NIH Indirect Costs and F&A Rates: What the 2026 Controversy Means for Your Grant Budget

What Are Indirect Costs, and Why Do They Appear on Your Budget?

Direct costs are the expenses your grant directly supports: your salary and effort, your postdoc's salary, reagents, equipment, travel to present your findings. Indirect costs — also called facilities and administrative costs, or F&A — are real institutional costs that support your research but can't be cleanly tied to a single project. The electricity in your building, the compliance office that processes your animal protocols, the IT infrastructure your sequencing pipeline runs on, the grants management staff who helped you assemble this application — all of these are funded, in part, through the indirect cost mechanism.

NIH doesn't pay for these line by line. Instead, your institution negotiates an F&A rate with the federal government — specifically with the Department of Health and Human Services Division of Cost Allocation — and applies that rate to your grant as a multiplier on a subset of your direct costs called the modified total direct cost base, or MTDC. The MTDC excludes equipment purchases above $5,000, patient care costs, tuition remission, and the portion of subcontract costs above $25,000 per subcontract per year.

Here's the practical implication for your lab: when NIH makes an award at your modular budget request, the total award is your direct costs plus whatever your institution's F&A rate generates on the MTDC. The indirect costs flow to your institution, not to your lab account. Your lab receives only the direct cost portion. Understanding this split matters whenever you're planning a budget, because the total cost of your grant — direct plus indirect — is what NIH is actually obligating, and it can be considerably higher than the number you see in your lab budget.

How F&A Rates Are Negotiated — and Why They Vary Across Institutions

Negotiated F&A rates vary enormously across the research landscape. Academic medical centers at large research universities often carry rates well above 50%, sometimes higher, on salaries and wages. Community teaching hospitals, smaller regional universities, and independent nonprofit research institutes typically carry lower rates. The variation reflects real differences in research infrastructure costs — the overhead required to run a major biosafety level 3 facility or a hospital-based clinical research unit is genuinely different from the overhead at a primarily undergraduate institution with a small research program.

A rate is negotiated every few years through a formal proposal and audit process. Your institution submits a cost study documenting its actual facilities and administrative costs, a federal auditor reviews and challenges it, and the two parties agree on a forward-pricing rate. Once set, the rate applies to federal awards unless the funding agency specifically limits it. Some mechanisms already carry statutory indirect cost restrictions — certain SBIR/STTR categories, for instance, have fixed overhead caps regardless of your negotiated rate. Some Funding Opportunity Announcements also specify a maximum rate; in those cases, the FOA rate governs.

Why does institutional variation matter to you as an applicant? Because when you're planning a budget, the F&A rate determines the total cost of your project to NIH — and total cost isn't invisible to program officers and grants management staff. A $300,000-per-year direct cost request at a high F&A rate carries a meaningfully different total cost than the same request at a lower rate institution. That rarely affects peer review scores directly, but it can surface during budget negotiation or when a program officer assesses whether a project fits within an institute's funding envelope.

The 2025–2026 F&A Rate Controversy: What Happened

In February 2025, NIH announced a policy that would have capped F&A rates at 15% of total direct costs for all grants awarded to institutions of higher education, regardless of their negotiated rates. The announcement came as part of a broader set of changes under the Trump administration and, if implemented, would have represented the most significant restructuring of research overhead policy in decades. Institutions whose negotiated rates were two, three, or even four times higher would have absorbed the difference directly.

The reaction was immediate. University research offices, faculty coalitions, and scientific societies argued that the cap would gut the infrastructure that makes research possible at major academic medical centers — facilities, core labs, regulatory compliance, and research administration. They also argued that negotiated rates are the result of a formal federal audit process and cannot simply be overridden by agency announcement without statutory authority. Lawsuits followed almost immediately.

Federal courts agreed. A permanent injunction blocked NIH from implementing the new policy. An appeals court subsequently upheld that ruling, concluding that NIH lacked the authority to impose uniform rates that override individually negotiated agreements. As of mid-2026, institutions are receiving reimbursement at their negotiated rates on both existing and new awards. The legal situation has stabilized, but the political context — ongoing budget debates, congressional interest in overhead reform, and executive branch skepticism about research infrastructure costs — means this conversation is unlikely to fully disappear.

What the Court Ruling Means for Applicants Right Now

For investigators submitting grants in fiscal year 2026, the practical answer is that your institution's negotiated F&A rate applies as it normally would. Your grants office will calculate indirect costs on your MTDC at the current negotiated rate, and that's what goes into the submission. You don't need to do anything differently in your budget because of the 2025 controversy — the injunction held, and the system is operating on standard terms.

That said, a few downstream effects are worth knowing about. First, the controversy has made grants management staff at many institutions more attentive to the total cost of proposed awards, not just the direct cost line. If you're submitting a detailed non-modular budget, expect more careful review of the total cost figure, particularly if it's near an institute's historically typical award size. Second, some institutions that were directly involved in litigation or negotiations may have specific guidance about award modifications or pending awards from the period of uncertainty — your grants office is the right place to ask.

Third, and this is worth understanding for multi-site grants: subcontract budgets interact with indirect costs in a specific way. The first $25,000 of each subcontract per year is included in your MTDC base; amounts above $25,000 per subcontract per year are excluded. Subcontracts at lower-F&A institutions can therefore reduce the total indirect cost load on your award, which matters when you're trying to maximize the productive direct costs within a fixed total award ceiling. Whether that consideration should drive collaboration decisions is a judgment call — collaboration should be based on scientific need, not accounting optimization — but it's a real factor in how total costs are calculated.

How to Think About Your Budget When Policy Is Uncertain

The F&A situation has settled legally for now, but it introduced something that many researchers weren't tracking before 2025: the possibility that indirect cost policy could shift substantially during the life of an award. What does that mean practically for someone planning a five-year R01?

For most purposes, the answer is: focus on getting the direct cost budget right, and let your institution manage the indirect cost side. Your responsibility as an applicant is to propose direct costs that are accurate, appropriately justified, and sufficient for what you've proposed. The F&A component is a function of your institution's negotiated rate — you can influence the MTDC base through budget choices (equipment purchases, subcontract structure), but you can't negotiate the rate itself. An F&A policy change, if one eventually occurs through legislation or regulation, would be handled at the institutional and award management level, not by individual PIs mid-project.

Where the uncertainty does touch investigators more directly is in collaborative and multi-site grants. If you're planning a U01, program project, or cooperative agreement with multiple performance sites, the overall structure of who holds the prime award and how work is allocated across institutions can meaningfully affect the total cost profile of the award. These structural decisions are worth thinking through early — not primarily for F&A optimization, but because the conversations with program officers and co-investigators that happen early in planning tend to produce better-scoped proposals than the ones that happen six weeks before a deadline.

Working With Your Sponsored Research Office Before Submission

The F&A controversy is, if nothing else, a good argument for engaging your institution's sponsored research or grants management office earlier in your application process than you might otherwise. Most investigators treat the grants office as a submission formality — people who check boxes after the science is written. That's a real missed opportunity, and the indirect cost policy environment makes it clearer why.

A good sponsored research office can confirm your current negotiated rate by budget category (on-campus vs. off-campus rates sometimes differ), flag whether any proposed costs are likely to create questions during negotiation or award, help you think through subcontract structuring for multi-site grants, and alert you to any institutional restrictions or mandatory cost-sharing expectations that might affect your budget. They can also tell you whether your institution has received any program-specific guidance from NIH institutes about total cost expectations for particular mechanisms.

If you're submitting a detailed non-modular budget — typically required when direct costs exceed $250,000 in any year — bring your grants office in during the budget construction phase, not after you've written the budget justification. The justification is supposed to explain a budget, not rationalize one that was built without coordination. Budget problems caught by reviewers or program staff are considerably more painful to fix than ones caught internally before submission. And in a policy environment where total cost is getting more scrutiny than usual, accuracy and justification quality matter more than they did a few years ago.

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