NIH's New Indirect Cost Rate Policy: What CFOs Need to Know

The NIH set a new policy that limits indirect cost recovery to 15% for research grants starting February 7, 2025. This alters the previous variable rates that institutions negotiated between 30% and over 60%. The NIH policy shift intends to increase funding for scientific research while ensuring NIH practices match those used by private foundations such as the Gates Foundation. The change creates substantial obstacles, especially for smaller institutions that depend on these funds to support their operations.

What Are Indirect Costs?

Indirect costs encompass essential infrastructure spending like facilities maintenance and administrative staff salaries, which support research operations but are not linked to particular projects. Institutions have customarily negotiated with federal agencies to establish indirect cost rates that allow them to recoup these essential expenses.

Key Considerations for CFOs

Financial Impact:

Substantial funding deficits may result from the implementation of the new cap. A university with $100 million in NIH funding will lose $40 million annually in indirect cost recovery when its rate drops from 55%. The financial effects fluctuate because negotiated rates differ significantly across institutions, ranging from 20% to 70%.

Impact on Smaller Institutions:

Small institutions with inadequate funding face incredible hardships from the lowered cap because they depend on indirect cost recovery to maintain their operational budgets. Smaller institutions typically do not have enough financial reserves, which more prominent universities possess, to manage these kinds of losses.

Fringe Benefit Rates:

To compensate for lost indirect cost recovery, institutions might have to change fringe benefit rates and their internal budgeting systems. These changes could result in higher costs or diminished research support services for researchers.

Legal Challenges and Temporary Restraining Order (TRO):

The NIH cap breached federal laws, according to lawsuits from 22 state attorneys general and multiple universities, which cited appropriations riders that prevent alterations to established indirect cost rates. The plaintiffs argue that the policy defies the APA because it operates arbitrarily and capriciously and goes beyond NIH's allowed legal powers.

On February 21, 2025, a federal judge decided to continue the temporary restraining order (TRO), preventing cap enforcement during ongoing legal actions. CFOs need to stay updated with these developments because they could lead to a delay or complete reversal of the policy.

Effective Date and Scope

The NIH revealed that their implementation process would occur in phases despite the perception of immediate enactment.

New Grants: The 15% cap will apply to all new NIH grants issued on or after April 1, 2025.

Existing Grants: Starting from February 10, 2025, existing grants must adhere to the new financial cap unless their original negotiated rates continue through grant renewal or re-competition.

Exemptions: Grants with existing negotiated rates will keep those rates until they undergo renewal or enter new competition terms.

Institutions must perform thorough assessments of their grant portfolios and seek guidance from NIH regarding how to apply this policy to their specific awards.

Federal Funding Freeze Context

The modification comes after reports of how the federal funding freeze has affected numerous research programs. Although both actions are components of broader initiatives to cut federal expenditures, they are distinct. The federal funding freeze stalled the release of money for specific programs, and the IDC cap introduced a fundamental change to NIH's funding distribution system.

Additional Considerations

Broader Implications:

Experts indicate that this policy will reduce research capacity and result in layoffs. Scientific discoveries will be delayed due to funding shortages for infrastructure and administrative support. The ability of institutions to attract leading researchers will also become difficult due to their dependence on strong institutional support.

Advocacy Efforts:

The Association of American Medical Colleges (AAMC) and the Association of American Universities (AAU) have initiated active lobbying efforts to oppose this policy change. The policy change harms public universities and smaller institutions more than larger ones, weakening America's standing in biomedical research leadership.

Ambiguity in Policy Language:

The cap targets institutions of higher education (IHEs) but raises questions regarding its relevance for non-IHE recipients of NIH funding, such as nonprofit organizations. Institutions must prepare themselves for wider application until NIH provides additional details.

Next Steps for CFOs

CFOs of research institutions need to take prompt action to address the risks of this policy change.

• Assess Financial Impact: Perform comprehensive evaluations of grant portfolios to determine possible revenue losses from the new cap while pinpointing high-risk areas that need fast intervention.
• Seek Professional Guidance: Research institutions must engage legal and financial professionals to ensure grant compliance and understand necessary adjustments according to new regulations.
• Explore Alternative Funding Sources: Expand funding sources through private foundation grants or industry partnerships, which could provide improved indirect cost recovery rates.
• Stay Informed on Legal Developments: Keep informed of legal updates through court decisions and advocacy organization reports focusing on policy challenges.
• Engage in Advocacy: Work alongside professional organizations such as AAMC or AAU who lead advocacy campaigns to change or postpone this policy's implementation.

Conclusion

Research institutions face significant challenges from the NIH's 15% IDC cap, which critically affects smaller organizations dependent on indirect cost recovery for their operations. Financial officers must plan for possible operational and financial effects because the policy's implementation remains on hold due to ongoing legal disputes. HHM's Nonprofit and higher education teams stand ready to assist impacted institutions in managing these challenges while building sustainable strategies to cope with this significant policy change.

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