We knew this was coming based on the June 30, 2025, PF 2025-38 (FAL 2025-05) Implementation of Indirect and Fringe Benefits Cost Reimbursement Limits on Financial Assistance Awards guidance to Granting officers. However, we believed the May 15, 2025, preliminary injunction issued by the U.S. District Court for the District of Massachusetts in the case of Association of American Universities et al. v. U.S. Department of Energy would slow down DOE‘s implementation of the cap on indirect cost recovery for more than just Institutions of Higher Education (IHEs). Sadly, that is not the case.
Department of Energy (DOE) has issued what is referred to as DOE Policy in a document titled Indirect Percentage (%) Cap Against Total Award Fact Sheet. While it has the DOE letterhead, the policy is undated, there is no signature or policy flash number, and it was not available on the DOE website. However, DOE has provided the document to non-IHE recipients responding to new Funding Opportunity Announcements (FOAs). It provides definitions, frequently asked questions and examples.
We believe the other agencies will follow DOE’s lead and apply similar caps on indirect costs of nonprofit, state and local governments, and for-profit organizations. The policy doesn’t address DOE FAR-based contracts, but we see a train wreck on the horizon. Read more in our article, “NIH Focuses on Indirect Costs, and DoD May Not Be Far Behind.”
Does the DOE Policy Impact My Organization?
If you are a nonprofit, for-profit organization or state and local government that receives Federal awards from DOE, it impacts you. Institutes of Higher Education (IHEs) are not impacted by the DOE cap because there is a preliminary injunction in effect for IHEs. The cap is applicable to grant awards and all subawards. Yes, subrecipients will also be held to the cap. To be clear, you will be responsible for holding your subrecipients to the cap.
How is it Supposed to Work?
The cap will be applied to the total award amount, including any cost share. This represents the maximum amount of indirect costs that DOE will reimburse. Subrecipients will need to apply the cap as part of their submission to the recipient. DOE has provided the following math formula to calculate the indirect cost cap as follows:
- Let (D) = Direct Costs
- Let (I) = Indirect Costs
- Let (T) = Total Award = D + I
- Let (C) = Indirect Cost Cap Percentage (e.g., 0.15 for 15%)
- Solving for the Maximum Indirect Cost Cap: I
Do We Still Use Our Negotiated Indirect Cost Rate Agreement (NICRA)/Provisional Billing Rates?
Recipients and subrecipients will continue to use their NICRA, de minimis rate, or provisional indirect rates to estimate grants and subawards and to record costs in the accounting system. DOE will only reimburse indirect costs up to the cap.
What is Considered Indirect?
The DOE policy includes both indirect cost and fringe benefit costs in the cap. What if my accounting practice is to charge fringe costs direct to grants? DOE has included fringe costs in the cap regardless of your accounting practice.
Are There Any Exceptions?
The policy does state that the dollar threshold for reimbursement of indirect costs to for-profit organizations may be modified if necessary and appropriate. But this is only if the DOE Secretary approves it through the Granting Officer and the Head of Contracting Activity. But good luck with that, as every for-profit will want to pursue this approval.
Subrecipient and Contractor Determinations
We believe there is going to be oversight on your determination of whether funds are provided to a subrecipient or a contractor. 2 CFR 200.331 requires you to document your determination. A subrecipient is responsible for performing part of the project for the recipient, while a contractor provides goods and services. A subaward will be subject to the DOE cap. On the other hand, a contract is not subject to the DOE cap. While this determination may seem straightforward, it is not always clear, so thorough documentation is essential. Agency Inspector Generals have identified non-compliances where the determination has not been documented.
What is in the Pipeline?
The Joint Associations Group on Indirect Costs (JAG) created the Financial Accountability in Research (FAIR) model. The purpose of the model is to assist organizations in classifying indirect costs that support or are linked specifically to research to be charged direct. They address three components: direct costs, those indirect costs linked to a project that can be charged direct (e.g., compliance with animal subject projections, clinical trial monitoring, system security plans, award monitoring and oversight, journal subscriptions that are project-specific, and research space that supports a research activity) and administrative costs. The JAG is engaging with Congress on the model, and they are hopeful there will be proposed legislative language for implementation. So, we will wait and see.
Takeaways
Organizations that receive new DOE grants should evaluate the cap amount, its impact on their bottom line, and determine whether to submit the grant. You will need to educate subrecipients on the indirect cap early in the process, as the subrecipients you work with may decide not to play in the grant world. It is important that you document the classification of a subrecipient or contractor in accordance with 2 CFR 200.331 prior to award, so the cap is understood upfront. Improperly classifying a subaward as a contract can lead to significant costs to be reimbursed (i.e., indirect costs over the cap) if an agency determines it was incorrectly classified.
Evaluate your indirect costs. Are there any steps you can take now to reclassify indirect costs as direct or at least directly allocate to grants? 2 CFR 200 Appendix IV Indirect (F&A) Costs Identification and Assignment. Rate Determination for Nonprofit Organizations allows for various indirect allocation methods, including the Direct Allocation Method, which reduces the administrative indirect costs. This model is similar to the proposed FAIR model. However, the direct allocation method is not an option in the regulations for state and local governments and for-profit organizations. You need to think outside the box.
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, our team of experts delivers training on 2 CFR 200 regulations.
