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Comment by countvonbalzac | Hacker News Reader

I am not in academia but the 53% overhead to an outsider is absurd! Probably the same reason tuition has gotten so high, someone has to pay for all those deans, vice deans and vice vice deans!

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Compared to industry? That's very low! Universities are cheap.

53% overhead works out to be 34% of the total money.

I've written grants with many industrial partners (companies you would recognize). All have had much higher overhead rates. Normally these rates are kept secret, but here's a fun memo from the Federal Transit Administration talking about 127% overhead rates! https://www.transit.dot.gov/funding/procurement/third-party-...

The DoD gives as an example a rate of 125%!

> For example, in recovering the indirect costs associated with particular contracts during the year, each dollar of engineering direct labor worked on a contract is burdened with an engineering overhead of 125.95 percent.

https://www.dhg.com/portals/0/headers/industries/government-...

This puts universities in some context: https://www.healthra.org/wp-content/uploads/2018/08/Nature_K...

You'll see that non-profits and hospitals tend to have far higher rates. This doesn't include industry though. Which would be far higher.

The DoD gives as an example a rate of 125%!

For DOT engineering design firms and environmental firms, a typical overhead rate is 165%-ish, I've seen ranges from 125% to 250%. Over 180% is considered "high".

That overhead honestly doesn't seem that high to me. If I think about private companies with low need for physical equipment (e.g. software companies) I suspect the overhead would be comparable if not greater. Usually I hear ~100% as an average figure (keeping in mind that overhead is defined as a percentage of non-overhead costs so 100% means half of your money spent is on overhead).

But I'm not that confident. Would love to hear from business owners.

I’m at a small software company that does lots of smallish (500k-1.5M) contracts like this. The government does audits to determine our overhead rate. Our is 2.8. That is my billing rate to the government is 2.8 times my hourly rate as determined by my salary. That pays for rent, benefits, and for things like the employees who aren’t on direct labor (e.g. accounting, HR, etc)

That means your overhead rate would be around 65%.

No it does mean the overhead is 280% if defined the same way as the university (overhead is calculated as percentage of non-overhead costs, not overall costs).

But I'm not sure whether the company would count just an employee's salary as non-overhead costs. I'm fuzzy on the details of how overhead is usually calculated.

> No it does mean the overhead is 280% if defined the same way as the university (overhead is calculated as percentage of non-overhead costs, not overall costs).

But he said:

> That is my billing rate to the government is 2.8 times my hourly rate as determined by my salary.

Doesn't that mean that the government pays a total of 2.8x his salary, so overhead would be 180% (+100% salary = 280% total)? Or what mistake did I make here?

Yeah, I don't know exactly what is called "overhead" if it's the full 2.8 or 1.8 above my costs. All I know is the accountants told me to write down 2.8 and that the bill that we send the government is 2.8x what I make "hourly" for the hours work on that contract.

Yeah. So for every hour you bill, about 35 cents of every dollar goes to you and 65 goes to the company.

And this is where it's weird, because 65%, 180%, and 280% are all valid, but different, ways of looking at it.

Because you get 35% of the money, the company gets 65%. i.e. 65% of your billable hours are overhead.

Or, the company gets 180% of what you get. Or, you could say your overhead rate is 180%.

Or, you charge the government 280% of what you get paid. Which is the effective end result.

>That is my billing rate to the government is 2.8 times my hourly rate as determined by my salary.

Why does your salary define the overhead rate for the entire company?

Sorry, that was me being lazy because I was typing on my phone. The government tallies up all qualified expenses the company has (salaries, benefits, rent, utilities, etc). And then tallies up all how many hours employees worked on "direct labor" so things directly related to a client (in lawyer speak, think "billable hours"). And then they come up with a ratio which is your overhead rate and that's the rate you're allowed to charge the government.

    all_expenses / total_hours_worked_by_all_employees = average_rate
    all_expenses / direct_hours_worked_by_all_employees = direct_rate
    direct_rate / average_rate = overhead_rate
    my_hourly_rate * overhead_rate = my_billing_rate

There's more nuance on what are qualified expenses and what are direct hours and things like that, but the government has formulae, and they determine your billing rate - or at least the overhead that turns into the billing rate.

Now, of course, my company can't pay me $1000/hour which turns into $2800/hour invoices to the government because then we'd be too expensive and never win the contract. So there is downward pressure on salaries because of that, and it prevents us from hiring superstars because their hourly rate will be too high. So that's one reason the government doesn't really get the A team working for them.

53% is both not particularly that high and not unusual. Keep in mind that in private industry, that stuff is built into the price. I've also seen the indirect rates for several private research firms - they're higher.

I think the telling thing is that, even at that rate, companies often find working with us to be cheaper than working with another industry partner. Our pricing just tends to spook people because it comes in a big chunk just labeled "Indirects" rather than snuck into all the other budget lines.

I've heard Harvard's is/was 96%? Or at least that was for a NIH R01-seeking person there in ~biochemistry in 2015. Where I'm at it's probably around 100% but I really don't want to know. We're all expensive.

It's 69%, so you were...close I guess?

https://osp.finance.harvard.edu/files/univ_july_2021_signed_...

Keep in mind that many researchers are given a huge startup package at the beginning of their career to jumpstart a research agenda. They also don't pay for any rent for lab space, electricity, and other campus resources. All of those expenses are basically paid for by the overhead tax. It's the lifeblood of any academic research institution.

While "huge startup package" varies wildly - epidemiologists are cheap, for example, you are by and large correct.

The data center where my nodes for HPC are kept? Indirects.

The salary of the folks who review and submit the proposals, manage the budgets, and make sure we're complying with neat things like human subjects protections? Indirects.

Journal subscriptions? Indirects.

Direct costs cover remarkably few things.

And if you look at the budget of most R1 state universities, you'll see that tuition is really far from covering the cost of education.

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