On May 8, 2025, Department of Energy (DOE) issued three new policy flashes limiting the indirect costs on DOE grants to state and local government, for non-profit organizations and for-profit companies. DOE previously limited indirect costs for colleges and universities (i.e., Institutes of Higher Education) in its April 11, 2025 policy action.
Why is This Happening?
According to the U.S. Secretary of Energy, “By aligning our policy on indirect costs with industry standards, we are increasing accountability of taxpayer dollars and ensuring the American people are getting the greatest value possible from these DOE programs.” Basically, DOE wants to use its grant funding to expand scientific research and not pay significant administrative costs. DOE further states this policy will save American taxpayer dollars some $935M annually.
DOE issued a similar policy in April limiting the indirect costs to Institutes of Higher Education (IHEs) to 15% for in-process and future grants. Read more in our article, Changes Ahead for University Grants as DOE Limits Indirect Costs to a 15% Rate Cap. After DOE issued the indirect rate cap policy on IHE’s we figured it was only a matter of time before the policy was expanded to indirect costs on other grants.
What are the Limitations on Indirect Costs?
The three separate policy memorandums issued by DOE cap the indirect costs and fringe benefits on financial assistance awards as follows:
- State and Local Government 10%
- Non-profit 15% and
- For-profit 15%
Recipients will continue to utilize negotiated indirect rates in applications, however DOE will establish a maximum dollar amount that they will reimburse. Is it an indirect rate cap? Not really, entities are limited to reimbursement of all allowable, allocable, and reasonable indirect costs which is calculated as a percentage of the total project costs using the percentages above. The percentage is inclusive of total indirect costs and fringe benefits. So don’t think the indirect cost limit is only on your general and administrative (G&A) costs.
Based on our reading, all future DOE grants and cooperative agreements will come with a stated not-to-exceed dollar limit on indirect costs, based on the percentage limit stated.
What Do We Not See in These Policies?
A Specific Definition of “Indirect Costs.”
DOE uses terms such as “sometimes,” “can,” and “may” when addressing what are included as indirect costs. DOE states the following:
- State and Local Governments – “indirect costs,” sometimes referred to as facilities and administration (F&A) costs. Facilities costs can sometimes be comprised of such things as depreciation of buildings, rent, equipment, capital improvements, and other operations and maintenance expenses, while administration costs can include such things as general expenses for administrative salaries and fringe benefits such as insurance and paid time off, accounting, office supplies, payroll, and other general administration costs.” [Emphasis Added]
- Non-Profit Organizations – Same wording as state and local government above.
- For-Profit Organizations – “Indirect costs can be comprised of one or more indirect pools to include fringe pools associated with employee benefits, overhead pools that support business operations, and general and administrative (G&A) pools associated with the overall administration of a business. These indirect pools typically may include costs for health insurance, paid leave, payroll taxes, rent, utilities, professional services, IT, supplies, executive salaries, rent, training, licenses and permits, depreciation, and other general expenses not directly tied to a specific project.”
Additionally, non-profits may have an advantage as they can use the “Direct Allocation Method.” 2 CFR 200 Appendix IV allows non-profits the option to use the direct allocation method and charge all costs direct except general and administration expenses therefore reducing the amount of indirect costs. State and local government as well as for-profit companies do not have this option available to them.
How the Fringe Relate to Direct Effort Should be Treated
While DOE mentions fringe as part of an indirect pool, what if your accounting practices are to charge fringe as a direct cost? Most grant proposals allow recipients to propose fringe benefits on direct labor as direct and there is a specific line item in the budget for direct fringe. However, DOE’s policy is not really clear, while it could be interpreted that fringe on direct labor is a direct cost, DOE may interpret all fringe costs are indirect and subject to the cap, no matter what your accounting practices are.
Are There Exceptions?
Possibly, each policy states that the Secretary may modify the dollar threshold for reimbursement of indirect costs on case-by-case basis.
When is This Effective?
DOE is implementing this policy beginning May 8, 2025, for all new awards and any proposals that have been submitted or are in negotiations.
Takeaways
All State and Local Governments, non-profits organizations, and for-profit companies should assess any grant proposals that have been submitted but not negotiated and determine whether they can live with the indirect cost limitation before it is negotiated. Be prepared to address the impact of any modifications to existing grants increasing funding as the indirect costs may be limited. If you are planning on submitting a proposal for a grant in the future, you should evaluate the cost impact of the indirect rate limitation as the amount above the limitation will impact cash flow. Remember, grants and cooperative agreements come with no profit. We addressed the importance of companies reviewing their rate structure to determine if a particular category of cost could be charged direct and consider making an accounting change. Read more in our article, NIH Focuses on Indirect Costs, and DoD May Not Be Far Behind.
Understanding the Impact and Planning Ahead
Navigating these new DOE limitations requires careful planning and financial awareness. Redstone GCI supports government contractors, non-profits, and other grant recipients by helping evaluate current rate structures, identify opportunities to reclassify costs where appropriate, and assess the broader implications of indirect cost limitations. Our team is here to help you understand how these changes may affect your existing and future awards, and how to adapt accordingly.
