TO:                   drda-net@umich.edu

FROM:             Robert L. Barbret

SUBJECT:        Resolution of Overdrafts

The increased flexibility to rebudget funds on sponsored projects and the change in the University's budget process with regard to distributing indirect cost recoveries has necessitated a change in the procedure for resolving overdrafts on sponsored projects. This change will provide consistency in the handling of overdrafts within all areas of Sponsored Programs.

In the past, departments were only responsible for covering the direct cost overrun on their projects, regardless of the status of the indirect cost category. Indirect cost overruns were covered "centrally". If a project had a direct cost overrun and an indirect cost positive balance, the two were combined and the department only had to absorb the net difference. Projects that only had an indirect cost overrun were absorbed centrally.

Under this new procedure when projects are rebudgeted, the impact on indirect costs must be taken into account. For instance, if dollars are spent on salaries (an indirect cost bearing item) that were originally budgeted for equipment (a non-indirect cost bearing item), dollars must also be set aside to cover the increase of indirect costs incurred. Conversely, if more money was spent on equipment than was originally budgeted and the dollars came from the salary (or other indirect cost bearing item) budget, part of the direct cost overrun would be "subsidized" by the lesser amount of indirect costs charged.

This change in the process also brings us into consistency with the process utilized when carrying forward a positive balance on a project. When the balance is carried forward, the net balance is split between direct and indirect costs based on the indirect cost rate being utilized on the project.

Therefore, when monitoring balances, the "bottom line" figure should be reviewed. The allocation of overdrafts will be calculated based on a factor of 1 + the indirect cost rate on the project. For example, a project with an indirect cost rate of 52.5% and a bottom line overdraft of $7,625 would be split as follows: $7,625 divided by 1.525 for a total of $5,000 to be covered by the department and $2,625 written off to the indirect cost recovery pool.

If there are question regarding this policy the account coordinator should be contacted.