Note: An update to this article is appended to reflect the February 21, 2025 ruling extending a temporary restraining order.
The National Institutes of Health (NIH) has announced a major policy change that will significantly impact universities, research institutions, and nonprofits receiving federal research funding (Research Institutions). On February 7, 2025, NIH issued Notice NOT-OD-25-068 (Notice), which imposes a 15% cap on indirect cost (IDC) recovery for all new NIH grants and, controversially, for existing grants awarded to institutions of higher education (IHEs) moving forward from Feb. 10.
This shift represents a substantial reduction from the negotiated IDC rates many Research Institutions currently receive, which often range from 50% to 60% of direct research costs. The NIH justified the change to ensure more federal funds go directly to scientific research, citing private foundations that reimburse indirect costs at much lower rates.
Historically, NIH has reimbursed indirect costs based on negotiated rate agreements with grantees. These agreements recognize that Research Institutions have unique and complex infrastructures that support federally funded projects. The shift to a flat 15% IDC rate will create substantial funding gaps for many Research Institutions who Research Institutions argue this cap could undermine infrastructure, reduce research capacity, and shift costs to universities and medical centers, many of which already operate on tight budgets.
Current Status: On Feb. 10, 2025, a federal judge in Boston issued a temporary restraining order preventing implementation of the Notice. A hearing is scheduled for February 21, 2025, to determine whether the order will be extended.
What Are Indirect Costs, and Why Are They Critical?
Indirect costs, also defined as Facilities and Administrative (F&A) costs, cover essential operational expenses that enable Research Institutions to conduct NIH-funded work. These include:
- Facilities Costs: Depreciation of buildings, equipment, and capital improvements; utilities; maintenance; security.
- Administrative Costs: Salaries for grant administrators, compliance staff, HR, IT, and legal services.
Many Research Institutions have separate fringe benefit rates which appear not to be covered in this NIH memorandum; however, some Research Institutions include fringe benefit cost in their IDCs. Research Institutions may what to reconsider their approach on this topic (see further discussion below).
Key Considerations for CFOs
1. Assessing the Financial Impact
NIH’s new policy could lead to significant funding shortfalls. CFOs should consider the following:
- Conduct financial modeling to quantify expected losses in indirect cost recovery.
- Identify high-risk programs that rely heavily on NIH funding.
- Determine cost absorption strategies to offset lost overhead recovery.
- Assess multi-year implications for ongoing research projects and infrastructure investments.
Example: A research university with a 55% negotiated IDC rate that receives $100 million annually in NIH grants would typically recover $55 million in indirect costs. Under the new 15% cap, that institution would receive only $15 million, leaving a $40 million funding gap per year.
2. The Impact on Fringe Benefit Rates
Many Research Institutions bundle fringe benefits (e.g., health insurance, retirement contributions, tuition benefits) into their indirect cost pools. With reduced IDC recovery, Research Institutions may have to:
- Increase fringe benefit rates on direct salaries to compensate for lost IDC funding.
- Reallocate benefit costs across other funding sources, potentially increasing financial strain.
- Evaluate whether reductions in employee benefits (e.g., retirement contributions, tuition reimbursement) are necessary to offset funding gaps.
Research Institutions should review their approach to fringe benefit cost and discuss with their internal team and outside IDC consultants to determine the best approach for their situation.
3. Operational and Compliance Challenges
- Managing Existing Grants: While the Notice explicitly applies the 15% cap to existing IHE grants moving forward, it is unclear whether NIH might apply it to other recipients (e.g., nonprofit research institutes). CFOs should seek clarification from NIH grant officers.
- Budgeting Adjustments: Departments reliant on indirect cost recovery will likely face budget cuts, hiring freezes, or program reductions.
- Regulatory Compliance: Research Institutions must ensure financial reporting and cost allocations comply with NIH’s new policy, particularly for multi-year grants awarded under higher negotiated rates.
4. Legal and Advocacy Considerations
The NIH policy faces multiple legal challenges, including claims that:
- The indirect cost rate reduction is arbitrary and capricious.
- The policy potentially violates Section 224 of the Further Consolidated Appropriations Act, 2024.
- NIH failed to follow required regulatory procedures before implementing the change.
- There is concern that NIH lacks the authority to alter negotiated rates on existing awards retroactively.
CFOs should:
- Monitor legal developments to anticipate potential policy changes.
- Engage in advocacy efforts through organizations such as:
- Council on Governmental Relations (COGR)
- Association of American Medical Colleges (AAMC)
- National Association of College and University Business Officers (NACUBO)
- Coordinate with government relations teams to provide data on institutional impact and support lobbying efforts.
5. Exploring Alternative Strategies
With IDC recovery limited to 15%, Research Institutions may need to:
- Renegotiate research agreements to shift costs to direct funding categories.
- Pursue alternative funding sources (e.g., industry partnerships, private grants).
- Restructure subawards to optimize financial recovery.
- Evaluate long-term capital planning to account for reduced overhead reimbursement.
Next Steps for CFOs
- Conduct an immediate financial impact assessment to quantify potential losses.
- Engage with NIH grant officers to clarify how the new policy applies to your institution.
- Communicate with stakeholders (faculty, research administrators, leadership teams) about expected changes.
- Join industry advocacy efforts to push for policy revisions or exemptions.
- Develop contingency plans for future grant budgeting and indirect cost recovery strategies.
- Stay informed on legal developments that could affect the policy’s implementation.
How BDO Can Help
BDO’s Nonprofit and Education Services teams are available to help Research Institutions navigate the financial and operational challenges posed by NIH’s policy change. Our experts can assist with:
- Financial Impact Analysis:
- Assessing revenue loss across NIH-funded programs.
- Scenario modeling for different policy outcomes.
- Budgeting and Cost Recovery Strategies:
- Identifying potential cost reallocations and sustainability measures.
- Optimizing IDC recovery within allowable NIH guidelines.
- Fringe Benefit Rate Adjustments:
- Evaluating the impact of reduced IDC funding on fringe benefit rates.
- Developing strategies to maintain competitive employee benefits while managing financial constraints.
- Regulatory Compliance and Audit Readiness:
- Ensuring compliance with new NIH indirect cost policies.
- Preparing for potential audits and grant modifications.
- Strategic Advocacy Support:
- Developing financial impact statements for advocacy efforts.
- Engaging with policymakers and industry groups.
- Operational Adjustments and Long-Term Planning:
- Evaluating business model implications of reduced IDC recovery.
- Exploring alternative funding sources and partnerships.
BDO’s team understands the unique challenges facing Research Institutions and nonprofit organizations. We are ready to support CFOs, grant administrators, and financial leadership as they adapt to this evolving regulatory landscape.
UPDATE: 2/24/2025
Legal Ruling on NIH Indirect Cost Reimbursement Policy
In early February 2025, the National Institutes of Health (NIH) announced a policy to cap indirect cost reimbursements at 15% for all new and existing research grants, effective February 10, 2025. This policy represents a significant reduction from previously negotiated rates, which averaged between 27% and 28%, with some institutions receiving rates exceeding 50%. Indirect costs, also known as facilities and administrative costs, cover essential expenses such as laboratory maintenance, utilities, and administrative support necessary for conducting research.
Legal Challenges
The abrupt reduction in reimbursement rates has raised concerns among research institutions about potential financial shortfalls, which could impact ongoing and future research projects. In response to the policy change, a coalition of 22 state attorneys general and several universities filed lawsuits challenging the legality of the NIH's new policy. They argue that the cuts violate congressional restrictions and could have devastating effects on research operations.
On February 21, 2025, U.S. District Judge Angel Kelley extended a temporary restraining order, blocking the implementation of the funding cuts pending further legal proceedings. The judge acknowledged the potential irreparable harm the cuts could inflict on medical research and patient care.
Government's Stance
The Trump administration contends that the reduced indirect cost rates would allow for more funds to be allocated directly to new research projects, aligning NIH's reimbursement practices with those of private foundations, which often have lower indirect cost rates. However, the research community remains concerned about the potential long-term impacts of the proposed funding changes on scientific innovation and public health advancements.
Implications for Research Institutions
The policy has sparked confusion and uncertainty at the NIH and across American universities and hospitals, as researchers try to reckon with the likely upshot—that many of them would have to shut down their laboratories or fire administrative staff. The legal challenges are ongoing, and the research community is closely monitoring the situation to understand the potential impacts on future funding and research capabilities.
References
- National Institutes of Health. (2025). Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates. Retrieved from NIH Grants.
- Reuters. (2025, February 21). U.S. judge extends order temporarily blocking Trump research funding cuts. Retrieved from Reuters.
- Associated Press. (2025). Trump NIH medical research funding cut indirect costs. Retrieved from AP News.
- Wu, K. J. (2025, February 19). The NIH Memo That Undercut Universities Came Directly From Trump Officials. The Atlantic. Retrieved from The Atlantic.