Overhead rates on grants, and prize money of the Royal Navy in the Napoleonic Wars

he Action and Capture of the Spanish Xebeque Frigate El Gamo, by Clarkson Frederick Stanfield

The Action and Capture of the Spanish Xebeque Frigate El Gamo, by Clarkson Frederick Stanfield

People who aren’t used to writing and running federal grants aren’t probably that familiar with how overhead works. For every dollar you bring in to do work with your grant, your institution gets an additional percentage from the federal agencies, which covers all of the indirect, or overhead, costs of running the grant. So, a project that directly costs $200,000 actually will bill the feds $320,000, if your overhead rate is 60%. There are additional complications, but that’s the gist of it.

At research institutions, overhead rates are typically > 50%, and sometimes much much higher. Teaching schools typically have lower indirect rates. My campus’ indirect rate is 42%. My previous university had an even lower one, which was only applied to salary. That’s a relative pittance compared to the 67% rate of Caltech, which also includes hefty salary fringe rates on top of overhead.

This money isn’t trivial. Most research institutions use it to stay afloat. Which is why universities value, or at least don’t eliminate, faculty members who bring in big grants.

In theory, overhead pays for lab space, equipment, maintenance contracts, electricity, computers, printer toner, photocopies, technicians and stuff like that. It’s entirely reasonable, at least in concept.

When funding gets tight, like it has been for a long time, some PIs gripe that high indirect rates make it harder for grants to be funded and result in smaller budgets. A good rebuttal comes from Prof-Like Substance. He points out that a lot of complaints about overhead are overblown, and no matter how you slice it, the money comes out of your grant one way or another.

Where does the overhead go, and who makes these decisions? Does it just enter some university general fund? No way. It gets divvied up among various fiefdoms. The president and the heads of financial stuff, who pull in unreasonably huge salaries, decide who gets various pieces of the pie, and the different sizes of those pieces. From the perspective of the scientist, how the pie is cut is entirely non-negotiable. You’ve got to wear a suit, drive a luxury car and work 9-5 to buy into that kind of conversation.

When comparing how the overhead pie is cut across different campuses, I’ve found that there are remarkable inconsistencies, and that some indirect allocation rules are very idiosyncratic.

Despite the differences among campuses, the entities that get a piece typically include:

  • The Campus office that runs awarded grants (post-award)
  • The Sponsored Research office that works on getting grants (pre-award)
  • The President
  • The Provost/Academic Affairs
  • The Dean/College
  • The Department
  • The PI who landed the grant

Everybody loves these indirect costs returned from grants because they have few or no restrictions. I’ve got a returned indirect account and I can spend it on pretty much any research-related need I have. That’s a good idea to get indirect back to the lab of the PI, because so much of the research that happens in the lab can’t be paid out of grants, which aren’t supposed to be spent on office supplies, for example. This isn’t a minor issue. There is no budget within my department that can be spent on toner for the printer in my research lab. And I’m not allowed to spend NSF money on stuff like this. It has to come from overhead, or some other creative source.

Under the salary of the university, our administrators send us out to compete for our share of federal funds to make our labs run. Getting the grants – the direct costs themselves – is merely part of our job and we are always expected to do the research, as that’s part of our job. However, the grants that we land also come with indirect, which funds the university to make it run.

Indirect is a kind of addictive gravy that comes poured over research grants that makes universities even more hungry for grants. I’ve never met a person in charge of stuff that didn’t love it when a grant comes in. Tell your administrator that you just two big-time publications and won a big non-monetary award. You’ll get a nice smile. Tell them you got a big grant. Then, they’ll be over the moon, and then ask for reassurance, “that comes with full overhead, right?” Administration can get bloated feeding on this gravy, if they don’t spend those calories where they need to be spent.

A similar phenomenon occurred within the British Navy during the Napoleonic wars a couple hundred years ago.

The allocation of indirect costs is surprisingly reminiscent of how the British Navy divvied up the spoils of war.

Whenever the Navy captured a vessel from another navy at war with England, the contents of the ship, and the ship itself, would be sailed back to England and sold. They also did this to any merchants allied with enemies, as well as privateers commissioned by enemies. In a short timeframe, the British Navy was at war with the Dutch, the French, the Spanish and the Americans. That’s potential for a lot of profit. Just like Halliburton makes a mint when the United States goes to war, so did the leadership of the British Navy in those days. War meant profit. For these men in the upper echelons of the Navy, news of peace was bad news.

Meanwhile, the captains of these ships-of-the-line were paid a modest living wage to do their job, and were provided the minimal provisions to get the job done. They were only given enough gunpowder to be used in case they were engaged in battle, and only the most spartan foodstuff were provided for the entire crew, including officers. Many captains, who often rose to that position through social connections, came from families with independent means and were able to purchase livestock and other comforts — and politically necessary entertaining — for their time at sea, and were able to purchase additional powder from their own funds that could be used to train their crews to become accurate and rapid with cannons and carronades. That accuracy and rapidity is what won battles at sea. Winning battles at sea is what brings money.

So, when a ship’s captain takes over an enemy’s ship, he sends over a portion of his crew to sail it back to England, where the ship and its contents are appraised and sold. Then, this prize money gets divvied up. Prize money was awarded even when the enemy’s ship was sunk. The Admiralty decided how this pie is divided. Who gets a piece?

  • The Admiralty
  • The Captain
  • The Senior Wardroom officers (lieutenants, master, and captain of the marines)
  • The Senior Warrant officers (carpenter, chaplain, gunner, purser, surgeon, several more men)
  • Junior Warrant Officers (a greater variety of men with various jobs)
  • The rest of the crew

How did the Admiralty divide this pie among all of the combatants? The Captain himself takes 1/4 of the prize money. Another 1/4 of the prize money is split among all of the regular crew on the vessel, with more senior members getting a bigger cut. The other categories listed above get 1/8 of the prize money.

That means that 7/8 of the prize money is going to the men that risked their lives in battle, and sailed at sea in often perilous conditions. And 1/8 of it goes to the admiral that issued the order. This money doesn’t go to run the Navy. That 1/8 of prize money from every ship captured or sunk goes into the pocket of the insanely wealthy admiral that sent that ship out to sea. (If there were no Admiral’s orders, by the way, then that eighth went to the Captain as well).

How is this system similar to, and how is it different from, how indirect costs are allocated in universities?

In this analogy, the PIs landing grants are the captains who capture ships. The officers and crew of the vessel are the students and staff of the PIs lab that make the project possible. The Admiralty is represented by the string of administrators that are above the PI in the administrative food chain.

I see a few key differences between the Royal Navy and the university. A Captain who does his job successfully becomes wealthy and actually climbs into new realms of social prominence associated with that wealth. PIs who land big grants don’t get paid more by the university, other than perhaps getting 2/9 summer salary. At my institution, if a PI of multiple federal grants were to approach the Admiralty administration for a raise in salary, this PI wouldn’t get yes for an answer. All the PI gets from landing a grant is the ability to keep one’s job, or the ability to fund the research that is expected of the PI. The PI also gets a little pat on the back. At least, that’s what happens at my university.

Here’s another difference. In the Royal Navy, 7/8 of the prize money goes directly to the individuals performing the task to enable the work to take place. In universities, even if you include direct costs into this measure, far less than 7/8 of the total award is controlled by the PI. A good chunk of the spoils of successful battle grantwriting aren’t reinvested back into getting more grants and supporting the projects that landed the grants.

In universities, the Admiral’s take is overwhelmingly greater than 1/8 of the prize money. It sure is at mine, at least.

Is that a fair comparison to make, considering that overhead really needs to be spent on things that the PI needs, to keep the lights on, equipment maintained and all that? I can’t speak for what happens at other universities in any detail, but in my university, the overhead doesn’t flow downhill. Almost none of the overhead gets back to the PI or the Department.

At my university, as rumor has it, all of Academic affairs is lucky to get 25% of the overhead. That’s just a rumor, mind you. The college gets a small bit of that fraction, and the department gets an even smaller piece, and the PI gets a pittance. (I don’t know the exact percentages. I’ve only overheard things at a meeting or two, and our last administration was entirely opaque about finances and the new administration this year is still busy cleaning up the mess left behind by the last one.) It’s not as if the overhead is being used at higher levels for startup packages for faculty, or support faculty research in some other way. I doesn’t even make it over to the academic side of the university budget.

You know that overhead account that I mentioned that I can do whatever I want with? It’s got a few hundred bucks in it. I’ve yet to spend any of it, and it’s less than 1% of the overhead than I’ve generated. (Up until a couple years ago, none — nada – – zilch — of the overhead came back to the PIs). I have to admit it’s hard on the administration to get overhead back to the college and below,  because some of the biggest grants that come into the university (mostly education grants) only allow about 10% overhead costs, which I hear is what it takes just to keep the post-award office running. Some of my grants from NSF fit that description, too, because they don’t allow overhead on “participant support costs” often which are the bulk of my awards.

That said, I haven’t observed anything to suggest that indirect costs over the past several years have been spent on any kind of infrastructure to support or facilitate research. Before our new president has started cleaning things up, it’s very clear that the Admiral’s Cut, which was something like 80% of overhead I could guess, was being spent on anything but academic affairs. It looks like this is changing with our new administration. I’ll feel better when I see the trickle that just came through isn’t just an intermittent springtime creek, but a genuine perennial creek. The cartridge in my lab is only going to last out a little while longer.

If you take a step back to look at the big picture, it is stunning.

When Admirals were greedy for even more wealth, they worked to perpetuate the wars so that more prize money would come their way. In the process, they made their successful Captains wealthy and powerful in the process, and allowed for a comfortable living for the crews of victorious vessels.

Administrators of universities that pressure faculty to bring in more and bigger grants have larger amounts of overhead that they can use to fulfill their plans, and they get a boost in salary when promoted to a higher administrative levels as a result of their success, which is built on the grant-garnering skills of their faculty. What do the faculty members get when they bring in these grants? They get to keep their jobs.

When you look at the funds raised from the exploits of Naval Captains and Scientific PIs, who would have thought that the Royal Navy, with only an eighth of the spoils going to the figureheads, would end up looking more equitable than one’s own university?

Hat tip to good friend and master artist Tony Millionaire, who once left on my doorstep a fresh copy of Patrick O’Brien’s Master and Commander.

9 thoughts on “Overhead rates on grants, and prize money of the Royal Navy in the Napoleonic Wars

  1. I know this blog is for academics, but as an financial administrator at a top research university, let me give some food for thought:

    – a significant chunk of those facilities and administration (indirect cost or overhead) rates that go to Contract and Grant administration, or indeed University administration in general goes to the cost of compliance – No compliance, no money.

    This could range from keeping the IRS from knocking, to making sure that the supply buy is following all purchasing rules, legally insuring the university is not taking on significant untenable liability (especially with human studies), among other examples. The folks at that level of administration that I know, are definitely not working 9-5 – indeed much more. Many things are mercifully kept from the faculty on a daily basis so that they can do the research they are here to do.

    – the larger the institution, the more it takes to feed it Kinda like teenagers.

    – every university is different in the way they calculate a researcher’s salary. I know a faculty member who got an appointment at a very prestigous institution who told me that while the salary scales were pretty flat, getting grants offered them much more flexibility in where they could devote their time, compared to other places where the same grant situation could give a much higher salary, but still the same pressures to maintain their research, teaching (and in our case, patient care) duties still continue. There are trade-offs in every institution.

    – I think that maybe your analogy regarding the spoils doesn’t reflect the reality that often the faculty who have tenure are much more secure in their position than the average university administrator or manager. Most institutions will lay off staff before a faculty member.
    That is a whole other story.

    If you look at the economics of a navy or even a whaling enterprise, the financial risk was primarily on the crown or the company. Have continuous defeat or lost cargos and after a while you will not have a navy, a country, a company or a viable eduational institution.
    Sure, successful captains may not get the majority percentage of the spoils. But there are many many stories about captains who were superstars who were able to ride on their early reputations even after some disasterous later turns (note Sir John Franklin’s northwest passage debacle as an extreme example), but they did get to go out to sea another day. You talk about the spoils, but the other side of the coin is even more brutal.

    Finally I’ve heard a couple university chancellors say imagine an institution with no staff or administration – only faculty and students. Different institutions may have different ratios, but ultimately you can’t have a university without faculty either, so it will always be a fight for the crumbs.

    • Excellent points – the analogy only goes so far.

      One thing that you raised that I hadn’t touched on. The costs of running big research institutions are much greater than little ones, even as a percentage of the money come in. This is true.

      This only highlights my point, especially for small teaching institutions, because these are the places where departments and PIs don’t see as much of their indirect coming back to them (on average). Big universities have lots of overhead, but they actually spent it to keep the lights on, equipment running, and all that.

      On smaller campuses, the overhead just seems to disappear. Of course, I’m sure there is compliance with the law, but do PIs who generate more overhead actually get resources to keep those projects running? This does happen in big schools – you get more lab space, and equipment maintenance contracts, and so on, not to mention a returned indirect account. But in small campuses, it’s all egalitarian to the extent that the people who bring in the dough are treated just like those who aren’t even though their projects need more support than the direct costs provide.

    • Jim,
      I note you didn’t touch administrative salaries, which is often one of the biggest sticking points for faculty who raise these issues. I realize that salaries are often market driven, but why is there such a discrepancy between average faculty and average admin. salary? I also will never buy the old “no admin, no research” or “no admin, no faculty” line. You have it the wrong way around: no faculty, no university. The argument that compliance somehow drives this entire enterprise (outsized growth in admin. while faculty ranks shrink year over year – here is just an example from the UC system but this is a national problem: http://keepcaliforniaspromise.org/2001/ucs-administrators-crossed-the-line) is an argument I have only heard from administrators. If we are to be scientific about this, it requires an experiment. In a replicate set we will have a treatment where we fire all of the administrators, and have the entire administrative load carried by faculty (this is the old, traditional liberal arts model). In the other all of the faculty will be fired and the administrators will run the whole show. As a control we will have a huge number of current University systems with which to compare. My bet is that such an experiment would cause us to realign our priorities back toward supporting faculty first and foremost.

      • Not to mention the fact that most admins in academic affairs have retreat rights to a tenured full professor position.

  2. Josh,
    Of course no faculty no university. What would be the point in being here otherwise? My job is to serve the faculty, plain and simple. I joke that on breaks with the lack of students and faculty it is a pretty nice place to work, but mainly because I’m not dodging my vanpool a half dozen times some days to avoid hitting people who decide to cross the street right in front me while they are texting and not looking. But I digress.

    I only make the argument that compliance is just PART of the issue, and is not a driver. But it is nontrivial, as businesses (especially in CA) can attest to the same sort of issue.

    If indeed the growth of non-faculty titled administration is the issue, then that’s one thing. If it’s the growth of faculty administrators that is the problem, then I would think that as faculty, they have the vested interest of leaning the scales to the faculty.

    Where I am, beyond any legal mandates, it is the faculty that have the say of how many administrators they are paying to run the place. But then again I have to give the caveat that this is a non-typical example as my area is basically self supporting. If they want to flatten out the non faculty management structure, they just do it.

    But why is the admin/mgmt ratio so much smaller in the CSU system or a liberal arts college than the UC or similar system? Is it because the CSU faculty are a more self sufficient hearty breed of professor? Is it because the UC faculty bask in the glory of a relatively larger budgetary and admin infrastructure? Does it have something to do with the phenomenon that if you upgrade to a two car garage from a one car garage, the growth of your stuff still prevents you from parking even one car in it?

    I think we can agree that the way things are structured in academia can be improved but even without any staff involved there will always be issues between a faculty-centric and student-centric institutions (because without students, universities become just essentially thinktanks). I think often that faculty members are their own worse enemy when it comes to re-invention. Companies can give mandates to meet a goal or vision; their structures are such that they put funds where they think it’s important. Higher education generally runs on consensus, on committee, on catering to the exception because lets face it, many professors think their needs are special compared to other professors (try standardizing computers systemwide to test that theory). I kid, but what I am saying is that it will take a lot for this ship to turn a different direction. Perhaps the current financial issues will press this point even faster…

  3. Very entertaining analogy. At many Universities you get another level. The Institute. This is where the big cheese Professor with the golden pen who brings in all the grants, gets the bigger piece of the overhead pie. If they get their own Instititute, then they MIGHT get a whopping 5 to 10% back.

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