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Why do universities charge companies indirect costs, and is the F&A rate negotiable?

Andrew T. Flowers ·

The project budget comes back from your university partner and the number at the bottom is 60% larger than the number the professor quoted. The line says "F&A" or "indirect costs" or "overhead," and the first instinct of most corporate finance teams is to ask for it to be waived. In our experience, that rarely works. The charge covers what a project uses but can't be billed for line by line, such as the building and the compliance offices. The rate comes from an audit of those costs, so most universities won't lower it for a company. What a sponsor can negotiate is the budget the rate applies to. We've written this for sponsors, but a sponsored programs officer will recognize every argument and may want to share it with the next company that asks about F&A rates.

We're not a law firm, and this isn't legal or accounting advice.

What are indirect costs, and where does the F&A rate come from?

Direct costs are the things the project consumes that can be assigned to it: the researcher's and students' time, the materials, the equipment bought for it, the travel. Indirect costs, which the federal rules call facilities and administrative costs, are the things the project consumes that can't be assigned to it line by line: the building, its power and maintenance, the library, the data storage and security, the compliance offices that handle export control, human subjects, animal care, and financial reporting. The university recovers them by applying a rate to the base. For most agreements the base is modified total direct costs, which excludes equipment, tuition, patient care, and the part of each subaward above $25,000, so a 60% rate isn't 60% of everything.

The U.S. federal government and the university negotiate that rate. Under 2 CFR 200.414 the negotiated rate "must be accepted by all Federal agencies," and the rate is based on an audited cost study, so it's a measured number, not a markup. An organization with no negotiated rate may elect a de minimis rate of up to 15%. The rate the university charges a company usually starts from the same federally negotiated figure.

Do universities make money on indirect costs?

The Council on Governmental Relations, which speaks for research universities on this, puts the position plainly in its FAQ: "No, universities absolutely do not financially gain from their F&A recoveries." Its evidence is the gap between what the rate covers and what the research costs. Universities paid $6.8 billion in unreimbursed indirect costs in fiscal 2023, and institutional funds now cover 25% of academic R&D spending. The Congressional Research Service's January 2026 report reaches the same place from the National Center for Science and Engineering Statistics' survey data: between 2010 and 2024 universities recovered on average about 71% of the indirect costs of their research. Azoulay, Gross, and Sampat found that NIH's effective indirect rate in 2024 averaged 42% of direct costs against a negotiated average of 58%, because so many cost categories are excluded from the base (NBER Digest, July 2025).

Translation Box: "overhead"

On the industry side: overhead is the cost a business absorbs and tries to drive down. Asking for a discount on it is normal commercial behavior.

On the academic side: F&A is a reimbursement for costs the institution already incurred and already under-recovers. A request to waive it is a request for the university to pay for a company's project, and most universities have a written policy, sometimes a state-audit finding, that says they can't.

Why is the industry F&A rate often higher than the federal rate?

This is the part that surprises sponsors. The federal rate has a cap built into it: since 1991 the administrative component of a university's negotiated rate has been limited to 26 percentage points, whatever the audited cost study shows. Companies aren't bound by that cap, so a growing number of universities publish an uncapped rate for industry that reflects the full measured cost. The University of Pittsburgh charges 65% on industry-sponsored research against 59% on federal for fiscal 2026 and 2027. Georgia Tech lists 66.5% uncapped for industry and non-US sponsors against 57.4% capped for federal non-defense work through fiscal 2027. UCSF's industry contracts division charges 64% on industry-sponsored research, and Purdue Northwest moved to a 64.75% uncapped industry rate in July 2025.

The logic behind it is stated most directly by UC Berkeley's industry alliances office: "If UC Berkeley absorbs the indirect costs associated with industry sponsored projects, the university essentially subsidizes commercial entities and their bottom line, which is not in line with UC's public mission" (IPIRA). The same page says the university must not subsidize profit-motivated entities by waiving or reducing the charge, and that for-profit sponsors must be charged full direct costs plus the full federally negotiated rate.

What happened to the 15% indirect cost cap?

Sponsors sometimes arrive having read that the government capped indirect costs at 15%, and ask why they should pay more. The short answer is that it didn't hold. In February 2025 NIH issued NOT-OD-25-068, setting a 15% rate on all grants. Universities, states, and the national associations sued within days. A district court permanently enjoined it in April 2025. The First Circuit affirmed on 5 January 2026, holding that the cap violated the appropriations rider Congress has renewed each year since 2018, and the government let the Supreme Court deadline pass on 6 April 2026. Parallel caps at NSF, DOE, and the Department of Defense were vacated or enjoined in 2025, and DOE rescinded its own in January 2026 after Congress directed it to apply the negotiated rates. In April 2026 NIH withdrew the 15% de minimis it had adopted and reverted to the 45 CFR 75 provisions, according to COGR's summary of the notice. The administration's fiscal 2027 budget proposed the cap again, so the argument isn't over in Washington. But the rate on your budget today is the negotiated one, and no agency has succeeded in replacing it.

Even if a cap had held, it would have cut what universities recover from the government, and the research would have cost them the same. Universities charge companies at least their federal rate, so a sponsor asking to pay a capped federal rate is asking to pay less than the government pays. We haven't seen a university agree to that.

Can a sponsor negotiate the indirect cost rate?

Rarely. The rate comes from the university's negotiation with the federal government, and most universities apply it to every company. In our experience, a waiver request goes to a committee, takes weeks, and comes back refused. These four approaches work on the budget the rate applies to instead, and they get further.

1. Decide what you're buying and scope to it

The direct costs are where a budget can come down. A project designed around the question you need answered, with the student time and the materials that question requires and no more, costs less at any rate than a project designed around what the lab would like to do.

2. Ask what's excluded from the base

Equipment the project needs, tuition, and the part of each subaward above $25,000 sit outside modified total direct costs at most universities. A project with a $90,000 instrument in it carries no indirect charge on the instrument. The budget conversation should establish the base before anyone discusses the rate.

3. Look for a published waiver, such as on SBIR and STTR Phase I

Some universities publish standing waivers for small companies. The University of Kansas waives F&A on its subaward in SBIR and STTR Phase I projects when the company is using KU's intellectual property or has KU employees among its founders. The University of Michigan Medical School waives indirect cost recovery on all Phase I SBIR and STTR projects as a standing policy that needs no request. The pattern is the same at both: a small company, a federal small-business award, and a reason the university wants the company to succeed. If you're a startup with a federal award and a university connection, ask whether a policy like this exists. A large company won't qualify, and asking for one anyway tends to make the rest of the negotiation harder.

4. Put the rate in a master agreement and stop renegotiating it

The companies that sponsor the same university repeatedly settle the rate, the base, and the payment schedule once in a master research agreement and don't renegotiate them project by project. Every project after that is a scope-and-budget conversation. The clearest measurement we've found comes from clinical trials. Across 581 new industry contracts at the five University of California health campuses, terms were finalized in 39 days on average under a master agreement and 73 days without one. The sponsors with master agreements were also the ones that came back most, with six contracts each on average against two (Tran and colleagues, Research Management Review, 2017).

What does the F&A rate add to a real budget? A worked example

A sponsor wants a 12-month project. The lab proposes a postdoc at $75,000 with benefits, a graduate student at $55,000 with tuition of $18,000, $20,000 of materials, $5,000 of travel, and a $90,000 instrument. Direct costs are $263,000. At the university's 62% industry rate on modified total direct costs, the base excludes the tuition and the instrument, so the base is $155,000 and the indirect charge is $96,100. Total: $359,100. The sponsor who assumed 62% of everything expected $426,060 and finds the real number is $67,000 lower. A waiver request, if it's refused, leaves the total at $359,100 and adds weeks to the schedule. A question about the instrument opens a different option: some universities let the company buy the instrument itself and loan it to the lab, so the company keeps it when the project ends.

Where should you start?

Start by asking for the university's industry rate and what it excludes from the base, before the lab drafts the budget. The rate is one line in the agreement. The payment schedule, the reporting, and what happens to unspent funds are the lines next to it, and we've found they cause more trouble over a project's life than the rate does. Our sponsor's guide covers all of them in the order they come up. Once the agreement is signed, a project on our Helikon platform tracks the milestones against the agreement's dates, with an owner and a reminder for each, so both sides see what's due before it's late. The project's budget records the indirect rate and the base it applies to, and tracks spending against it, so the people managing the project can see what's left. You can set one up on a free account.

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Why do universities charge companies indirect costs, and is the F&A rate negotiable? · Helikon Labs