All About Indirect Costs


When I started Rock Talk, one of my goals was to lift the curtain on NIH decision-making and to demystify NIH policies and processes. One topic that I have talked endlessly about throughout my tenure is indirect costs (IDCs). Indirect costs generate almost more discussion than any other topic and there are many misunderstandings about them. Comments and questions reflect a range of perspectives, such as: “Indirect costs are rising all the time and eating up funds that could go for research.” and “Why can’t NIH reduce the rate of indirect costs?”. Others have asked us, “NIH – please get rid of the 26% cap in administrative indirect costs!” or simply want to know, “INDIRECT COSTS! Huh! What are they good for?!” (to paraphrase Edwin Starr).

At meetings, and in the blogosphere (Rock Talk comments especially!), I hear a lot of misconceptions of how IDCs are determined, how they are calculated and applied, and general debate about what role indirect costs play in supporting research. For example, in the responses to the NIH request for information asking for your comments on creating efficient and sustainable funding policies, many respondents commented on IDCs and echoed this debate. IDCs are not just fervently discussed in the extramural community outside NIH, but among NIH’s extramural staff as well.

I thought a recent presentation I gave to NIH leadership would be of benefit to the community too, so I’ve recorded this presentation to post on the blog. I hope it is helpful in understanding the background and use of indirect costs in supporting research and sheds some light on the costs of research, both direct and indirect. Enjoy.


  1. There has been much debate over this part of the world recently about whether the 8% F&A rate for foreign institutions needs to be justified in a yearly audit. That is, do foreign institutions need to be able to prove that they have generated at least this amount of F&A costs in the last year? Or is the 8% a flat rate that does not need to be justified, like is the case for US institutions once the F&A rate has been negotiated?

    1. Yes, foreign institutions must be able to support that the amount of F&A costs that were charged to projects were actually expended. Only actual F&A costs may be charged to projects. During the organization’s fiscal year, grant drawdowns may include F&A costs at 8% of Modified Total Direct Costs (MTDC) excluding equipment costs, but when the year has ended, the estimated or budgeted amounts of F&A expenses must be reconciled to actual costs, not to exceed 8%. The 8% F&A rate is not a flat rate, and it is not correct to assert that US institutions do not need to justify rates after they have been negotiated, since the calculation and application of indirect costs may be audited. Organizations that have expended $750,000 in Federal funds are subject to audit requirements. Foreign organizations are subject to the same audit requirements as for-profit organizations [specified in 45 CFR 75.501(h) through 75.501(k); also see NIH Grants Policy Statement at , Audit, sections 8.4.3 and 16.7.4]. Organizations that expend less than $750,000 in HHS awards are exempt from requirements for a non-Federal audit for that year, but records must be available for review by appropriate officials of Federal agencies.

  2. One would really like to know the researcher who actually wants the NIH to get rid of the 26% cap on indirect costs! Sure this wasn’t a University/Research Center/Medical Center administrator posing as a researcher?

  3. Personally, I feel that an 8% figure is so low that there is no reason to incur the expense, for the foreign institutions and for the U.S. government auditors, to conduct an audit to insure that at least 8% is being spent. It is difficult to imagine that less than two or three times that amount is being spent, and an annual audit simply does not make fiscal sense.

  4. Research space used by NIH funded investigators fluctuate from year to year. How is research space calculated for the IDC cost rate? Is research space used only by investigators funded by government included in the calculation or is all available research space included? Salaries are capped for NIH investigators. Is the same cap applied to administrative salaries? Lastly, while I appreciate the importance of IDC, I believe that a primary mission of the university is to do research, and thus we should not expect NIH to cover 100% of the research costs for any one project. Also, research raises the prestige of the university and thus provides benefits to the university which are not considered in the cost analysis for the IDC rate – not that this is an easy calculation, but supports the idea that NIH should not be expected to fund 100% of the cost for a project.

  5. Thanks for a very clear explanation of the history and evolution of the indirect costs associated with federal funds. Your presentation makes me wonder if there might be a way to use indirect costs in a way as to incentivize universities to become more efficient and cost effective in their research administration. There has been a well documented and very burdensome increase in administration that is passed down to researchers. I think the NIH or HHS should be able to determine a “reasonable” cost of FFA and make that uniform and thus the target for all universities. Those that can reach that goal more efficiently/cost effectively win. Why should the NIH/HHS allow higher IDCs when a university has a bloated administration or complex structure?

  6. I’d like to see an analysis of how even a 1% across the board reduction in negotiated IDC for funded grants could alter the RO1 payline if that money could be applied to the actual research. What about 5% or 10%?

  7. Does the NIH or any other federal agency track and monitor how universities actually spend the IDC? Not all the IDC goes to supporting the research infrastructure that it is intended to support; many universities use it to subsidize their graduate teaching programs (didactic instruction), for example, and other activities that one could argue are not directly related to research.

  8. I’ve no hot water, no distilled or deionized water ( because of decaying infrastructure), the air conditioning turns off at 5:00 pm, there are frequent floods in my lab from the floors above…in short I do not think the indirect costs that my grant generates are even being applied to support the work in my lab. Complaining to administration doesn’t seem to work…is it time for me to call the PHS? The comments about administrative ” bloat” are certainly spot-on. My PI salary is less than many of administrators who supervise the spending of my award. I think the NIH has been way to lax on these issues

  9. Thank you for this informative presentation. Could you please comment on the use of total cost grants by the SBIR and STTR programs? It appears that these programs incentivize small business concerns to partner with academic institutions and federal laboratories that have a lower indirect cost rate, and a number of academic sites have responded by reducing their indirect cost rate for these specific grant programs.

  10. Can you provide this as a pdf or power point? There are many reasons why having this information to hand and in a disseminable form would be very useful for researchers

  11. In contemporary times, with shrinking budgets, it is absolutely ridiculous that IDC or F&A rates are >50% of total direct cots. I think NIH and all granting agencies should cap total indirect costs at no more than 50% for academic institutions. Institutions should be grateful to be able to attract grants and not consider IDCs as part of operating budgets!!!!!

  12. What are indirect costs paying for, really?

    Our institution charges 47% and services steadily slide while total grants won and total grant dollars steadily increase annually. Through the past 10 years, the researchers pay more and get less: we were required to move as part of a building remodel. The space we were put in wasn’t suitable for ANYONE to use as a lab, yet somehow we got stuck with the remodel bill. We now have 3 associate directors where once we only had 1. Janitorial support has shrunk to the point that we have to sweep/vacuum our own spaces and empty our own recycling. We used to have 3 full time secretaries in our division, now there’s 1.5 FTE devoted to our division (it’s been growing steadily–despite the ever longer administrative lag in the hiring process). Mail used to be delivered to each lab, now everyone has to get it themselves from the administration building at the edge of campus. The freight crew has shrunk so small that it will be the same for packages soon too (at least that building is located more centrally). It’s a good thing researcher time isn’t money…

    It’s not all bad: the computer network & support software has slowly improved with time, administration is keeping the buildings standing & the exterior grounds well maintained. Hardware reliably works and various improvements to facilities are continuous. But some days I do have to wonder if these basic services that have broken in the mean time couldn’t have been preserved?

    In summary, increasing the indirect cost rate won’t necessarily improve anything–it will change the amount of money available to be wasted on silly administration shenanigans. More oversight required.

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