The Leopard is Eating My Indirect Costs!
The details matter.
I must confess, I never thought I would be writing a post on OTB about indirect costs, but here we are. As most readers may recall, the last eight-plus years of my time working for a university was in the role of Dean of Arts and Science. One of the things I had to learn about was the indirect costs associated with grants and contracts (sometimes referred to as overhead). When a professor gets a research grant, for example, the budget includes the money for the actual research project (the direct costs) but also includes money for other costs associated with the research (administrative costs, the use of other university equipment and resources, etc).
If, for example, a biology professor is awarded a grant to study a specific aspect of a specific cancer, there will be money in the grant for direct costs, like to purchase specific materials needed to do the research. But in addition to those specific costs, the university incurs facilities costs, administrative costs, and other related equipment costs that the grant’s indirect costs are meant to cover in a way that is proportionate to the grant’s overall dollar amount. Just maintaining a lab wherein such grant-funded research can be done is expensive, and the costs are ongoing.
Just having a grant, let alone dozens if not hundreds, creates accounting and other administrative costs to the university as well. None of this is so simple as just transmitting funds from the NIH to a given researcher.
While I kind of understood this in the abstract, I came to understand very rapidly the importance of indirect costs as an administrator. And I was working at a school that was way down the scale in terms of the level and prowess it or its research activities, but it did give me a glimpse into a much wider world. Now, to be clear, I am not saying that there is some sacrosanct percentage that is the correct one. Nor am I saying that the federal government can’t change the rate. But the notion that this can be done on the fly is reckless and irresponsible, which has been a hallmark of Trump administration actions over the last several weeks.
Indeed, different agencies/foundations/companies use differing indirect rates. Often the type of grant or contract would dictate the rate. And yes, the federal government tends to be the most generous in this arena. It is part of how the US government funds major research institutions.
There is no doubt that major research universities rely heavily on indirect costs to fund their overall operations and that they have budgeted based on the rates in the grants they have been awarded.
All of which leads me to this from AL.com: Katie Britt vows to work with RFK Jr. after NIH funding cuts cause concern in Alabama.
Alabama’s junior U.S. senator said she will work with President Donald Trump’s health secretary nominee Robert F. Kennedy, Jr. to “ensure our nation remains at the forefront” of innovation, research and care after funding cuts announced Friday night by the National Institutes of Health.
“Every cent of hard-earned taxpayer money should be spent efficiently, judiciously, and accountably — without exception,” U.S. Sen. Katie Britt said on Saturday.
“While the administration works to achieve this goal at NIH, a smart, targeted approach is needed in order to not hinder life-saving, groundbreaking research at high-achieving institutions like those in Alabama,” Britt told AL.com.
On Friday night, the NIH announced it was cutting payments toward overhead costs for research institutions that receive its grants, a policy that could leave universities with major budget gaps, The Associated Press reported.
Currently, some universities receive 50% or more of the amount of a grant to put toward support staff and other needs, but that would be capped at 15%, according to AP.
Many thoughts occur, including that I don’t think that Britt needs to worry about RJK, Jr. as much as she does Elon Musk and people like the new head of OMB, Russell Vought.
Another thought is that this strikes me as a situation wherein a conservative politician likes to rail against federal spending until that spending starts to be cut off to their constituents. It is like when members of Congress want to vote against infrastructure spending but then take credit for it when it passes.
It should be noted that while I am sure most readers think more about football teams than research when universities in Alabama come to mind, the reality is there is a lot research that happens in the state, with the University of Alabama at Birmingham (UAB) being a central actor in biomedical research, among other fields (including a massive NASA project to aid research conducted on the International Space Station).
UAB alone has received more than a billion dollars in NIH funding in recent years, AL.com’s John Archibald reports. UAH also receives NIH funding, university spokesman Russell Nelson said Saturday but couldn’t say how much.
Steve Ammons, president of the Birmingham Business Alliance, said he was unsure of the specifics of the cuts, “but certainly any reduction in funding would be a hit to UAB since they were in the top 30 for 2024 for NIH funding. Certainly something we need to watch and make sure we advocate for the state’s largest employer.”
In terms of many of Britt’s constituents, we should note the following.
Birmingham Mayor Randall Woodfin also said he was trying to assess the impact. He said the cuts would first hurt UAB’s ability to save lives, now and in the future, and potentially stifle technological growth that not only makes us healthier, but sustains the economy.
“People need to be reminded that UAB is not just the largest employer in the city, it’s the largest employer in the state,” he said. “So as it relates to our state’s GDP, as it relates to our economic growth, as it relates to our future around genomics, personalized medicine, and where health care is going, NIH research dollars play a massive, significant role. And without a doubt, without knowing numbers yet, I can tell you this early, just receiving the information, those in the UAB family have a right to be concerned.”
More on UAB, which is just one example nationwide, here (also via AL.com): NIH cuts threaten UAB, Birmingham and beyond.
And it’s not just UAB. According to United for Health, NIH grants in Alabama in 2023 alone supported 4,769 jobs for an economic impact of $909 million and went to institutions from Mobile to Huntsville and in between. They impact almost 13,000 jobs at more than 1,200 businesses. Including HudsonAlpha.
People losing their job won’t make eggs cheaper, by the way.
More on the indirect cost issue from CNN: Researchers decry ‘disastrously bad idea’ as NIH slashes payments for research infrastructure.
The US National Institutes of Health is lowering the maximum “indirect cost rate” that research institutions can charge the government, the agency said late Friday – a move that scientists said could be devastating for the nation’s position as a research leader.
The average NIH grant to an institution has typically had about 30% earmarked for infrastructure costs such as facilities, maintenance and security; some institutions charged up to 60% or more. The new NIH policy will cap that indirect cost rate at 15%, effective immediately.
“Effective immediately” is rather important, as we are talking about already set budgets and plans that will now have to be radically rethought. This is highly disruptive. And, again, these are already appropriated funds.
See, also, Heather Cox Richardson.
NIH is the nation’s primary agency for research in medicine, health, and behavior. NIH grants are fiercely competitive; only about 20% of applications succeed. When a researcher applies for one, their proposal is evaluated first by a panel of their scholarly peers and then, if it passes that level, an advisory council, which might ask for more information before awarding a grant. Once awarded and accepted, an NIH grant carries strict requirements for reporting and auditing, as well as record retention.
In 2023, NIH distributed about $35 billion through about 50,000 grants to over 300,000 researchers at universities, medical schools, and other research institutions. Every dollar of NIH funding generated about $2.46 in economic activity. For every $100 million of funding, research supported by NIH generates 76 patents, which produce 20% more economic value than other U.S. patents and create opportunities for about $600 million in future research and development.
As Christina Jewett and Sheryl Gay Stolberg of the New York Times explained, the authors of Project 2025 called for the cuts outlined in the new policy, claiming those cuts would “reduce federal taxpayer subsidization of leftist agendas.” Dr. David A. Baltrus of the University of Arizona told Jewett and Stolberg that the new policy is “going to destroy research universities in the short term, and I don’t know after that. They rely on the money. They budget for the money. The universities were making decisions expecting the money to be there.”
I recommend the whole thing, but the numbers she cites are worth noting, as is the notion that the 2025ers (like, I would note, Vought) is really launching an ideological battle (“leftist agendas,” oh my!) and not just cost-cutting.
These actions are damaging to a key US resource. This is not making America great. It, like all of this haphazard nonsense, is going to damage American greatness, power, influence, and reputation.
The thing that is so, so very maddening about ALL of this is that this information IS. NOT. SECRET.
Katie Britt and every other Trump-enabling Republican Senator or member of Congress either knew, or should have known, about this. As a state-level legislative aide, I had to manage a near-constant parade of lobbyists coming through our office, and not one of them was shy about sharing details on how state funds were spent.
If Katie Britt is just now grasping that gee, cutting funding to a research university might have consequences for both the research and her constituents, she deserves every bit of criticism that is coming her way.
Being profoundly ignorant is not the flex she should be striving for, and yet here we are.
The ironic thing is that if Project 2025 is successful, it’s likely going to become like the abortion issue where catching the car turned out to be really bad for the Republican dog.
While almost no one really wants to admit this, the primary activity of the federal government in our current society is transferring money from highly productive blue areas to highly unproductive red areas. The only reason those blue areas are okay with this arrangement is because there are a lot of figleafs creating the illusion of shared interest, like NIH funding.
The more of those figleafs the Republicans are successful at eliminating, the more it’s going to be obvious that the federal government is just naked tribute, and the more blue areas are going to start questioning why they cooperate with this arrangement.
@Stormy Dragon: I hope you’re right. I need a silver lining to all of this destruction.
It’s beginning to feel like reckless Welchian or general techbro cost cutting to drive up share value.
I’ve always been astonished at the double-think required to believe that increased private sector profits create jobs, but somehow giving money directly to people who are going to use it exclusively to employ other people and purchase goods… does not.
This is poor, stupid management. I have no doubt that some of the indirect costs being charged are not legitimate. I have no doubt that many could be cut. However, it’s a sign of incredibly stupid management to assume that everyone’s indirect costs can be the same. If you wanted to do this correctly you would look at costs across the country and what they are for different areas of researchers. You would find the outliers, the average costs and set a percentage based upon actual findings. Then you would let know people applying for grants what level of indirect costs would be allowed.
So this is stupid, but only if you assume they were trying to cut some costs. In reality this is probably not stupid but intended to harm academic centers, especially medical research, as science and medicine are liberal, progressive stuff.
Steve
This also torches both pharma and ag research – both of those industries have “privately” developed exactly zero drugs since forever. Development of everything is from grants to colleges [not just NIH, also other departments like Energy which funded one of my grad school research projects] followed by the profs themselves privately funding acquisition of a patent on anything interesting from that research, followed by marketing that patent.
The place where I had my first job out of undergrad, Cornell’s patent marketing firm, owns the first patent issued for GMO crops – corn, licensed exclusively to Monsanto. Monsanto didn’t fund any part of the development, they only came to the table after the product was viable.
You’ve heard of Ozempic.. the VA is to thank for that because they are one of few places funding large animal research.
The school owns the rights to the IP, the prof and the school split any revenues because you can [you should] think of research at a university as a VC that has about a 0.1% hit rate.. but you have no visibility into what specifically is that 0.1% on the front end of that research, so if you want to Be A Leading Research Institution, you’re also funding the 99.9% that goes nowhere… cut it, and goodbye Leading at anything.
The easiest case of measuring overhead was when I worked for a company’s research organization. We were housed in a separate building, so you could start by adding up the lease, power, water, sewage, maintenance, janitorial, administrative aides, printers, etc. Payroll, purchasing, legal, and IT services from corporate were pretty simple to estimate. IIRC, overhead came to between 35-40%.
15% is startup territory, where people are stacked on top of each other, lots of other things are skimped on, and a good chunk of the overhead is really unpaid overtime.
@Gavin: I would note, too, that while the hit rate for big discoveries/products is small, we need a lot of basic research to help build to those kinds of outcomes.
@Michael Cain:
Indeed.
And there is a lot of that in academia.
@steve:
For Trump, possibly. For everyone else involved, it’s not stupid — destroying the firm is the goal, and the mismanagement is deliberate. Musk’s goal is not “efficient government” — Musk’s goal is to be the government, and he’s eliminating rivals.
Birmingham, Alabama, is not the only center of biomedical research. Seattle, Baltimore, Boston, and many others are on the chopping block also. Is Sen. Britt looking to lift the burden of these cuts from all of medical research, or is she seeking a special exemption for her home state?
The objections to cutting the NIH surely apply to the whole gamut of Musk machete slashes to the government. The NIH cuts are simply the most obvious.
I don’t think America is ready to give up leadership in research or other areas.
You and me both! And if indirects are being discussed on a political blog, things must be very bad indeed.
For some context, I’m a tenured full professor at an R1 institution. My lab conducts clinical and laboratory research on a few of the most pressing public health issues.* We are a mix of undergrads, PhD students, postdocs, early career scientists, clinicians, and support staff. Most of my research is funded by the NIH.
As usual, Steven does a great job detailing the key points about indirects. I want to add one other bit that doesn’t get as much attention: indirects that are returned to investigators.
Depending on the institution and the academic unit in that institution, principal investigators of NIH grants may get some of the indirects returned back to them. This might be something like 5-10% of the total indirect costs.
Note, this 5-10% is not in the form of salary to me, the principal investigator, but rather in the form of a research account to be used in support of research activities. In my lab, I spend a lot of this money on trainees — to support their projects, to fund their attendance at conferences or special trainings (eg, statistics workshop), etc.
I also use it to conduct pilot projects — many of these “fail” but a few provide the foundation for future large scale, grant-funded research.
In other cases, I use it to buy equipment, software, etc that are otherwise difficult/impossible to purchase by any other means.
Sometimes I use it to keep trainees and staff at full-time effort while we’re waiting for new grants to hit. This is happening right now with post-docs who, as a result of the recent NIH shutdown, are in limbo waiting (hoping) for their grants to be reviewed and/or final funding decisions to be made. It’s still not clear if these suddenly canceled meetings/decisions will ever occur.
I write all this in hopes of shining further light on the real human implications. This is not an abstraction. This has real, um, direct costs to human lives. And the knock-on effects are too many to even try and comprehend.
A 15% indirect rate at the institution level will be crushing to the research engine of our country. And by consequence, to the health and well-being of our communities. It will devastate my university and my lab.
Almost forgot to say that there is a real discussion to be had about the wisdom of the current system. I’ve got many (!!) gripes with the NIH, how grants are reviewed and funded, etc. Please, let’s have that discussion at the national level. But what’s happening now… that is just malicious and destructive and other things I’d best leave unsaid.
*For lots of reasons, I prefer to not be any more specific than that.
Ostensibly, to the public, this 2025 rampage is about attacking government waste of the “Deep State” (as cover for their real ideological agenda).
But, I’ve spent a good bit of time “under the hood” of large private sector organizations during startups, ramps ups, and ramp downs as well as day-to-day operations, and there is plenty of waste and efficiency to be seen. Sometimes staggering amounts.
The private sector may have means of burying it into other operations or building it into margins, that do not exist for public entities and agencies (with which I did not interact to any significant degree). I personally, ran a very tight ship for my operations, for which scale certainly allows. Nonetheless it was eye opening.
So color me highly skeptical of these “privateers” bringing efficiency to platforms they don’t really understand, and missions that they don’t really care about.
The questions to ask: Efficiency for whom? The end-user/clients? Or, those seeking greater tax cuts for themselves? What is the mission, the whole mission of the particular agency?
The mission of healthcare research agencies like NIH (or universities) , is likely outside the comprehension of these mercenary beancounters
Are they going to cap other cost reimbursement contracts as well? Like, I don’t know, Elon’s companies fed contract indirect rates? Or better yet, they sending auditors out to his offices to validate his rates? I doubt it….
Though this is actually tied to the USAID closure, a close friend of mine announced the closure of his Soy Bean Lab here at our midwestern research university, putting an end to years of research and development of heat resistant soy beans that improve the ability of the global south to better feed themselves and putting an end to 30 good-paying jobs.
Good management is specific. If you think USAID is misspending money, bring the receipts and eliminate that expenditure. Just closing it is lazy (and cruel) and suggests another agenda. Similarly, if some institution is gouging the government on its overhead, reduce or end the grants to that agency. Putting a single below-market cap on every funded agency is lazy and suggests another agenda.
@Mimai:
Very good points, thank you.
A few decades ago I worked as a contract and grants analyst at the University of California, in support of many science department grants. My recollection is that, at that time, the approved indirect cost rate (IDCR) for our NSF grants was about 40%, which some people thought high, that is until they found out that the approved rate for sponsored projects at elite private universities (i.e, Harvard) was close to 100% (dollar-for-dollar).
A few years later I worked to support contract and grants at a health policy NPO (very technical wonky stuff) where we had to calculate, justify and negotiate a IDCR with our regional federal contract officer. It was arduous, we managed to get a rate of about 20%, which is less than that of a big public university, which is entirely expected as a university has an extensive infrastructure that supports research projects.
Most people have no idea just how technical this stuff is.
China must be grinning from ear to ear. There’s already a lot of areas of technology where a lot of the prior art that I uncover are patent applications from China (A.I. used with vehicles for battery control, for instance. Or drones. So now we’re withdrawing from yet another area of research.
This isn’t going to mean that patents won’t be filed in the field—it’ll just mean that US corporations/universities won’t be filing them.
@al Ameda:
Hot damn, you were in the deep end!
Thank you for your service.
I say that cheekily, and I mean it earnestly.
@Mimai:
Thanks for sharing that background. From past context clues I had guess you were involved with biomedical research. Great to see we have another thoughtful academic participating here.
As a lowly research prof at an R1, I’ve never seen morale so low. I’m in a red state where there won’t be a dime of money from the state, we’re viewed as the enemy by the state GOP, despite the fact that the only reason the state isn’t a complete financial debacle is the broad range of companies developed via state universities and companies moving here to poach new graduates.
Every faculty member is looking at options to move, preferably abroad. Every graduate student is trying to find options outside of academia (or at least the US). Every postdoc is absolutely screwed, no new hires in academia, limited prospects in industry. I don’t expect to have a job in a year and pretty much everyone here feels the same way.
Even if we’re all wrong and things improve? The damage is largely done.
Some of the overhead that has to get charged to something:
– Coordination and review of grant applications
– Ensuring proper reports are filed (status reports, etc) to NIH (or whomever) – this is a bloat that could be addressed
– Filing of patents (sorry, researcher has little or no experience in this area)
Some of this is just accounting waving of the hand, the cost may now be charged to the project as a line item rather than a general indirect cost = lots more accounting paperwork that will accomplish little.
A friend from high school (PhD EE) used to run the patent office for a major State University (Land Grant). A cousin just retired as a biomedical research professor.
This is actually worse than what Project 2025 proposed. They had 15% as the floor to negotiate upward and wanted to do it legally through Congres not adhoc through Musk’s minions.
@Mimai:
This is an excellent point that I did not expound on in the OP. My former institution did not send funds back to the PI (although I advocated for such). Some of the indirect did come back to my office, which I was able to use as you describe. In real terms we aren’t talking about a lot of money, but it could be used for equipment and supporting student research and faculty development. It mattered.
See also, USAID and farmers.
Is still seems amazing how well the GOP has managed to get large block of the electorate to consistently vote against their interests.
@Mimai:
I wanted to highlight this piece of Mimai’s (excellent) comment, because analogous comments apply across a wide range of public policy issues. I don’t know of any liberals who think we’re getting it exactly right in how our government currently does anything. A lot of that is due to sabotage by the GOP, but not all of it. Democrats are perfectly capable of doing the right thing the wrong way, over and over.
The main differences I see are (1) the big one, that Democrats actually want government to work and Republicans do not, and (2) the little one, that Democrats care more about how well the system achieves its goals than they do about how much it is abused, while Republicans are willing to do without the benefits in order to avoid even low levels of abuse*. This pattern reveals itself over and over, in tax policy and administration, in immigration policy, in federal responses to the drug crisis, in public health, etc.
*Abuse by billionaires apparently doesn’t count.