Stanford University (A): Indirect Cost Recovery

In July of 1990, Stanford University enjoyed wide praise for cutting costs. Less than one year later, Stanford was at the center of a roiling dispute over indirect costs billed to the government for federally sponsored research. The case introduces students to procurement and audit from several perspectives-the regulator, the purchaser, and individuals within the supplier organization. The determination of costs under procurement regulations and contracts receives special attention. The not-for-profit setting is novel. Principal issues for discussion are: (i) The costs and benefits of various forms of procurement contracts; (ii) The effect of the cost allocation scheme on the incentives faced by individuals within Stanford University and the government; and, (iii) The role of auditors and audited cost information in the procurement process. The case also raises certain ethical and political issues.