.
When developing Cost Pools related to Operation and Maintenance costs, one must ask who or what benefits from these costs. These costs that support university facilities and plant may benefit the entire campus population or a small subset of departments or buildings. Uniform Guidance Appendix III, Section A.2 (Criteria for Distribution) provides some guidance on how to appropriately group these costs with the benefiting cost objectives. Grouping costs for “selective distribution” should follow these criteria:
When determining how to group costs, first look at the organizational structure to determine types of costs and who or what benefits from those costs. The following questions may help.
Too much detail in your O&M sub-pools can be a problem. In order to be sure cost groupings and allocations are appropriate, it may require many conversations with financial and facilities management staff. Finding the right contact person or data owner can make the difference between guessing and knowing how these costs are applied. Be sure to
When asking for what you need, be sure to request
After all the conversations, once you have created the cost pools and captured the allocations to cost objectives, ask yourself… do the results represent what you know?
There can be multiple ways to allocate Operation & Maintenance costs, and sometimes it may not be clear which way of allocating is most appropriate.
Suggested allocation methods for O&M cost pools are as follows:
When determining the order of O&M Sub-pools for allocations, remember that cross allocations can occur between Sub-pools. In which case, it is appropriate to create sub-pools and rules for allocations that allocate costs to general sub-pools first, with more specific or targeted allocations happening later. The reason for this is that general O&M costs that support the entire university or campus will cross allocate to more specific cost objectives within the university or campus. This shows that the specific cost objectives also benefit from those costs that support overall university operations. For example:
With the Utility Cost Adjustment (UCA) generally available for claiming in an indirect cost rate proposal, any institution may calculate and include this in their rate proposal to more heavily weight their research-intensive space when looking at utility consumption. As an overview of the calculation, remember that
The UCA is calculated on a building-by-building basis, and the ratio of research lab space to other space, combined with room usage, is what drives additional utility costs to the research function. Three factors determine the impact of the Effective Square Feet calculation toward Organized Research for each building. These factors include:
When considering what room types qualify as Research Labs, take guidance from the review criteria provided by CAS Best Practices.
Obtain the greatest impact with the UCA from claiming high OR% room types, such as research labs and lab service rooms. Consider Greenhouse, Animal Care Procedure Space, or Animal Housing Space for the adjustment only if these room types can be justified as requiring the same or similar outside air for ventilation or it can be shown that utility dollars per square foot are similar to research lab spaces. It is more justifiable and conservative to apply the UCA on research lab and lab service rooms only.
The Operation & Maintenance (O&M) component is an important piece of an institution’s Indirect Cost Rate. Operation and Maintenance expenses are not capped as a rate component, unlike the administrative component that is capped at 26%. This is why it is important for institutions to know the details of their university’s financial expenditures and what Uniform Guidance states about the O&M costs.
Some of the commonly forgotten costs that should be placed in O&M include:
It is important to have a strategy on how to organize the O&M cost pools to make the most of these costs. Be sure to keep in mind who is benefiting from these costs and what Uniform Guidance indicates about allocations and cross allocations of the cost pools.
Uniform Guidance states that the extent to which separate cost groupings and selective distributions would be appropriate at an institution is a matter of judgement to be determined on a case-by-case basis (A2c). The number of separate cost groupings within a category should be held within practical limits (A2c6). If the expenses in a cost grouping are more general in nature, the distribution may be based on a cost analysis study which results in an equitable distribution of the costs (A2d3). However, the cost analysis study must
Another important strategy for the O&M cost pools is to review the data thoroughly. Start early on this process, even before the end of the base year fiscal year. Schedule meetings with key management to ensure that all the O&M type costs have been considered. Once all the costs are collected and the information is prepared for the proposal, another review should be completed.
One of the biggest challenges with O&M is the space utilization survey. The space survey is what associates and allocates facilities costs to the appropriate direct cost base in the indirect cost proposal, so having an accurate space utilization survey is crucial to the rate development process. It is also important to determine the best space survey to implement for the university. Uniform Guidance allows two methods:
After a space methodology is determined, the next step is to create the survey and the training. It is highly encouraged to have the business managers and the facilities managers complete the survey together. Both have a significant role to play in the space utilization survey. The facilities managers will know the space and who is using various rooms. This person will also be familiar with the various room use types, square footage of the rooms, and any possible changes that may be occurring in the room in the next few years. Whereas the business manager is familiar with the staff, the grant portfolio of the department, and whether the activity in the lab should be categorized as organized research, departmental research, or another activity type, based on the funding source. Create the training document that provides detailed instructions on how to complete the survey. Make sure to include all the definitions for each type of activity. Here is a partial list of various room functions:
In addition to the training document, it is also best to hold training sessions with the business managers and the facilities managers. This can be done via in-person, virtual, or prerecorded training sessions. Another option for training is one-on-one individual sessions with each department but that could be more time-consuming.
A best practice would be:
As the surveys are completed and returned, it is important to start the review process right away. A few tips on what to look for include:
Reviewing the space utilization survey and comparing it to the last survey is a good way to check for reasonableness of the completed survey. If it looks consistent, that is great. There may be times when a department could have a large swing from organized research to department research. This could be accurate, but by reviewing the grant portfolio of the department, it can be confirmed whether the shift is that seems accurate. Did the organized research of the department decrease since the last survey? If so an increase in department research would seem appropriate.
While examining the survey results, if the same allocation 50% DR and 50% OR is utilized across all the labs of a department, a follow-up may be warranted. This could be perfectly fine, but contacting the business manager and facilities manager who completed the survey and discussing the various definitions of each type of research would be a good idea. Perhaps the definitions were misinterpreted.
Space may also be allocated based on joint use. This means that the space is used jointly by more than one function and/or operating unit, in which case the cost of the jointly used space must be allocated to the benefitting functions based on one of the following methods:
The most used method to allocate joint use space is by salary & wages. Only a handful of institutions utilize the FTE method.
Operation & Maintenance costs are an important part of an institution’s Indirect Cost Rate calculation. We have provided definitions, examples, and some tips on how to maximize the university’s costs allocated to these cost pools. Also provided were some best practices and tips on one of the most important factors of the O&M cost allocations, the space survey. One final tip would be to review the data in multiple different ways, at the cost pool level, department level, project/cost center level, account code/object code level, to verify everything was captured correctly. Throughout the rate development process, keep a list of things that worked well in the proposal and things that could be improved for the next proposal.
About the Authors
Jennifer Otto is the Senior Associate Director of System Government Costing at the University of Illinois. Jennifer joined the university in August of 2005 and has over 19 years of experience in cost accounting. Her areas of expertise is in calculating the Indirect Cost Rate (long/short), Fringe Benefit Rates, Tuition Remission, and Service Center Rates as well as conducting Space Surveys. She can be reached at jotto@uillinois.edu
Jennifer Smolnik is a Senior Manager for Maximus Higher Education Practice with 16 years of experience in managing Indirect Cost Rate proposals, sponsored projects administration and capital assets compliance. Jenny served as a Senior Costing Analyst at Arizona State University, overseeing two F&A rate proposals, space survey, special cost studies, proposal submission, federal negotiation, and service center compliance. Jenny can be reached at JenniferSmolnik@maximus.com