Indirect cost recovery

Indirect cost recovery is a major revenue stream for research-intensive universities, often exceeding 100 million GBP/USD per year at large institutions. It funds general infrastructure (libraries, IT, buildings depreciation, central administration) and may be partially returned to faculties or PIs. Under-recovery (where the negotiated rate exceeds what sponsors actually pay due to programmatic caps or fixed rates) is a persistent funding gap, especially with foundations and EU schemes.

The F&A rate and the MTDC base

Indirect cost recovery is calculated by applying the institution’s negotiated indirect cost (F&A) rate to the Modified Total Direct Cost (MTDC) base of a given award, not to the award’s total dollar value. The negotiated rate itself is fixed in an Indirect Cost Rate Agreement (NICRA), agreed between the institution and its cognizant federal agency (HHS or, for a minority of institutions, the Department of Defense) under 2 CFR Part 200 Appendix III. See NICRA: Negotiated Indirect Cost Rate Agreements Explained for the full negotiation process.

What is excluded from the MTDC base

Because the rate applies only to MTDC, several real cost categories on an award generate no indirect cost recovery at all. Under 2 CFR 200.1, MTDC excludes: equipment and capital expenditures; the portion of each subaward in excess of the first $50,000 (raised from $25,000 effective for awards issued on or after October 1, 2024; NIH reverted to $25,000 for its own awards in April 2026); patient care costs; tuition remission; off-site rental costs; and participant support costs (scholarships, fellowships, stipends and related costs). An award with a large equipment purchase or a large subaward will therefore recover proportionally less indirect cost than its total dollar value would suggest — a common source of confusion when comparing recovery rates across awards of similar face value.

Why recovered indirect is not “profit”

Indirect cost recovery reimburses costs the institution has already actually incurred — facilities depreciation, utilities, library services, sponsored-programs and departmental administration — that cannot practically be assigned to one specific award. Under the cost principles in 2 CFR Part 200 Subpart E, these are real, documented, allowable costs, not a markup: the negotiated rate is derived from the institution’s own cost pools and space-use studies (2 CFR 200 Appendix III), audited periodically, and capped at the negotiated ceiling regardless of what a sponsor actually pays. Where a sponsor pays less than the negotiated rate (a foundation cap, a fixed programmatic rate, or — historically — an attempted government-wide cap such as NIH’s 2025 proposed flat 15 percent F&A rate, which was blocked in federal litigation), the institution absorbs the difference as under-recovery; it is a cost gap, not foregone profit.

Who decides

The institution’s cost accounting or sponsored-programs finance office prepares and submits the indirect cost rate proposal; the cognizant federal agency reviews and negotiates the rate, producing the binding NICRA. Individual program/grants officers on a specific award do not set or waive the rate — they apply whatever rate the award’s terms specify (the institution’s NICRA rate, a sponsor-imposed cap, or a de minimis rate where the institution has no negotiated agreement).

References

• 2 CFR Part 200 Subpart E (Cost Principles) and Appendix III (Indirect Cost Rate Determination for Institutions of Higher Education); Council on Governmental Relations (COGR) Excellence in Research; UK Transparent Approach to Costing (TRAC).