On April 11, 2025, the Department of Energy (DOE) announced a new policy action to limit indirect costs of DOE research funding to Institutes of Higher Education (IHE) to 15%. DOE projects this change to generate over $405 million in annual savings. As expected, a judge has issued a Temporary Restraining Order (TRO) on this policy. This comes on the heels of the National Institute of Health (NIH) issuing Supplemental Guidance to the 2023 NIH Grants Policy Statement: Indirect Costs dated February 7, 2025, limiting indirect costs on current and future grants to 15%. A Temporary Restraining Order (TRO) is still outstanding on the NIH policy.
Why is DOE Limiting the Indirect Costs?
DOE funds research projects to expand innovation and scientific research with a portion of the funding going to indirect costs. Indirect costs for universities include facilities and administration costs. Facilities costs are comprised of depreciation on buildings, equipment, capital improvements, and operations and maintenance costs. Administration costs are general expenses such as director’s office, accounting, etc. DOE found that the average indirect rate at colleges and universities is more than 30%, “a significantly higher rate than other for profit, non-profit and state and local government grant awardees.” By limiting the indirect rate to a standard 15%, the funding will be used for direct research and improve efficiency and generate cost savings for the American taxpayers.
The U.S. Secretary of Energy stated, “The purpose of Department of Energy funding to colleges and universities is to support scientific research – not foot the bill for administrative costs and facility upgrades.”
The Department of Health and Human Services and the Department of Defense Office of Naval Research are the two agencies that negotiate the majority of indirect rate agreements for Institutes of Higher Education.
Is This for New Awards Only?
Clearly – “All future Department grant awards to IHEs will default to this 15 percent indirect cost rate.” The bigger question is the impact on previously awarded grants. Unfortunately, we believe DOE will be applying this limitation to grants already awarded. Even though the wording is not as direct as NIH was, DOE states “the Department is undertaking action to terminate all grant awards to IHEs that do not conform with this updated policy.”
Are More Than Institutes of Higher Education Impacted?
DOE states they are initially taking this action only with respect to Institutes of Higher Education per 2 CFR 200.414(c)(1).
What does that mean? Well first of all, DOE’s study shows that Institutes of Higher Education have a 30% indirect rate which they claim is significantly higher than for-profit companies. We are not aware of many for profit companies that have an average indirect rate less than 30%, maybe if you only consider the General and Administrative (G&A) rate. For profit companies tend to allocate much more cost than a non-profit organization due mostly to the large number of projects (i.e., contracts and agreements – final cost objectives).
If the purpose of DOE’s policy is to spend more federal funds on direct costs, we believe it is only a matter of time that this change will be applied to grants awarded to non-profits and for-profit entities and possibly DoD grants. Non-profit entities can use the direct allocation method in 2 CFR 200 Appendix IV B.4. so indirect costs can be limited.
Are Institutes of Higher Education Subawards Impacted?
As for subawards to Institutes of Higher Education, the DOE policy is silent. However, it is very likely that DOE will expect this to flow down to subaward with Institutes of Higher Education.
Takeaway
We recommend Institutes of Higher Education perform an analysis to determine the impact of the 15% cap on in-process and potential future grants. We recommend Institutes of Higher Education review their practices for classifying costs as direct vs. indirect. See our article on evaluating indirect costs for DoD contractors as a helpful outline (NIH Focuses on Indirect Costs, and DoD May Not Be Far Behind). While it focuses on indirect costs at defense contractors, these costs are similar to many organizations including Institutes of Higher Education.
Support for Managing Indirect Rates and Grant Compliance
Redstone Government Consulting assists organizations in navigating the complex requirements of grant compliance and indirect rate management. Our team can review your current rate structure, identify opportunities to appropriately reclassify costs from indirect to direct, and evaluate your indirect cost rates for consistency with federal regulations. In addition to indirect rate and cost analysis, Redstone GCI offers specialized consulting services to support compliance with 2 CFR 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Whether you need assistance with grant management, cost classification strategies, or understanding how recent changes impact your organization, Redstone GCI provides tailored solutions to strengthen compliance and improve cost recovery.
