The Hidden Infrastructure of University Research: Why Overhead Matters

In the wake of recent attempts to slash university research overhead rates, it’s crucial we understand what’s actually at stake for American innovation. As someone who has navigated the complex landscape of research funding, I want to shed light on a system often misunderstood by those outside academia.

When the federal government awards a research grant, it doesn’t just fund scientists and equipment—it invests in an entire ecosystem that makes discovery possible. The “overhead” or Facilities and Administrative (F&A) costs aren’t a luxury or a slush fund; they’re the essential infrastructure that powers our nation’s research engine.

Think about what allows a researcher to focus on finding the next breakthrough cancer treatment instead of fixing the lab’s HVAC system or navigating complex regulations. It’s the building maintenance staff, compliance officers, grant administrators, IT security teams, and countless others whose salaries are partially covered by these indirect costs.

The reality is stark: when organizations receive a $1 million research grant, typically 25-33% goes to this invisible but vital infrastructure [1]. At research-intensive institutions, the actual cost of maintaining this ecosystem can reach 50-60% of direct research costs. These rates aren’t arbitrary—they’re meticulously documented, audited by federal agencies, and negotiated every few years based on real expenditures.

February’s proposal to slash these rates to a flat 15% sent shockwaves through the research community, prompting immediate legal challenges [2]. While proponents pointed to private foundations that pay lower overhead rates, this comparison overlooks a crucial fact: foundation grants represent a small fraction of research funding and are only sustainable because federal grants cover the baseline infrastructure costs [3].

Without adequate overhead support, universities face impossible choices: subsidize federal research from other sources (effectively forcing students to foot the bill through tuition), reduce their research footprint, or watch their facilities deteriorate. The hardest hit would be public universities and institutions without massive endowments—precisely the diverse institutions we need for a robust national research portfolio [3].

This isn’t about protecting bureaucracy; it’s about preserving America’s global leadership in science and innovation. The infrastructure that overhead rates support allows researchers to navigate increasingly complex compliance requirements, maintain cutting-edge facilities, and translate discoveries into real-world impact [4].

As we debate research funding policies, let’s remember that scientific discovery doesn’t happen in isolation. It requires an ecosystem of support that, while invisible to many, is absolutely essential to progress. The overhead rates that sustain this ecosystem aren’t just accounting figures—they’re investments in our collective future.

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How Overhead Rates Are Set on Government Grants to Universities

What Are Overhead Rates?

Overhead rates represent the “facilities and administrative” (F&A) costs of conducting research. While direct costs cover researcher salaries, equipment, and supplies, overhead costs fund the essential research infrastructure and operating expenses that support the research. These include state-of-the-art laboratories, data processing systems, security measures, regulatory compliance, maintenance staff, and other necessary support services.

How Overhead Rates Are Determined

The process for setting overhead rates involves these key steps:

Regular Auditing Process: Every 2 to 4 years, either the Department of Defense Office of Naval Research or the Department of Health and Human Services comprehensively audits a university’s shared costs to determine the appropriate federal reimbursement rate.
Negotiation: Each university negotiates its own overhead rate with the federal government. This includes separate rates for facilities and administration.
Rate Calculation: The university aggregates all its F&A costs across hundreds or thousands of research projects. These total F&A costs are then divided by a subset of direct research costs to arrive at an F&A cost rate, which is then reviewed and approved by the government.
Application to Grants: Once established, this rate is applied uniformly to each research grant as its direct funds are spent.

Factors Affecting Overhead Rates

Overhead rates vary between institutions because of several factors:

Regional cost differences (urban versus rural locations)
Construction and maintenance costs
Utility expenses
Administrative costs
Age and condition of facilities and buildings
Special requirements for certain types of research

For example, a biomedical research facility in an earthquake-prone urban area will have different F&A costs compared to an engineering research facility in a rural area.

Typical Overhead Rate Percentages

The average amount paid to universities for F&A expenses is approximately 25-33% of the total grant amount. Universities with medical centers tend to be closer to 33% because of the higher costs involved in medical research facilities.

The base rate for NIH grants averages about 52% of the modified total direct costs—meaning the agency pays a school $52,000 to cover overhead costs on a $100,000 research grant. However, universities usually don’t receive the entire 52% because some awards carry lower rates, and certain expenses don’t qualify.

Modified Total Direct Costs (MTDC)

It’s important to understand that the overhead rate is not applied to the total grant amount but rather to a subset called “modified total direct costs” (MTDC). Some direct research costs are excluded from this calculation, such as equipment, capital expenditures, patient care charges, rental costs, tuition remission, and scholarships/fellowships.

For example, if a university has a 50% F&A rate and receives a grant with $445,000 in direct costs (of which $365,000 qualifies as MTDC), the F&A reimbursement would be $182,500 (50% of $365,000). This would make the total grant $627,500, with F&A costs representing 29.08% of the total budget.

Recent Policy Changes

There have been significant recent developments regarding overhead rates:

In 2024, the Department of Energy announced that it was cutting university overhead rates to 15% on research grants. DOE said this would save $405 million in an annual external research grants budget of $2.5 billion.

The DOE justified this change by stating they wanted to “better balance the financial needs of grant recipients with the Department’s obligation to responsibly manage federal funds.” This standardized 15% rate applies to all grant awards to institutions of higher education.

Similarly, the NIH had previously announced a shift to a flat 15% rate from individualized institutional rates, claiming it would save $4 billion annually. However, a coalition of universities and state attorneys general sued, and a federal judge issued a permanent injunction against the change.

University Contribution to Research Costs

Universities do not profit from F&A recoveries. In fact, they are typically not fully reimbursed for all the expenses they incur to support federal research. According to data collected by the NSF, in FY23 universities contributed approximately $6.8 billion in facilities and administrative expenditures not reimbursed by the government.

This is partly due to an Office of Management and Budget (OMB) cap limiting the amount the government can repay universities for administrative and compliance-related expenses, including federal mandates. This cap has been in place since 1991 and has never increased.

Comparison with Other Research Performers

Studies suggest that proportionately, F&A expenses for university research are slightly less than those for other research performers. A study in 2000 by the RAND Corporation found universities had the lowest percentage of total research costs classified as F&A (31%). Federal laboratories were somewhat higher at 33%, and industrial laboratories were higher still at 36%.

Sources:

Association of American Universities (AAU). “Frequently Asked Questions about Facilities and Administrative (F&A) Costs of Federally Sponsored University Research”
Science. “NIH plan to reduce overhead payments draws fire”
Science. “Energy Department cuts university overhead rates to 15% on research grants”
Department of Energy. “Department of Energy Overhauls Policy for College and University Research, Saving $405 Million Annually for American Taxpayers”

Deep Dive: The Administrative Backbone of Research

Administrative costs make up approximately 40% of the total Facilities and Administrative (F&A) costs in university research overhead [5]. These costs are critical to supporting research activities, though determining which administrative expenses are properly attributable to research requires careful analysis and documentation.

Components of Administrative Costs

Administrative costs in the F&A structure typically include three main components:

Departmental Administration (DA): This is the largest component, representing approximately 19% of the total F&A rate. It includes administrative and clerical salaries and expenses at the academic department level that support research [5].
General Administration (GA): This covers university-wide administrative functions like the president’s office, accounting, human resources, and purchasing [5].
Sponsored Programs Administration (SPA): This includes the offices that specifically manage research grants and contracts, ensuring compliance with sponsor requirements [5].

Determining Research Association

The process of determining which administrative costs are associated with research activities is complex and involves several methodologies:

Time and Effort Reporting

Government regulations recognize that faculty and departmental staff have research-related administrative responsibilities, and their salaries and related costs can be considered costs of research. Universities capture an estimate of the amount of time spent on administration related to research in academic departments [5].

This is typically done through:

Faculty activity reports
Time and effort certification
Administrative workload surveys

Space Surveys and Functional Usage

A space inventory and functional usage survey is a critical component of F&A rate proposal development. Universities conduct detailed surveys of how institutional space is used, which helps allocate costs appropriately between research, instruction, and other activities [6].

When administrative staff work in spaces dedicated to research support, their costs can be more clearly allocated to the research function.

Cost Pools and Allocation Bases

Universities gather administrative costs into “pools” and then distribute these costs to different functions (research, instruction, public service) using appropriate allocation bases. For example:

Administrative salaries might be allocated based on the proportion of total direct expenditures in each function
Central service costs might be allocated based on square footage or headcount

The Federal Cap on Administrative Costs

It’s important to note that there are specific federal limitations on administrative costs:

Since 1991, the amount universities can be reimbursed from the government for administrative costs has been capped by the Office of Management and Budget (OMB) at 26% of modified total direct costs. This cap only applies to higher education institutions [1].

This cap was implemented following some high-profile cases of perceived misuse of indirect cost funds in the early 1990s.

The Review and Audit Process

The association of administrative costs with research is rigorously reviewed during the F&A rate negotiation process:

Professional negotiators from the cognizant federal agency review grantee indirect cost rate proposals to ensure rates are both appropriate and compliant with grant terms and federal regulations [7].

This review includes:

Examination of audited financial statements
Review of treatment of fringe benefits
Verification of lobbying cost certification
Ensuring compliance with OMB Cost Principles [7]

Negotiators specifically identify and exclude any unallowable costs from the indirect cost pools, such as certain public relations expenses, debt costs, and contingencies [7].

Challenges in Administrative Cost Allocation

Several factors make administrative cost allocation particularly challenging:

Joint Purpose Activities: Many administrative functions serve multiple purposes simultaneously (supporting both research and education).
Increasing Compliance Burden: University support for research has grown 65% since 2010, due in part to rising compliance costs associated with increased federal research regulations in areas such as human subject protection, export control compliance, and ensuring research security and integrity [1].
Inconsistent Treatment: Different federal agencies and private sponsors may have different perspectives on what constitutes a reasonable administrative cost associated with research.

The current debates about reducing overall F&A rates would significantly impact universities’ ability to maintain administrative infrastructure supporting research, potentially forcing difficult choices about which administrative services to maintain and which to reduce [4].

References

[1] Association of American Universities (AAU). “Frequently Asked Questions about Facilities and Administrative Costs of Federally Sponsored University Research.” https://www.aau.edu/key-issues/frequently-asked-questions-about-facilities-and-administrative-costs

[2] Science (AAAS). “Energy Department cuts university overhead rates to 15% on research grants.” https://www.science.org/content/article/energy-department-cuts-university-overhead-rates-to-15-on-research-grants

[3] Science (AAAS). “NIH plan to reduce overhead payments draws fire.” https://www.science.org/content/article/nih-plan-reduce-overhead-payments-draws-fire

[4] Delip Rao. “Understanding NIH’s 15% Overhead Cap.” https://deliprao.substack.com/p/understanding-nihs-15-overhead-cap

[5] Boston University Research Support. “Facilities and Administrative Costs and Analysis.” https://www.bu.edu/researchsupport/tools-services/facilities-administrative/

[6] University of Oregon Research and Innovation. “Understanding Facilities and Administrative (F&A) Costs.” https://research.uoregon.edu/manage/awards/understanding-facilities-administrative-fa-costs

[7] U.S. Department of Health and Human Services. “Indirect Cost Negotiations.” https://www.hhs.gov/about/agencies/asa/psc/indirect-cost-negotiations/index.html

[8] National Institutes of Health. “Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates.” https://grants.nih.gov/grants/guide/notice-files/NOT-OD-25-068.html

[9] AcademyHealth. “NIH abruptly slashing indirect grants. What this means for researchers.” https://academyhealth.org/blog/2025-02/academyhealth-situation-report-nih-abruptly-slashing-indirect-grants-what-means-researchers

[10] Office of the University of Utah. “Indirect Costs/Facilities and Administrative Costs (F&A).” https://osp.utah.edu/policies/handbook/budget-development/indirect-costs.php