Capped Costs, Increasing Pressures: The Impact of Indirect Rate Limits on Institutional Finances

Oct 15, 2026

Indirect cost rates, or facilities and administrative (F&A) rates, reimburse higher education institutions for overhead that supports federally funded research but cannot be charged to a single project. As research needs and regulations have grown, many negotiated rates have exceeded 60 percent. Proposed federal caps at 15 percent would create severe financial strain, particularly for resource-limited institutions. The brief explains how indirect cost rates are structured, outlines reimbursement history, and describes consequences when costs are not recovered.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages5

Reading Time13 min

AccessFree to download

What Are Indirect Cost Rates?

History

What Happens When Indirect Costs Are Not Reimbursed?

NEA RESEARCH BRIEF Capped Costs, Increasing Pressures: The Impact of Indirect Rate Limitson Institutional Finances Indirect cost rates, also known as facilities and administrative (F&A) rates, are a critical yet often overlooked element of federally funded research. These rates help higher education institutions recover the real and growing costs of supporting research infrastructure expenses—including lab maintenance, compliance oversight, and grant administration—that cannot be directly attributed to a single project. As research demands and regulatory requirements have increased, so too have the associated indirect costs. Through complex negotiations with the federal government, institutions have secured rates to reflect these realities, some more than 60 percent. However, recent efforts by federal agencies to drastically cap indirect cost rates at 15 percent threaten to impose severe financial strain on research institutions, particularly those without substantial endowments or diversified funding sources. This brief examines how potential funding reductions may impact institutions’ financial stability, research capacity, and, ultimately, the United States’global leadership position in science and innovation as legal challenges to these caps continue. WHAT ARE INDIRECT COST RATES? Higher education institutions apply indirect cost rates to federally sponsored research projects—for example, projects funded through grants or contracts—to reimburse that institution for the overhead costs associated with supporting that research. Indirect costs are not easily attributable toa specific project and are grouped into two categories: l Facilities, which includes buildings and equipment depreciation; operation and maintenance (utilities, janitorial services, etc.); and library expenses. l Administrative, which includes general administration (HR, payroll, purchasing); departmental administration; project administration; and compliance costs (institutional review boards, conflict of interest management, etc.). NEA RESEARCH BRIEF | 1 HISTORY Prior to WorldWar II, federally funded research was nearly nonexistent. During the war, the Office of Scientific Research and Development (OSRD) invested heavily in the development of new technologies to support the war effort. University researchers made significant advances in the sciences, medicine, and engineering, and faculty-led research expanded into other federal agencies as well. However, both the federal government and higher education institutions recognized the need for institutional infrastructure and their respective costs, so federal agencies began reimbursing these costs through grants and contracts. From 1958 to 1963, Congress increased the flat rate of 8 percent to 20 percent, which Congress made a statutory limit. In the years after the war, higher education institutions and the federal government continued cost reimbursement conversations. In 1958, the Bureau of the Budget—later, renamed the Office of Management and Budget (OMB)—issued federal guidelines for determining indirect costs. Over the years, there have been many revisions to these guidelines.1 OMB fixed the administrative cost reimbursement rate at 26 percent in the 1990s; however, each institution negotiates its own facilities cost rate with the federal government,2 and as a result, each institution has a different overall indirect cost rate, some of which are more than 60 percent.3 Notably, universities are the second-leading funder of academic research and development behind the federal government, and the inflation-adjusted dollars that universities spend on research have increased over the years, faster than any other sector. Much of the increased costs for research are due to increased compliance—an administrative indirect cost. Yet, the administrative indirect cost rate cap that universities can charge has remained flat for more than two decades and is lower than other entities’ caps. For i

FAQs

What are indirect cost rates in federally funded research?

They are facilities and administrative (F&A) rates that reimburse higher education institutions for overhead costs such as research infrastructure support and compliance expenses that cannot be directly attributed to one project.

How are indirect costs categorized?

Indirect costs are grouped into facilities (buildings, equipment depreciation, operations and maintenance, library expenses) and administrative costs (general administration, departmental administration, project administration, and compliance activities such as IRBs).

What financial effects could arise if indirect costs are capped or not reimbursed?

Institutions may absorb unreimbursed overhead, which can weaken financial stability and reduce research capacity. They may also adjust strategies and competitiveness by accepting lower indirect cost rates, potentially affecting programs and long-term project continuity.

Oct 15, 2026

Uploaded by Taylor Morgan