DoD Indirect Cost Rate: ONR/DCAA Process

When a college, university, or nonprofit research organization’s cognizant agency for indirect costs is the Department of Defense — assigned via the Office of Naval Research (ONR) rather than the Department of Health and Human Services — the path to a signed NICRA involves one genuinely distinct step that HHS-cognizant institutions do not go through: an independent audit of the institution’s indirect cost rate proposal performed by the Defense Contract Audit Agency (DCAA) before ONR negotiates the final rate.

Why DoD cognizance differs from HHS cognizance

Under 2 CFR 200 Appendix III, cognizance for indirect costs is assigned per-institution to whichever federal agency has provided the largest share of that institution’s federal funding over a recent multi-year period. The large majority of US institutions of higher education — over 1,000 — are cognizant to HHS, whose own cost-allocation function (historically the Division of Cost Allocation, administratively under HHS’s Program Support Center) both reviews the institution’s rate proposal and negotiates the resulting rate. A much smaller group, historically on the order of 40-50 institutions with heavier DoD research funding, are cognizant to DoD instead, administered through ONR’s Indirect Cost Branch. Both populations follow the same underlying 2 CFR 200 Appendix III framework and produce the same kind of NICRA — see the Indirect Cost Rate Agreement (NICRA) entry for that shared mechanism (rate types, MTDC base, negotiation cycle). What differs for DoD-cognizant institutions is a procedural detail in how the proposal gets reviewed before ONR sits down to negotiate.

The DCAA audit step

Rather than reviewing a DoD-cognizant institution’s indirect cost rate proposal itself, ONR contracts that review out to DCAA, the Department of Defense’s contract-audit agency. DCAA’s role for this population is defined in its own Contract Audit Manual (DCAAM 7640.1), Chapter 13, titled specifically to cover audits at educational institutions, nonprofit organizations, and Federally Funded Research and Development Centers (FFRDCs) — a separate chapter from the far larger body of DCAA guidance covering commercial defense contractors. DCAA examines the institution’s submitted F&A rate proposal and supporting cost data, a process commonly reported to take on the order of six to twelve months, and returns a formal audit report to ONR. ONR then uses that audit report as its negotiation tool with the institution to arrive at the final F&A rate(s) and the rate period, generally similar in length (roughly three to four years) to negotiation cycles seen at HHS-cognizant institutions.

What doesn’t change

The DCAA-audit step changes who reviews the proposal, not what the proposal must contain or what the resulting agreement looks like. A DoD-cognizant institution’s rate proposal is still built under the same 2 CFR 200 Appendix III cost principles as any other institution of higher education, still expressed as one or more rates against a Modified Total Direct Cost (MTDC) base, still issued as provisional, predetermined, fixed, or final depending on the negotiated rate type, and still binds every other federal awarding agency once signed, under 2 CFR 200.414(c). There is no separate rate structure, appendix, or legal category reserved for DoD-funded research at universities — the negotiated outcome is an ordinary NICRA.

Not to be confused with forward pricing rate agreements

DCAA also performs a substantial amount of audit work supporting Forward Pricing Rate Agreements (FPRAs) and Forward Pricing Rate Recommendations under FAR Subpart 15.4 and DFARS — but that is a distinct defense-acquisition context: negotiated rates used to price future contract proposals with for-profit defense contractors and commercial-item suppliers, not the 2 CFR 200 indirect-cost-rate process that governs federally sponsored research at universities and nonprofits. A university’s DoD indirect cost rate, negotiated by ONR after a DCAA Chapter 13 audit, and a defense contractor’s FPRA, negotiated by a DoD contracting officer with DCAA pricing support, share an auditing agency but serve entirely different populations and regulatory frameworks.

Related CASRAI vocabulary

• Indirect Cost Rate Agreement (NICRA) — the shared negotiated-rate mechanism this entry adds DoD-specific procedural detail to
• Indirect Cost Rate (F&A Rate) — the percentage the resulting agreement authorizes
• MTDC (Modified Total Direct Cost) — the base each rate line applies to
• Cost Accounting Standards Disclosure Statement (DS-2) — supporting cost-accounting documentation reviewed as part of the same proposal
• Sponsored research agreement — the award document the negotiated rate is applied against

References

• US Office of Management and Budget, Uniform Guidance, 2 CFR Part 200, Section 200.414 and Appendix III (Institutions of Higher Education).
• DCAA Contract Audit Manual (DCAAM 7640.1), Chapter 13, “Audits at Educational Institutions, Nonprofit Organizations, & FFRDCs.”
• GAO-16-616, “Indirect Costs: Agencies Involved in the Indirect Cost Rate-Setting Process” (background on HHS/DoD cognizant-agency assignment).
• FAR Subpart 15.4 and DFARS (forward pricing rate agreements for defense contract pricing — a distinct, non-university context referenced here only to disambiguate).