Congress and recent appropriations legislation have restricted federal agencies from applying indirect cost rate caps on grants, reinforcing the use of negotiated rates. The change affects DOE and other agencies and may require organizations to review award terms, reimbursement eligibility, and timing considerations tied to indirect cost recovery.
Highlights
- Appropriations Act Restrictions. The 2026 appropriations legislation prohibits DOE and several federal agencies from applying or developing indirect cost rate caps, reinforcing the use of negotiated indirect rates under federal grant regulations.
- Policy Flash Withdrawal. On January 27, 2026, the Department of Energy rescinded multiple policy flashes that had imposed indirect cost limitations, aligning agency guidance with Congressional direction.
- Restoration of Negotiated Rates. Grant recipients and subrecipients may seek reimbursement based on negotiated indirect cost rates rather than previously imposed caps, which could affect prior and future award administration.
- Agency Scope. The restrictions extend beyond DOE and apply to agencies such as Commerce, NASA, and NSF, signaling broader federal oversight of indirect cost recovery practices.
- Compliance Considerations. Organizations should review award terms, indirect rate provisions, and funding availability, as timing of agreements and modifications may affect reimbursement eligibility and financial reporting.
On January 27, 2026, the Department of Energy announced in Policy Flash (FP) 2026-30 that its Policy Flashes on indirect rate/cost caps are no longer in effect. The H.R.6938 - Commerce, Justice, Science; Energy and Water Development; and Interior and Environment Appropriations Act, 2026 states in Division B Title III Section 313 “the Department of Energy shall continue to apply the indirect cost rates, including negotiated indirect cost rates, as described in section 200.414 of title 2, Code of Federal Regulations, including with respect to the approval of deviations from negotiated indirect cost rates, to the same extent and in the same manner as was applied in fiscal year 2024.” DOE is prohibited from spending any funds under this act to create new, existing, or apply changes to the negotiated indirect cost rates. Division A Title V Section 542 of the bill also prohibits the Department of Commerce, the National Aeronautics and Space Administration, and the National Science Foundation from limiting indirect cost rates.
The following DOE policy flashes (PF) have been discontinued:
- Policy Flash 2025-22 Adjusting DOE Grant Policy for Institutions of Higher Education (IHE)
- Policy Flash 2025-25 Adjusting DOE Financial Assistance Policy for State and Local Governments Financial Assistance Awards
- PF 2025-26 Adjusting DOE Financial Assistance Policy for Nonprofit Organizations Financial Assistance Awards
- PF 2025-27 Adjusting DOE Financial Assistance Policy for For-Profit Organizations’ Financial Assistance Awards
- PF 2025-38 Implementation of Indirect and Fringe Benefits Cost Reimbursement Limits on Financial Assistance Awards
Pushback from Organizations
It was a matter of time before DOE removed the indirect rate caps. There was pushback from many organizations. Universities and State and local governments filed lawsuits to stop the indirect caps. The courts issued orders prohibiting DOE from applying its guidance until the cases were final. The Small Business Technology Council (SBTC) issued a letter to DOE indicating the substantial harm to technological development that the rate cap would cause. Behind the scenes, the Joint Associations Group (JAG) developed the FAIR model for grant recipients to recover related grant support costs that are normally charged as indirect costs. The FAIR model was sent to Congress for consideration. (For more details on DOE’s guidance, see our article, “Department of Energy is Placing a CAP on Reimbursement of Indirect Costs on Federal Awards”)
Organizations Will Continue to Use Negotiated Indirect Rates
DOE’s removal of its indirect rate caps/indirect cost limitation guidance should allow recipients/subrecipients of DOE grants to receive reimbursement based on their negotiated indirect cost rates instead of any previously imposed limitations. The way we read the bill and the January 27, 2026, DOE PF-2026-30, it prohibits DOE from placing limitations on indirect costs/rates in prior and future years. Congress and DOE state “funds appropriated in this or prior Acts or otherwise made available … may [not] be used to develop, modify, or implement changes to … negotiated indirect cost rates.” Recipients and subrecipients that received federal awards or subawards with indirect limitations should contact the granting official or higher-tier organization to get their agreements modified to remove such limitations. If the award or subaward was completed and closed out, the provisions of 2 CFR 200.345(a)(3) should be used to get additional payment if funding is available. Going forward, organizations should ensure no indirect cost limitations are included in any awards or subawards.
This is a huge win for universities, non-profits, state and local governments, and for-profit companies. For-profit companies and small businesses with SBIR/STTR programs were also impacted by the 15% cap on indirect and fringe benefit costs.
Takeaways
Recipients of grants, subawards, or SBIR/STTR awards should review their agreement documents for terms and conditions that limit indirect costs or rates and have the Federal Agency or higher-tier organization modify the agreement to remove references to indirect cost limitations or rate caps. In addition, coordinate with the Federal Agency or higher-tier organization to ensure funding is available to obtain reimbursement for the difference between negotiated indirect rates and any limitations or rate caps for prior periods. This should address limitations affecting organizations at all levels (i.e., recipients and subrecipients).
Redstone Government Consulting, Inc. supports organizations in meeting grant compliance requirements both before and after award. Our team of experts assists with establishing cost structures, drafting and reviewing accounting and procurement policies, preparing and reviewing quarterly financial reports, and developing property management procedures. Additionally, Redstone GCI delivers training on 2 CFR 200 regulations.
Frequently Asked Questions (FAQs)
- What changed with indirect cost rate caps on federal grants? Congress directed certain federal agencies to stop applying indirect cost rate caps and to continue using negotiated indirect cost rates. As a result, prior agency guidance that limited indirect recovery has been withdrawn.
- Who does this apply to? The change affects recipients and subrecipients of federal financial assistance, including universities, nonprofits, state and local governments, and for-profit organizations participating in grants or SBIR/STTR programs.
- Does this mean organizations can recover more indirect costs now? The changes to DOE’s policies should allow organizations to be reimbursed using their negotiated indirect rates instead of capped amounts. However, organizations will need to contact the Federal agency/recipient to determine funding availability.
- What should organizations review in their agreements? Teams should review their award terms and conditions for language that limits indirect costs or references prior rate caps. Existing agreements may need to be updated to align with the current policy direction.
- How does this affect completed or closed awards? 2 CFR 200.345(a) does provide for the Federal agency/recipient to make financial adjustments to closed awards, such as resolving indirect cost payments. Organizations need to coordinate with the Federal agency/recipient.