NIH caps indirect costs at 15%

A radical restructuring of biomedical science

Welcome to Science with Shrike! NIH’s evening announcement that it is cutting all indirect cost rates down to 15% is a massive shock to the biomedical science community, and the universities that fund the research. Today we’ll dig into what this means, and what might happen.

What are Indirect Costs?

Indirect costs (also called “F&A”, “facilities and administration”, “overhead” or “IDCs”) are the portion of a grant that goes to supporting the research infrastructure at a grantee organization. These contrast with “direct costs”, which is the money going to the research project, and spent by the PI. In theory, F&A covers the cost of building repairs, pays utilities, secretaries and other parts of the research enterprise that are not directly related to the project.

In practice, at research intensive universities, F&A supports their ability to operate, including all of the research administrative bureaucracy bloat, all of the secretaries that help with purchasing, accounting, etc, all of the centers (genomics/microscopy/flow cytometry/transgenic mice), internal seed funds to help researchers start high risk projects, new equipment, and start-up packages when hiring new faculty (it costs ~0.5-$1.5M over 3 years to equip and start a research lab).

What were the F&A rates before?

Prior to the change, F&A rates were negotiated between the government and each university. Universities could choose which of several gov’t bodies to negotiate with to get the best rate. These rates are typically 50-75% of the direct costs.

For government agencies that use a total cost model for grants (like the Department of Defense), indirect costs cut into the ability of the researcher to do the project. For example, DoD may commit $1M to fund a grant. At an IDC rate of 60%, the researcher would have $625k, while the university keeps $375k for F&A.

In contrast, NIH uses a direct cost model to fund grants. NIH focuses grant amounts on direct costs. That $1M grant from NIH would be worth $1.6M to the university, because the researcher would get the full $1M, and the university gets an extra $600k (60% of the direct costs).

So this change represents ~75% cut to the amount of money universities were expecting from the federal government.

What about F&A rates from other organizations?

The NIH cites the lower F&A rates that many foundations and other non-profits pay to universities as part of their rationale for lowering rates to 15%. On one hand, foundations and other non-profits can get away with a lower F&A rate because the federal government pays the rate it does. So in one sense, this may force foundations to raise their F&A rate, or offer new programs to support things that could previously be done with federal F&A returns. Also, foundations are a small percentage of most universities’ research portfolio, so their impact is smaller.

It is also worth noting that F&A rate varies by NIH grant type. Training grants (salary money to support students and postdocs) are already capped at 8% F&A. Most research grants (eg R01, R21, R35, etc) get full F&A. So claims that the average rate is 27% is more a mix of the grant types given out than anything else.

At the time of this writing, the other major federal funders of university research (NSF, DoD, USDA, VA) have not capped their indirect cost rates. Shrike expects these agencies to follow suit soon. It is possible they wait for legal challenges to NIH, but Shrike would not count on that.

Capping F&A might have been more popular among researchers if agencies that paid by total costs capped their F&A rates first. But doing NIH first could be because they want to hit the biggest funder first, those other agencies might have rules preventing them from changing how much F&A they charge, the agencies might be pre-occupied with other priorities, or the people enacting these cuts failed to realize the difference in funding approaches.

Can the NIH get away with this?

The NIH memo announcing this rate cap is brutal. They are not changing the negotiated rate with the universities, but instead announcing their reasons for using a different rate. This lets them change the rate now, instead of in the future when the negotiated indirect cost rates come up for renewal. Their claim rests on various aspects of US code, and they argue that they could have been more extreme (cap rates at 10%, plus clawback F&A on all current grants). Shrike is not a lawyer, but takes an empirical approach to law. That means we’ll find out if it is legal in practice when a university lawyer tries to convince a judge to block it.

The timing on the memo is also rough for universities. NIH announced after 6 pm eastern time on a Friday. Only research administrators in California were likely to still be working when the announcement hit. Looks like it forces people into paying overtime for non-salaried staff if they want to cover the news. It also gives markets a few days to digest what happened, and/or forget it when the next bit of weekend news hits. Many of the Trump administration announcements have followed this pattern.

Another surprise in the memo is that the NIH is imposing the F&A cut immediately (eg effective Feb 10) on all existing grants, plus all new grants. Shrike is surprised at the immediacy cut, which will cause the most disruption to universities (and perhaps give the university lawyers ammunition to get it blocked). The universities have already budgeted those F&A returns, and those returns just evaporated. We’re about to see if the federal government’s terms and conditions hold up in court.

How will this play out?

Now for the fun part: predicting the consequences.

Shrike thinks this is an opening negotiating position. While it is unlikely that we see a return to 60%+ IDC rates long-term (a judge may block immediate implementation in the short term), Shrike thinks the final rate will be ~25-40% (unlikely Elon accepts less than a 2x cut). As part of the negotiations, there is about to be a ton of advocacy from scientific societies and universities towards Congress to push back on the new rates. So we’ll see how the power struggle goes.

It is unclear if this “saving the government $4B” means NIH will try to not spend the money, or if that money will go to funding additional grants. Since the NIH used ‘spend more money on research’ as their justification for the rate caps, it seems to Shrike the university lawyers will have a field day if NIH fails to keep this money within the extramural grants program. If the money gets spent on extramural grants, this will mean better paylines for NIH grants and more grants get funded.

Research universities are in a world of pain now. Even if their lawyers get a judge to block the immediate cut, they know it’s a matter of time before the rate cuts end up permanent. What will they do?

The NIH suggested they spend from their endowments. Aside from being not practical for universities with poor to no endowments, universities hate touching these things for operations. Getting a university to dig into its endowment is like expecting a business to cut into its profit margin in response to price controls or tariffs. It’s a last resort to be used immediately prior to cutting parts of a university’s athletics program.

Start ups for new faculty are a huge outlay up-front. Shrike expects startup amounts to be lower, and/or universities to impose a hiring freeze for this hiring cycle and the next. Not good if you are looking for a job now or will be in the next year or two. Postdoc positions should be unaffected (most paid out of direct costs).

Shrike expects university cores will be on the chopping block. Genomic sequencing, transgenic mouse creation facilities, antibody production cores, all of these will be aggressively audited by the universities. Where these facilities underperform, they will get trimmed and/or cut entirely.

Internal grant competitions, seed funds and bridge funds to support faculty will all get clobbered. Grad student funds may also run into trouble. Offices that support grad student and postdoc professional development will also be on the list to cut.

While a sensible company would try to automate the bureaucracy to eliminate jobs, Shrike does not expect universities will pull this off. Too much of the compliance requires human touchpoints, and the rules change too often. There will be some consolidation, but this will be more ‘make one person do the job 3 people did before’, not ‘here’s a script that removes the need for these people to be employed’.

Instead, soft-money positions are going to get clobbered. These are things like ‘research’ professors and research support staff (glassware/autoclave people) paid by the university. Research staff will have to do more, and PIs may need to support more people on their grants.

Biowaste removal will become ‘you can autoclave it bro’ instead of ‘we will dispose of it for you’.

Also, under-performing faculty (ie no active grants) will get less grace and they will try to force them out sooner rather than later. This already happens, but expect it to be worse.

Will PIs write more grants? Not clear at this stage. But until the other agencies cap their rates, expect the other agencies to become way more popular (= grants there get even more competitive). It will be interesting to see what Howard Hughes Medical Institute does, since they need an excuse to spend money every year.

Industry/company money might go further. And if companies are willing to either pay better IDC rates or support specific admin personnel, it might help with negotiations for the IP developed later on. Of course, this would require many universities to incentivize their PIs to generate IP in the first place. Maybe they’ll rethink their IP policy. But Shrike would not count on it.

Universities will try to find ways to impose some of the indirects on PIs. Either by requiring more grants, or by renaming some of the tasks/positions so that direct costs can cover these expenses. If you were one of the lucky few who got F&A back to you as a PI, this will dry up fast.

Non-research intensive universities (eg R2 and lower) will be less affected. They get most of their money from tuition, state funds and Dept of Ed, so the pending enrollment cliff, the impending Dept of Ed cuts, and Trump’s free online college (yet to be announced, but expect it in 2025) are bigger threats to them.

Who wins long-term with an F&A cap?

If these changes stick, research universities in low-cost of living areas stand to do better than their high cost of living counterparts. A flat rate means the F&A dollars go further. This will allow them to catch up on a relative basis.

Low-ranked universities are about to have an opportunity to pick up better talent than they are used to, especially if they keep hiring.

Rich states will do better on a relative basis, especially if they are willing to spend on their universities. Texas in particular does this well.

If your grant just missed payline, you might get it funded this cycle now.

Contract research organizations that can replace university core functions may do better as everyone shifts from defunct core facilities.

What do you think will happen?