What if Congress Doesn't Specifically Reject NIH Indirect Cost Changes?

This post will be slightly wonky and in the weeds (unlike everything else we write at the Good Science Project!). Bear with me.

In a recent piece that was widely read in DC circles, I made the case that any attempt by NIH to limit indirect costs to a flat rate (at any level) contradicts Congressional budget language that was adopted in 2017 and has continued ever since. The previous Trump administration tried to limit NIH indirect costs to a flat rate, and a Republican Congress adopted language solely to prevent NIH from ever doing any such thing again.

But we’re still waiting for a final FY2025 budget, and the political environment seems different today than in 2017.

What if Congress chickens out? That is, what if it removes the language instructing NIH/HHS not to change the methods for calculating indirect costs?

It would still be illegal to impose a flat rate on all grants, whether 15% or 50%. That’s just not how anything works under federal accounting regulations. If federal agencies could just impose a flat rate by fiat, out of thin air, there would be no point to having any of the extensive accounting principles in 2 C.F.R. 200.

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Isn’t there a counterargument, you might ask? After all, NIH has pointed to a specific provision that allows it to make exceptions—45 C.F.R. 75.414(c)—which I’ll quote in its entirety here:

This mirrors a provision in 2 C.F.R. 200, which applies to all federal agencies (not just HHS).

What does this provision do?

It allows an agency to make exceptions to the negotiated indirect rate.

That’s it. Not a new rule, not an across-the-board practice, not an excuse to ignore all principles of accounting—just exceptions, where justified.

This provision has been so rarely used that it has never been cited in any court case.

I can only find one example online where HHS even mentioned it before (i.e., this Covid bulletin that briefly mentioned that HHS could use its authority here to extend current indirect rates so as not to bother with renegotiation for the moment). I also found one document about the parallel provision under 2 C.F.R. where the Department of Commerce made an exception for certain limited grants, such as the “NIST Summer Institute for Middle School Science Teachers Program.”

As far as I can tell, no one has ever been so brazen as to claim that a provision about limited exceptions actually allows an agency to announce a new flat rate across the board, without any negotiation or any consideration of any accounting principles whatsoever.

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Let’s dig into the regulation a little more closely to see when and if an agency like NIH can make an exception to indirect rates:

1. The exception must be for a subset of grants, not all grants

The first thing to notice is that NIH can make an exception for indirect rates only for “a class of Federal awards or a single Federal award.”

Nothing here says NIH can dictate the indirect rates for all awards. That would make all the rest of the accounting principles and negotiating rules pointless.

2. The exception has to be based on documented justification

NIH can make an exception only with “documented justification.”

What does that mean? It means this: NIH “must implement, and make publicly available, the policies, procedures and general decision making criteria that their programs will follow to seek and justify deviations from negotiated rates.”

Did NIH do that here? No. To my knowledge, NIH has not published any set of “policies, procedures and general decision making critera” by which it will make “deviations” from the negotiated indirect rates.

Moreover, any announcement that NIH, by simple fiat, has decided to use a flat rate for all grants obviously doesn’t count, because that wouldn’t be a “deviation” from a negotiated rate, nor would it be a new set of “decision making criteria” that others could use to determine where deviations apply.

This provision is about how “deviations” are to be justified, not about allowing an agency to adopt a new across-the-board rule that is the opposite of a “deviation.”

3. The exception has to be announced in advance for each specific occasion where it is used

Under subsection (4), if NIH wants to make an exception for indirect cost rates as to certain grants, it has to include those indirect policies in the notice of funding opportunity!

[A “notice of funding opportunity” is a typical way that NIH announces that it is going to make a few million $$ in grants for a narrow area, such as this one on brain sensors and bioelectronics.]

One implication here is obvious: If exceptions to indirect rates have to be announced in each notice of funding opportunity, then this provision cannot possibly be a way for NIH just to impose a brand-new flat rate across the board on all funding.

The whole point is to announce an exception in advance for those limited cases where the exception applies. An agency can’t just say, “EVERYTHING is now an exception.” That makes no sense. It would be an exception that swallows the rule.

Subsection (4) also cross-references Appendix Section D.6. What does that say, you might ask?

Here’s the full text:

Funding Restrictions—Required. Notices must include information on funding restrictions in order to allow an applicant to develop an application and budget consistent with program requirements. Examples are whether construction is an allowable activity, if there are any limitations on direct costs such as foreign travel or equipment purchases, and if there are any limits on indirect costs (or facilities and administrative costs). Applicants must be advised if Federal awards will not allow reimbursement of pre-Federal award costs.

So here we have a further explanation of why NIH has to announce exceptions in advance, in each specific case.

Researchers and universities who want to apply for a specific grant need to have advance notice so that they can develop the right budget, and so that they will know ahead of time “if there are any limits on indirect costs” for that particular type of grant.

For example, if you’re applying for a grant on on the role of “defective HIV proviruses,” and there’s some special limitation on indirect costs for whatever reason, you and the university need to know about that in advance of preparing a budget.

Nothing about that process makes sense if NIH is entitled just to announce a sweeping cut to indirect costs that apply to literally every grant.

Conclusion

In short, there is nothing about section 75.414(c) that even hints that NIH could just come up with a flat indirect rate that isn’t based on any accounting principles, and then apply it to everyone. Everything about that section makes it clear that the only point is to explain how and when to advertise a narrow deviation, and then allow organizations to deal with that exception. Launching an entirely new across-the-board rule is the polar opposite of what section 75.414 would allow.

In short, NIH cannot impose any single indirect cost for all university grants (whether 15% or 50%). That just isn’t allowed. Indirect costs have to be negotiated with each university based on their actual cost structure (as defined in very detailed regulations).