Information on direct and indirect costs of federally-sponsored research at colleges and universities, the nature of such costs, and the necessity of such costs are presented in this booklet that summarizes relevant federal regulations itemized in Office of Management and Budget Circular A-21, which deals wholly with the costs of research and other sponsored projects. According to Circular A-21, allowable costs under federally sponsored research agreements include all expenses that have been incurred solely for work on the project (direct costs), and a share of other costs that are incurred primarily for necessary administrative and service functions related to the sponsored research projects (indirect costs). Direct costs usually include: salaries and wages, personnel benefits, supplies, travel and communication, equipment, computer use, and alterations and renovations. Indirect costs are usually divided into the following categories of supporting activities: general administration and general expense, sponsored project administration, plant operation and maintenance, library expenses, departmental administration expenses, depreciation or use allowance, and student administration and services. The rate for reimbursement of indirect costs is calculated according to the procedures set forth in OMB Circular A-21. When all the calculations have been made, the institution prepares an annual indirect cost proposal and submits its working papers and supporting data to the federal audit agency for review. Costs that may be classified as either direct or indirect are listed, and institutional organization that may affect the indirect cost rate are described. (SW)