Changes to Indirect Costs
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As you may have heard, the new administration has recently tried to impose that government funding agencies reduce their allowable indirect cost rates for grantees to 15%. This announcement was made on February 7, 2025, in the Office of Director’s Notice NOT-OD-25-068.
This is one of the biggest changes that the government has made in recent memory to how government agencies function and what they do with their funding budgets. Together with other planned tectonic shifts that this government is planning across federally-funded agencies (stay tuned for further blogs on the matter), this increased government involvement is expected to have far reaching implications.
There has been a lot of legal pushback, with a temporary halt being imposed by a federal judge, first in 22 states that sued the administration, then nationwide. Thus, it is not clear where this stands and whether and how it will be implemented. Nevertheless, it is still worth discussing, as I believe this will likely go through eventually, in one form or another.
What are indirect costs?
Government grants are generally divided into two categories: direct and indirect costs. Direct costs are those that go towards performing the proposed research itself. It’s the personnel’s salaries, materials and supplies, contracted services, equipment, travel, etc. Indirect costs are those costs that do not go towards performance or direct oversight of the work proposed in the grant, but rather are necessary to run the organization and maintain the research environment. Broadly speaking, this is the overhead, which is needed to run the organization.
There are various types of indirect cost, the most common of which is called “facilities and administration,” or F&A. In fact, these two elements represent what indirect costs cover, even if they’re not officially called F&A. Generally, “facilities” refers to the infrastructure, including the lab space itself, equipment, core facilities (animal houses, clinical facilities, microscopy units, sequencing, units that produce custom antibodies and transgenic animals, etc.), construction and maintenance, support staff, janitorial services, utilities, etc. “Administration” is the staff that run the department and organization, from the CEO or department head, through the supporting clerical staff.
How much indirect costs do grant awardees usually take?
Generally, indirect costs are taken as a percentage of the amount of the grant…with exclusions. The percentage is often established through negotiation with the Department of Health and Human Services or other cognizant agency and is a function of the type of organization and its size, facilities, infrastructure and services. Thus, a small, “virtual” company, which outsources all of its research to contract research organizations (CROs), might take minimal indirect costs, on the order of ~10-15%; an average size R&D company with some research facilities would usually take on the order of 20-40%; whereas large academic institutions, which have a substantial administrative layer and offer an abundance of core research facilities and services could easily take upwards of 50% and it can even get as high as 80%. Out of the top 50 academic institutions in the US, all but four fell in the range of ~48-69%, and a full 50% of those fell in the rather narrow range of ~55-60%.
That is when a rate is negotiated. When there is no rate negotiated, then the applicant proposes a provisional rate in their application, which is essentially the rate that they will propose when they negotiate. This should be based on the factors described above. Some agencies provide limitations on provisional rates: NIH allows you to ask for a provisional rate as a high as 40% if you don’t have a rate negotiated already; NSF allows only up to 10%.
Why is the government changing this?
This comes down to two guiding principles of the new administration. The first is government efficiency. They want to get the most for their money. This means funding the research, i.e., the direct costs, rather than the supporting infrastructure and administration. The notice announcing this change stated that out of over $35 billion dollars that NIH awarded in grants in Fiscal Year 2023, $9 billion dollars went to indirect costs, or overhead. Assuming the same budget being allocated to grants, if the indirect costs are capped at 15%, then that would mean an increase in more than $3.75 billion dollars for research. (And I’m saying “more than” because not all grants will ask for the full 15%: foreign grants are limited to only 8%; some grants have limits that apply to the total amount and some applicants might ask for more direct costs even at the expense of sometimes all of the indirect costs) This could have an effect of increasing the number of grant awards by 10%, meaning another 6,000 grants. It could significantly lower the bar for awards, such as hasn’t been seen since 2008.
The other principle is this administration’s attempt to limit what they perceive to be an in appropriate infiltration of coercive political ideologies into academic institutions, with particular attention given to the Diversity, Equity and Inclusion (DEI) elements, greatly inflating the administrative layer for political/ideological purposes.
As a justification of the new limit mandated by the government, the NIH announcement referenced several private funding agencies that allow only 10-15% indirect cost rates, further noting that some private funding agencies do not allow indirect costs at all. In fact, a search that I ran for a couple other funding agencies that weren’t listed in the announcement similarly found rates within this range. The announcement also noted that most academic institutions do allow indirect cost rates in this range, if required by the funding agency, even if their negotiated rates are much higher.
So what is the problem with this change?
The government has the prerogative of changing its focus and deciding that it prioritizes funding the research itself and thereby restricting the funds that do not go towards that purpose. If these institutions do accept lower indirect cost rates and the government is not obligated to pay them, then is this not just a matter of someone moving the universities’ cheese (by which I’m alluding to the book by Spencer Johnson, Who Moved My Cheese, in which he laments people’s tendency to perceive longstanding benefits or conditions that they have been accustomed to getting as inalienable rights that they are entitled to and that cannot be taken away)?
Well, for one thing, these institutions have negotiated agreements with the government, in which the government has agreed to these rates. And these institutions budget themselves accordingly. Changing the rates while the existing agreements are in effect, even if there is a legal mechanism for them to do so, essentially defaults on those agreements and could lead the institutions to question the value of reaching an agreement with the government, when they are liable to default on that agreement. In fact, in response to this announcement, several academic institutions have issued a halt on submission of grant applications until this issue is clarified.
Secondly, whether the universities are “entitled” to this money or not, this has been part of their budget for many decades. As such, it makes sense that they were counting on its continuity. This kind of a cut could amount to a loss of income of a hundred million dollars or more, each year, for large, research-focused institutions.
Although I have not been privy to negotiations on indirect cost rate agreements and do not know the calculus of how it is determined and what goes into it, from what is reported and word of mouth, it does seem true that DEI administration has become ubiquitous in academic institutions and has greatly increased in size in at least the past 10-15 years. However, while I do not have access to the specific changes in the indirect cost rates of any individual academic institution over the years, I can say that their indirect cost rates were always high. Already 20 years ago, even when DEI administration, if it existed at all, was not nearly at the extent that it is today, academic institutions still had indirect cost rates of at least 45%. If the expansion of DEI has increased indirect cost rates, I see no evidence that it has done so by more than 10%. If indirect cost rates lead to administrative reductions, it will be more than just DEI that will need to get cut. Much more.
This degree and suddenness of the cuts will likely lead to cessation of lines of research, layoffs of staff, including scientists and researchers, even closure of departments.
Even though the greatest impact would be on academia, the biomed and biotech industry would also likely be impacted. Essentially, the extent of the impact would be in proportion to the degree of the cut that this represents. And even for R&D companies, this could cut their indirect cost income to less than a half or even a third of what they would get otherwise. This could spell the difference between a company that is viable to one that is not, potentially leading to bankruptcies and closures of business, meaning cessation of development of promising, life-saving treatments.
Thus, while the cuts to indirect costs are not supposed to impair the amount and quality of research directly, it is very likely to do just that, albeit, well, indirectly.
With this potential impact, it is understandable that the uncertainty that was created by this move is actually bordering on panic throughout academia and the scientific research industry.
Ultimately, it makes sense to reexamine how much indirect costs the government is paying and what it pays for. It’s also legitimate for a government to say that certain elements that have been paid for before are inconsistent with their policies and they are unwilling to continue funding them in the future. It can audit the institutions more closely and make higher resolution distinctions between what is allowable or unallowable for a certain purpose. But, the administration must respect the binding agreements that were made between the government (even if it’s a previous government) and institutions. It must allow for the large institutions time to adapt to the changes in policy to make sure that research and development can continue smoothly and reduce uncertainty. And in order to ensure scientific and medical progress, it must make sure to keep the scientific research and development worlds viable.