Explainer: What are indirect costs, and how do they support university research?

Strong Hall, a university administrative building, viewed from above

On Feb. 7, 2025, the federal government announced that indirect costs would be capped at 15% for all new projects funded by the National Institute of Health (NIH). Additionally, the 15% indirect cost cap also has been proposed for the Department of Energy (DOE).  A 15% rate is substantially less than institutions have received to reimburse for facilitating research; the rate usually is between 30% and 70%. 

The following information is provided to help Life Span Institute researchers and staff explain indirect costs and their critical role in conducting research. More information is also available from the Association of American Universities.

The key points are: 

  • Universities carry out the research that is prioritized by the federal government on behalf of all Americans
  • Indirect costs reimburse universities for a portion of the costs of housing that research and for complying with the fiscal and ethical regulations that govern the conduct of that work. 
  • A reduction in indirect costs would be devastating to the mission of most research institutions, and in the long run will disadvantage American superiority in basic, translational, and applied sciences. 

The history of indirect costs

After World War II, when the federal agencies supporting research were expanding, indirect costs were charged to grants as direct costs. The federal agencies funded personnel, electricity, heat, maintenance, etc., and those costs were included directly in grant budgets based on the calculation that institutions would split these expenses evenly with federal sponsors. So, the agreement was that federal agencies would only be asked to shoulder half of the costs of housing and maintaining research that the agencies agreed to support.  However, it quickly proved too onerous (for both parties involved) to track these costs, and an agreement was struck in which these institutional costs would be reflected as an amount paid to the institutions as a percentage of those costs to conduct the research.  

Understanding indirect costs 

University research is driven by researchers who apply for grant funding through a combination of federal, state, industry and philanthropic sources. When a university researcher successfully achieves grant funding for a project, the grant award includes funding for two areas: the expenses of the project itself (direct costs), and support to reimburse institutions for activities that make research possible (indirect costs).  Indirect costs are sometimes also referred to as Facilities and Administration (F&A) costs, or overhead.  

Indirect costs are research-related expenses necessary to support research.  Examples of indirect costs include funding for building and infrastructure such as laboratories and equipment that may be used by multiple researchers, projects and students. These are the “facilities” in F&A. Indirect costs for administration (the “A” in F&A) cover the management and execution of research, such compliance with federal, state and local requirements. 

In effect, universities invest in research in advance…when an investigator is awarded a federal grant the university “fronts” the costs of grants and then periodically draws money from the federal sponsor to reimburse these costs.  These draws include the direct costs of the grant (personnel, equipment, travel, participant costs, etc.), as well as the indirect costs of the grant, which includes the costs of building, maintaining, and remodeling research space, acquiring equipment to conduct research, and paying for the infrastructure that provides support for grant management and compliance with federal regulations. As part of partnering with institutions to further scientific discoveries, the federal government reimburses part of these indirect costs of research.  

An illustration of indirect costs that shows people moving around a cutaway of a building. Examples in the illustration include internet and data storage, building maintenance, safety and security protocol, and lab space.

What Is KU’s indirect cost rate? 

Indirect cost rates at research universities across the nation vary from 30% to 70%. At the University of Kansas, indirect cost rate — the rate at which the federal government agrees to provide support for a project — is  53%.   At KU, the administrative (“A” part of F&A) rate is constant at 26%, and the facilities cost (the “F” part of F&A) is 27%.  These rates are negotiated on a periodic basis with the federal government, and vary as a function of the institution’s investment in its research infrastructure and facilities.   Even though KU’s overall indirect cost rate might be listed as 53%, indirect costs are not collected on all parts of grants, such as large-scale equipment costs, rental costs, student tuition, participant support costs, and some parts of subaward costs.  Thus, KU only actually realizes about 40%-45% of federal indirect costs.

As you may be aware, some institutions accept lower F&A rates from some sponsors…in fact, some awards come with no F&A. The actual realized F&A rate across the University when all research grant and contract funding sources are included is only about 20% to 22%. At the Life Span Institute, it ranges from 16% to 19%. 

Private institutions have justified higher F&A rates  to the federal government because their spending on infrastructure and brick-and-mortar facilities was not subsidized by public (i.e., state) funds. However, state funding to public institutions like KU has dwindled over time, so this is not as distinct as it once was. 

What are indirect costs used for? 

This varies across different institutions and how their revenue streams are configured.  

At some institutions, indirect costs are pooled with other institutional revenue and used for general operating costs.  In other places, they are redistributed to units for research development and support. 

What happens if the indirect cost rate Is cut?

Capping indirect costs would affect both new and existing grants for expenses incurred from Feb. 10 onward.   In the short term, this will cause a massive shortfall in revenue for research across the U.S., including the University of Kansas.

In Lawrence, this impacts the long-term commitments of the KU Office of Research, including the Life Span Institute budget.

If the NIH policy on indirect cost stands, it will immediately shift the burden of supporting research to institutions. Universities including KU will need to re-imagine how they support research and will need to be much more selective about what areas are prioritized.

In the long run, this may lead to a higher education system that prioritizes research less than it has for the past 70 years.  

The previous attempt to cap NIH costs back in February was challenged in court and the existing rate was extended indefinitely.  We expect the recent extension of the cap to DOE to be challenged in the courts as well, but the eventual fate of indirect costs is highly uncertain. 

 

Illustration: Adobe Stock and Christina Knott