Universities and Indirect Costs for Federally Funded Research

The federal government is the largest source of academic research and development (R&D) funding in the United States, providing funds through more than two dozen federal agencies. U.S. colleges and universities, often referred to as institutions of higher education (IHEs), play a role in the U.S. R&D ecosystem and in supporting American innovation, competitiveness, and economic growth. In 2023, federal funding accounted for $53 billion of the $102 billion in R&D performed at IHEs. Federal support for R&D comprises two main types of costs—direct and indirect. Direct costs of research are those that can be readily identified with a specific project or program, such as salaries and laboratory supplies. Indirect costs—such as utilities, research administration, and library costs—cannot be readily connected to an individual project or program but nevertheless are necessary to conduct research. The amount of federal funds that should be allocated to the direct costs, compared to the indirect costs, of federally funded R&D performed by IHEs has been a subject of debate since the 1940s. Broadly, the method and policies associated with determining federal reimbursement of indirect costs have varied (e.g., full reimbursement, negotiated rates, fixed percentage of direct research costs). As of January 2026, indirect cost reimbursements for IHEs are typically determined by an indirect cost rate that is pre-negotiated with the federal government and varies by IHE—ranging from 30% to 70%. In the first half of 2025, the National Institutes of Health (NIH), the Department of Energy (DOE), the National Science Foundation (NSF), and the Department of Defense (DOD), which is “using a secondary Department of War designation” under Executive Order 14347 of September 5, 2025, released policies that would impose a 15% indirect cost rate on all R&D awards to IHEs. As of the date of this report, Congress has prohibited the implementation of these policies through language included in various appropriations acts and other laws. For example, the Commerce, Justice, Science; Energy and Water Development; and Interior and Environment Appropriations Act, 2026 (P.L. 119-74), requires the Department of Commerce, the National Aeronautics and Space Administration, NSF, and DOE to continue to use the negotiated indirect cost rates in effect in FY2024. The National Defense Authorization Act for Fiscal Year 2026 (P.L. 119-60) prohibits the Secretary of Defense from changing or modifying the indirect cost rates for DOD grants and contracts awarded to IHEs and nonprofits until the Secretary certifies to congressional defense committees that DOD has (1) worked with the extramural research community to develop an alternative indirect cost model and (2) established an implementation plan with “adequate transition time to change budgeting and accounting processes” for affected IHEs and nonprofits. At issue for Congress are the potential consequences of changes to indirect cost rates (e.g., federal savings, effects on university R&D infrastructure) and whether, and to what degree, the federal government should support indirect costs. As Congress assesses policies and potential actions related to indirect costs for federally funded R&D at IHEs, the evolution of how indirect costs have been determined and debated, including potential alternative approaches, may be of interest. For example, Congress has previously considered fixed indirect cost rates, capping indirect cost rates broadly or for a subset of IHEs, and freezing indirect cost rates (e.g., prohibiting IHEs from negotiating new rates, requiring the use of a previously determined rate or a specified percentage of a previously determined rate). As Congress determines whether to further act on indirect costs associated with federally funded R&D at IHEs, it may consider the potential benefits and concerns associated with various actions. For example, reducing or limiting federal funding for indirect costs at IHEs could result in savings for federal agencies. On one hand, such savings might be used to increase the number of research projects funded by the federal government, in addition to potentially incentivizing operational efficiency at IHEs. On the other hand, such changes may have a disproportionate impact on public research institutions or on smaller IHEs that lack the level of private-sector support or endowments to buttress their overall R&D efforts. Alternatively, allowing indirect cost rates to continue to be negotiated and to vary by IHE would enable indirect costs to fluctuate in response to cost differences due to geography, IHE organizational structure, and the types of research conducted. Such an approach, however, might limit Congress’s ability to address long-standing critiques (e.g., lack of transparency in the use of indirect cost reimbursements and concerns that reimbursements are for less than the full amount of indirect costs).