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).

When this last changed, and how you find out next time

The $50,000 MTDC subaward exclusion above is current as of October 1, 2024 for most federal awards. It is not permanent: OMB revised 2 CFR 200 on April 22, 2024, published in the Federal Register at 89 FR 30046, raising the threshold from $25,000. NIH separately reverted its own awards back to the $25,000 threshold in April 2026 — an agency-specific action, not a further Uniform Guidance revision.

OMB publishes every change to the Uniform Guidance in the Federal Register, and the Federal Register is one of the sources Regulatory Radar checks every day — so 2 CFR 200 is one of the few subjects where CASRAI reads the primary publication venue itself rather than waiting for somebody’s summary. It does not watch the NIH Guide, and it does not watch private accreditors.

Ask CASRAI what 2 CFR 200 currently requires for calculating indirect cost recovery when an award includes a large subaward or equipment purchase — it answers from an indexed corpus it re-checks daily and cites the passage it used, so you can open the source and check it. Two questions a day are free while you are signed out, no account and no card. Regulatory Radar is $29 a month for 150 a day, a subscriber dashboard, API keys and MCP access. Everything CASRAI publishes, including this page, stays free to read.

Frequently asked questions

Is indirect cost recovery calculated on an award’s total dollar value?

No. It is calculated by applying the institution’s negotiated F&A rate to the award’s Modified Total Direct Cost (MTDC) base, not to the award’s total value.

What cost categories are excluded from the MTDC base?

Under 2 CFR 200.1: equipment and capital expenditures; the portion of each subaward above $50,000; patient care costs; tuition remission; off-site rental costs; and participant support costs.

Is recovered indirect cost profit for the institution?

No. It reimburses real, already-incurred costs — facilities depreciation, utilities, library services, administration — that cannot practically be assigned to one specific award, under the cost principles in 2 CFR Part 200 Subpart E.

Who negotiates the rate used to calculate indirect cost recovery?

The institution’s cost-accounting or sponsored-programs finance office prepares the rate proposal; the cognizant federal agency reviews and negotiates it, producing the binding NICRA.

What happens when a sponsor pays less than the institution’s negotiated rate?

The institution absorbs the difference as under-recovery — a cost gap, not foregone profit, since the negotiated rate reflects real documented costs rather than a markup.