NASA HQ Talking Points: Full Cost Management and Overhead Simplification

Key Message

Implementation of full cost accounting in FY 2004 created problems for NASA’s research Centers when a complex allocation of overhead costs disproportionately inflated their costs compared to the Agency’s space flight Centers. Believing that all Centers should compete for work based on their technical ability and management skills, not simply on the basis of their overhead rate costs, NASA plans to implement an overhead cost simplification process in FY 2007 that will allow Centers to compete for work on an even playing field.

NASA will be changing the method for how overhead is spread to individual projects. This reallocation of Center overhead costs results in full-cost budget changes to all programs and projects and top line changes to all Mission Directorates. However, it is important to understand that this change is simply a reallocation of overhead funds. It is a budget-neutral change. The amount of funding going to each Center will not change. The amount of funding for direct program and project activity will not change. The total amount of funding for overhead will not change, nor will the total NASA budget.

While it appears that the Aeronautics Research Mission Directorate (ARMD) will take a significant hit as a result of this accounting change, the overhead simplification structure is a good thing for ARMD. ARMD will still have the same direct buying power. ARMD will not lose research dollars. But the change will free ARMD from the fiscal responsibility of having to carry the majority of overhead costs for the four research Centers.

Why did NASA move to full cost management?

• NASA implemented full cost management in FY 2004 to improve project management insight and resource allocation.
• Full cost management incorporates the costs for civil servants, test facilities, travel and overhead into each project’s total cost. Thus, the Agency communicates true cost of projects.
• Project managers are held accountable for each project’s full cost and performance. Managers focus on maximizing efficiency of resources used.

How was full cost management implemented?

• NASA developed a complex, idealized model for overhead cost allocations.
• Allocations were determined based on function of square footage used (facilities), personnel (Center G&A or information technology), and direct budgets (Agency G&A or construction of facilities.)
• This complex model forced finance workforce to manage overhead transactions rather than focusing on execution of high risk projects.

Was there an unintended consequence with regard to current overhead cost allocations?

• Large Centers spread costs over a larger business base, resulting in a naturally lower overhead rate. Thus, work migrated to the larger Centers because of the lower rates.
• Full cost management forced the smaller Centers to charge more for their services. As a result, the smaller Centers (many of them aero research facilities), lost customers. Additionally, many were pressured to close important facilities and eliminate capabilities.
• Result was suboptimal allocation of resources – not the lowest total Agency cost.

How will NASA fix this problem with overhead costs?

• Since it is the Agency’s responsibility to maintain 10 healthy Centers, adjustments must be made to the previous overhead allocation model in order to align managers’ incentives with NASA’s governance principles.
• In FY 2007, NASA plans to implement a common Center overhead rate for nine Centers, which promotes competition based on quality of a Center’s capabilities, not its rates. This is known as the “simplified overhead allocation.” (The Jet Propulsion Laboratory (JPL) will not be affected because its overhead rate is included in its contract rates as a Federally-Funded Research and Development Center.)
• Center overhead will be designated as Center Management and Operations (CMO) in FY 2007, and CMO costs will be allocated to non-JPL projects and programs based on each project’s direct budget.

• This change is simply a reallocation of overhead funds. It is budget neutral:
• The amount of funding going to each research Center, direct program and activity is unchanged.
• The amount of funding for overhead across the Agency is unchanged.
• The total NASA budget is unchanged.

Why does ARMD seem to be taking a disproportionate hit as a result of this fix?

• When reviewing the Aeronautics Research Mission Directorate (ARMD) budget, it is important to look not only at the top line, but also to understand the composition of the budget.
• Currently, the FY 2007 budget request includes $441 million of direct buying power for programs and research, and $272 million for corporate and center overhead.
• With overhead simplification, ARMD still receives $441 million for research and programs, but it will no longer be responsible for the significant majority of the operating costs of its research Centers.
• The result is that ARMD will be assessed a lower rate for overhead costs, based on its direct budget.
• ARMD top line will be reduced by nearly $200 million or 27 percent when the overhead costs are realigned and shared equally Agency wide. But ARMD believes this is a good thing.

How will this fix benefit Aero and the Research Centers?

• By reallocating the overhead costs to the other Directorates, ARMD is no longer held solely responsible for the fiscal health of 4 of the 10 centers.
• If there are shortfalls in overhead costs for these centers, ARMD no longer has to cut its research budget to make up for these shortfalls.
• ARMD can now focus on research rather than worrying about maintaining facilities for the good of the Agency. Maintaining facilities and assets are now an Agency responsibility.

• With a standardized overhead rate, research Centers can compete against the larger Centers for work. Competition is based on technical capability, not cost.
• Significant improvement in work allocation to the research Centers.
• Research Centers will be able to maintain key facilities.

What is the next step?

• NASA is notifying key Congressional Members and Committees regarding the simplified overhead allocation. NASA plans to implement the change, beginning in FY 2007.
• The FY 2008 budget request will reflect the simplified overhead allocation.