Congress has directed NIH and the Department of Defense to maintain negotiated indirect cost rates and restrict the use of rate caps within recent appropriations legislation. The update may affect grant funding, reimbursement expectations, and agreement terms. Organizations should understand how timing and regulatory alignment influence existing and future awards.
Highlights
- Congressional Action. The 2026 Consolidated Appropriations Act and related legislation direct NIH and the Department of Defense to continue applying negotiated indirect cost rates and restrict the use of new rate limitations.
- Effective Direction. Provisions signed February 3, 2026, reinforce existing regulatory frameworks at 2 CFR 200.414 and 45 CFR 75, limiting agency authority to alter negotiated indirect rates.
- Agency Impact. The requirements apply to federal financial assistance issued by DoD and NIH, with oversight tied to appropriations language and Congressional restrictions on funding use.
- Compliance Implications. Government contractors, recipients, and subrecipients may need to review agreements for indirect rate caps and assess whether modifications or reimbursement adjustments are warranted.
- Operational Considerations. Timing of awards, existing agency guidance, and alignment with government-wide indirect cost regulations may affect funding recovery and audit readiness.
On February 3, 2026, the President signed the 2026 Consolidated Appropriations Act H.R. 7148. The Appropriations bill in Division A, Title VIII, Section 8146 for the Department of Defense (DoD) used the same wording as that used for the Department of Energy (DOE) to prohibit the use of or development of indirect cost rates that are lower than those negotiated with the organization using the process at 2 CFR 200.414. Additionally, in Division B, Title II, Section 224 for the National Institutes of Health (NIH), similar language was used to prohibit the use of or development of indirect cost rates that are lower than those negotiated with the organization using the process at 45 CFR 75.
As we explained in our prior article on DOE, the DOE used this direction from Congress to discontinue its policy guidance to limit indirect costs by capping negotiated rates.
Department of Defense (DOD)
“In making Federal financial assistance, the Department of Defense (DOD) shall continue to apply the negotiated indirect cost rates 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 such negotiated indirect cost rates were applied in fiscal year 2024.”
DOD is prohibited from spending any funds under this act or prior acts to develop, modify, or implement changes to negotiated indirect cost rates.
In addition, the 2026 National Defense Authorization Act Section 230 Prohibition on Modification of Indirect Cost Rates for Institutions of Higher Education and Nonprofit Organizations also prohibits DOD from changing or modifying indirect cost rates for grants and contracts awarded to institutions of higher education and nonprofit organizations until an assessment of the indirect rate process is completed and presented to Congress.
National Institute of Health (NIH)
“In making Federal financial assistance, the provisions relating to indirect costs in part 75 of title 45, Code of Federal Regulations, including with respect to the approval of deviations from negotiated rates, shall continue to apply to the National Institutes of Health to the same extent and in the same manner as such provisions were applied in the third quarter of fiscal year 2017.”
None of the funds appropriated to the Department of Health and Human Services or to any department or agency may be used to develop or implement a modified approach to such rate-setting provisions.
NIH has not yet removed or retracted it’s NOT-OD-35-068 Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Rates dated February 7, 2025, imposing the standard indirect cost rate on all grants of 15% pursuant to its 45 CFR 75.414(c) authority. NIH reports to the Department of Health and Human Services and, as DOE did, should therefore be discontinuing this guidance.
Effective October 1, 2025, HHS is using the government-wide regulations at 2 CFR 200 with some modifications. The HHS Regulation Changes Overview provides the background and cross-references from 45 CFR 75 to 2 CFR 200. While references in the 2026 Appropriations Act refer to 45 CFR 75 for the indirect rates, NIH is now following 2 CFR 200.414 Indirect costs.
Organizations Should Be Allowed to Use Their Negotiated Indirect Rates
The way we read the bill, it prohibits DOD and NIH from imposing limitations on indirect cost or rates. Congress stated that funds in this or prior Acts 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.
Takeaways
Recipients of grants and subawards 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).
Recipients with grants from Federal Agencies other than DOE, NASA, DOC, NSF, DOD, and NIH that have indirect rate limitations should review the Appropriation Acts for the relevant agency to determine whether the indirect rate limitations have been removed.
Supporting Compliance and Financial Oversight for Federally Funded Awards
Redstone Government Consulting, Inc. supports organizations in meeting grant compliance requirements throughout the award lifecycle, helping teams align financial practices with federal expectations. Our team of experts assist with establishing compliant cost structures, drafting and reviewing accounting and procurement policies, preparing and reviewing quarterly financial reports, and developing property management procedures that support accountability and audit readiness. We also provide training on 2 CFR 200 requirements, along with outsourced accounting support, policy and procedure development, and guidance that helps organizations maintain consistency across financial management and reporting activities.
Frequently Asked Questions (FAQs)
- What changed in the recent appropriations legislation? Congress directed certain federal agencies to continue using negotiated indirect cost rates and restricted their ability to impose new rate caps. The update reinforces existing expectations around honoring approved indirect rate agreements for grants and financial assistance.
- Who is affected by this update? The changes primarily impact organizations receiving federal grants or subawards, including higher education institutions, nonprofits, and contractors supporting federally funded programs. Both recipients and subrecipients may need to review their agreements.
- Why are negotiated indirect cost rates important? Negotiated rates determine how organizations recover overhead and administrative costs associated with federally funded work. Limitations or caps can reduce reimbursement and affect budgeting, financial reporting, and program execution.
- Does this automatically remove existing indirect cost limitations? Not necessarily. Organizations may need to review agreement terms and coordinate with the awarding agency or higher-tier organization to determine whether updates or modifications are required.
- How could this affect existing grants or closed awards? Some organizations may identify past periods where indirect rates were limited. The article explains that certain payment provisions may allow recipients to request additional reimbursement if funding remains available.
- What should contractors and finance teams pay attention to going forward? Timing of awards, agency guidance, and agreement language remain important factors. Understanding how indirect rates are applied can help reduce compliance risk and support accurate cost recovery.