The NIH recently released Supplemental Guidance (NOT-OD-25-068), announcing a 15% cap on indirect cost rates for institutions of higher education (IHEs), effective February 10, 2025. This change applies both to new grants issued after this date and existing grants for all go-forward expenses. If you’re an IHE or a grant applicant collaborating with one, this policy will impact your grant budgeting and overall project planning.

What Is Changing: 15% Indirect Cost Cap Explained

As part of its efforts to ensure maximum efficiency in allocating federal funds, the NIH will enforce a 15% indirect cost rate cap on all grants involving IHEs. Here’s a closer look at the core aspects:

1. Applies to New and Existing Grants:
   • For new NIH grants issued after February 10, 2025, the 15% cap will be applied from the start.
   • For existing grants, the cap will apply only to future expenses incurred from February 10, 2025, onward. Past indirect cost charges will not be retroactively adjusted.
2. Why 15%? NIH believes this rate provides a reasonable and realistic recovery of indirect costs while ensuring that grant funds are primarily spent on advancing its scientific mission. Indirect costs typically cover facilities, administrative support, utilities, and other non-direct expenses.
3. Not Retroactively Applied: While NIH acknowledges it has the authority to apply the cap retroactively under 45 CFR 75.414(c), it will not require adjustments to expenses incurred prior to February 10, 2025. This decision is intended to minimize disruption for ongoing projects.

Why This Matters to You

1. Reduced Recovery for Indirect Costs: IHEs with previously negotiated indirect cost rates exceeding 15% will see reduced funding for facilities, administrative overhead, and other indirect expenses. Institutions accustomed to higher rates (e.g., 30%-50%) will need to restructure internal budgets and reallocate resources to absorb the reduction.
   • 💡 Tip: Evaluate your current cost structure and identify areas to streamline administrative expenses.
2. Potential Impact on Collaborative Projects: Grant applicants working with IHEs—particularly under STTR, SBIR, or R&D collaborations—must account for this cap when developing project budgets. Failure to properly allocate indirect and direct costs could lead to budget shortfalls or compliance issues during project implementation.
   • 💡 Tip: Early collaboration with IHE partners will be essential to ensure budgets are realistic and reflect the new cap.
3. Competitive Pressure for Funding: IHEs with large, resource-intensive projects may face challenges meeting their research objectives under the new constraints. This could lead to increased competition for grant funding, as institutions attempt to secure direct funding to cover gaps.
   • 💡 Tip: Explore additional non-dilutive funding sources to supplement indirect cost recovery.

How to Prepare

1. Consider External Funding Options: With reduced indirect cost recovery from NIH, IHEs, and collaborators may benefit from pursuing supplementary grants or non-dilutive funding opportunities to offset administrative costs.
2. Assess the Financial Impact: Evaluate your current and future NIH grants to determine which projects will be affected by the cap. Work with your finance and grant management teams to project indirect cost recovery losses and identify areas where costs can be optimized.
3. Revisit Budgeting Strategies: For future NIH proposals, ensure your budget narratives clearly define the allocation of direct and indirect costs, highlighting how funds will be maximized to achieve project goals within the 15% cap. Seek NIH guidance if you anticipate challenges.
4. Strengthen Direct Cost Justifications: Since indirect cost recovery will be limited, applicants should ensure their direct cost requests are comprehensive and thoroughly justified, including personnel costs, materials, and any critical project components.
5. Collaborate with IHE Partners Early: For collaborations involving universities or research institutions, work together early to address budget constraints and develop a shared understanding of responsibilities. This will help avoid misunderstandings or funding gaps mid-project.

Learn more about NIH’s recently released Supplemental Guidance (NOT-OD-25-068)

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