Defense Department Caps Universities’ Indirect Cost Rates

The Department of Defense is capping indirect cost reimbursement rates for higher education institutions at 15 percent, according to a May 14 memo signed by Secretary of Defense Pete Hegseth. 

“The Department of Defense (DoD) is the steward of the most critical budget in the Federal Government—the budget that defends our Nation, equips our warfighters, and secures our future. That stewardship demands discipline. It demands accountability. And it demands that we say no to waste,” wrote Hegseth.

The DOD’s indirect rate cap plan will go into effect immediately, marking the fourth federal agency—including the National Institutes of Health, the Department of Energy and the National Science Foundation—that has enacted a plan to cap indirect cost rates at 15 percent. For decades, universities have negotiated with the federal government to calculate bespoke indirect cost reimbursement rates to pay for research costs that support multiple grant-funded projects, such as facilities maintenance, specialized equipment and administrative personnel. 

Universities and their trade associations have already sued the NIH, DOE and NSF over these plans, arguing that capping indirect costs would hurt research production and compromise global competitiveness, all while violating multiple aspects of the Administrative Procedure Act, including bypassing congressional authority required to alter indirect cost rates. So far, federal judges have blocked indirect cost caps from taking effect at the NIH and DOE. 

Matt Owens, president of COGR, which represents research institutions, condemned the DOD’s newly announced plan. 

“DOD research performed by universities is a force multiplier and has helped to make the U.S. military the most effective in the world. From GPS, stealth technology, advanced body armor, to precision guided missiles and night vision technology, university-based DOD research makes our military stronger,” Owens said in a statement. “A cut to DOD indirect cost reimbursements is a cut to national security. Less funding for research means less security for our nation.”

Hegseth’s memo claimed that capping the Defense Department’s indirect cost rate for universities would “save up to $900 [million] per year on a go-forward basis,” while also claiming that the department’s “objective is not only to save money, but to repurpose those funds—toward applied innovation, operational capability, and strategic deterrence.” The NIH has also made similarly incompatible assertions. It touted on social media its indirect rate cap plan’s potential to save taxpayers more than $4 billion, while a lawyer for the NIH told a federal judge that the cut was simply a reallocation of funds. 

The Defense Department’s plans “will not stop at new grants,” Hegseth wrote, adding that “meaningful savings can also be achieved by revisiting the terms of existing awards to institutions of higher education.” The memo directed the under secretary of defense for research and engineering to do the following within 30 days:

• Initiate a departmentwide effort to renegotiate indirect cost rates on existing financial assistance awards to institutions of higher education. “Wherever cooperative, bilateral modification is possible, it shall be pursued.”
• “Where bilateral agreement is not achieved, identify and recommend lawful paths to terminate and reissue the award under revised terms.”
• “Complete renegotiations or terminations for all contracts by 180 days from the date of this memorandum.”