Note: This post was updated with new information on February 13, 2025.

On February 7, the National Institutes of Health (NIH) issued Supplemental Guidance to its 2024 NIH Grants Policy Statement, Indirect Cost Rates, purporting to cap indirect cost (also called facilities and administration, F&A) rates at 15% for all new grants issued as well as for go forward expenses for existing grants for educational purposes.  The purported basis for the cap, which is a quarter or less of the indirect rate charged by many universities, hospitals, and other research institutions, is that 15% is in line with the rate permitted by a number of foundations. 

Even though a temporary restraining order has already been issued to prevent enforcement of the Supplemental Guidance pending hearings in two lawsuits challenging the cap, we recommend that recipients of NIH and other federal grants carefully evaluate the terms and conditions of their government grants, contracts, and cooperative agreements to evaluate whether this and other, recent government actions are permissible.  In addition, we recommend entities that regularly apply for NIH research grants carefully review the terms of any notice of funding opportunity before submitting any new applications because NIH may well seek to cap indirect cost rates on grants yet to be awarded in a more targeted manner than the February 7 notice.  Setting aside whether NIH’s rationale supports the proposed action, it is highly questionable whether NIH can cap indirect rates for existing grants. 

Deviations from Negotiated Indirect Rates Do Not Appear to Comply with Regulatory Requirements 

NIH’s Supplemental Guidance cites 45 CFR §75.414(c)(1) as the authority relied on to deviate from negotiated F&A rates.  That provision allows a Department of Health and Human Services (HHS) awarding agency to use a rate different from the negotiated rate “for a class of Federal awards or a single Federal award only when required by Federal statute or regulation, or when approved by a Federal awarding agency or delegate based on documented justification as described in paragraph (c)(3) of this section.”

Instead of a deviating from negotiated F&A rates for a “class of Federal awards,” as that term defined at 45 CFR §75.2, the Supplemental Guidance seeks to establish a single F&A rate for all awards. In addition, while the Supplemental Guidance provides purported justification for the deviation, NIH ignores the procedural requirements of paragraph (c)(3), which requires the NIH to implement and make publicly available, the policies, procedures, and general decision making criteria that their programs will follow to seek and justify deviations from negotiated rates.” 

Applying the Supplemental Guidance to existing awards faces additional challenges.

First, §74.414(c)(4) states that the HHS awarding agency, “[a]s required under §75.203(c) [which sets forth, with reference to Appendix I, what must be in included in notices of funding opportunities], … must include in the notice of funding opportunity the policies related to indirect cost rate reimbursement, matching, or cost share as provided.”  This requirement, which seems to be intended to ensure that applicants for federal grants understand the indirect cost rate reimbursement restrictions to which they will be subject so they decide, in part, whether or not to apply, has been completely ignored by NIH’s attempt to apply the 15% indirect cost rate cap to existing, previously awarded grants.  Indeed, §72.203(c)(2) requires that HHS include in the notice “Federal award information, including sufficient information to help an applicant make an informed decision about whether to submit an application,” citing back to the F&A rate provision at §74.414(c)(4).

Further, §74.414(c)(4) references sections C.2 and D.6 of Appendix I to 45 CFR Part 75, which establishes the requirements for the full text of notice of funding opportunities. D.6 states, in full:

Funding Restrictions—Required. Notices must include information on funding restrictions in order to allow an applicant to develop an application and budget consistent with program requirements. Examples are whether construction is an allowable activity, if there are any limitations on direct costs such as foreign travel or equipment purchases, and if there are any limits on indirect costs (or facilities and administrative costs). Applicants must be advised if Federal awards will not allow reimbursement of pre-Federal award costs.

The retroactive application of the 15% indirect cost rate to existing grants violates this requirement that notices include information about funding restrictions in order to allow applicants to develop an application and budget consistent with program requirements because the notices failed to disclose any limits on F&A costs.

The NIH also cites a provision in Appendix III, which governs F&A cost rates for Institutions of Higher Education (IHE), to suggest that it has even greater flexibility to revise the indirect rate for those entities.  But rather, supporting the NIH’s position, it seems to undermine it.

The referenced provision, C.7.a of Appendix III, which is the first paragraph in a sub-section titled “Fixed Rates for the Life of the Sponsored Agreement,” is aimed at providing certainty to IHEs that the indirect rate in effect at the time of initial award will apply through the life of that award.  It reads in full:

Except as provided in paragraph (c)(1) of § 75.414 Federal agencies must use the negotiated rates for indirect (F&A) costs in effect at the time of the initial award throughout the life of the Federal award. Award levels for Federal awards may not be adjusted in future years as a result of changes in negotiated rates. “Negotiated rates” per the rate agreement include final, fixed, and predetermined rates and exclude provisional rates. “Life” for the purpose of this subsection means each competitive segment of a project. A competitive segment is a period of years approved by the Federal awarding agency at the time of the Federal award. If negotiated rate agreements do not extend through the life of the Federal award at the time of the initial award, then the negotiated rate for the last year of the Federal award must be extended through the end of the life of the Federal award.

The citation to 75.414(c)(1) at the beginning of C.7.a most likely does not mean that NIH can change an IHEs’ indirect rates whenever they want, but rather that a negotiated indirect rate will not apply if an HHS awarding agency has properly deviated from a negotiated rate in accordance with the procedural requirements of 75.414, which, as noted above, include explaining the deviation in the funding opportunity.

Second, to the extent that the Supplemental Guidance is intended to apply to new grants to hospitals, 75.414 does not apply to them at all.  

Going Forward

While there is pending litigation and an injunction covering nearly half of the states, to the extent NIH attempts to implement the rate cap outside of those states, impacted institutions should carefully consider challenging the application of the Supplemental Guidance to existing grants because the policies, procedures, and general decision supporting the deviation from negotiated and approved indirect rates was not included in the relevant funding announcements.

Further, additional scrutiny should be applied prior to submitting applications in response to any new NIH notices of funding opportunities.  At a minimum, we recommend that entities carefully review correspondence with NIH regarding existing grants to ensure that all rights under those government agreements are reserved.

If you have any questions about the NIH Supplemental Guidance, the cap on indirect cost rates, or the impact of any other executive actions on your federally-funded agreements, please contact the authors.