Where the Overhead Goes: Unpacking the Facilities and Administrative Rate on Federal Research Grants

For every one hundred dollars the federal government awards a university scientist to conduct laboratory research, it typically pays an additional fifty to sixty dollars directly to the institution. This secondary payment is not a bonus, nor does it go to the scientist. It is the mechanism that keeps the lights on, the building compliant, and the hazardous waste removed.[7]

The federal grant system divides the financial burden of scientific discovery into two distinct categories. Direct costs pay for the visible elements of the project: the principal investigator's salary, the post-doctoral researchers, the specialized microscopes, and the lab mice. Indirect costs—formally classified as Facilities and Administrative (F&A) costs—cover the shared institutional infrastructure that makes the direct work possible.[4][7]

The rules governing these payments are dictated by the Office of Management and Budget (OMB). In August 2000, the agency published OMB Circular A-21, standardizing the cost principles for educational institutions. As the document states verbatim, "The costs of a sponsored agreement are comprised of the allowable direct costs incident to its performance, plus the allocable portion of the allowable F&A costs of the institution."[1]

Universities do not simply declare an F&A rate and attach it to their grant applications. They must negotiate their specific percentage with a cognizant federal agency, which is almost always either the Department of Health and Human Services (HHS) or the Department of Defense's Office of Naval Research (ONR).[2]

This negotiation is a rigorous, data-heavy audit. A university submits a comprehensive cost proposal based on its actual expenditures from a prior base year. The federal agency reviews the depreciation schedules of research buildings, the utility bills for laboratory spaces, and the payroll records for compliance staff, eventually agreeing on a rate that will apply for the next three to five years.[3]

The resulting rates vary widely depending on the institution's location, infrastructure age, and research volume. The University of Illinois System, for instance, maintains distinct rate schedules for its Urbana-Champaign, Chicago, and Springfield campuses, reflecting the different operational costs of each physical footprint.[3]

Similarly, rates differ based on where the work physically occurs. The University of Arizona negotiates separate percentages for on-campus research, where the university bears the full facility cost, and off-campus research, where the facility overhead is significantly lower because the work happens at a remote or third-party site.

The F&A rate itself is split into two distinct buckets. The "Facilities" portion covers the physical environment: building depreciation, interest on debt issued to construct research facilities, electricity, heating, and custodial services. The "Administrative" portion covers the human infrastructure: payroll processing, human resources, and the increasingly complex apparatus required to comply with federal regulations.[4][7]

In 1991, the federal government placed a hard ceiling on the administrative portion of the rate, capping it at exactly 26 percent. This cap remains in place today, meaning that any variation in a university's total F&A rate above 26 percent is driven entirely by its facilities costs.[8]

If an institution has a negotiated rate of 54 percent, 26 points of that rate cover administration, while the remaining 28 points cover facilities. An analysis published by the Clinton White House noted that this fixed cap often forces universities to absorb administrative compliance costs that exceed the 26 percent threshold.[8]

Because the administrative cap has not moved in over three decades, university administrators argue they are subsidizing federal research. As mandates for cybersecurity, human subjects protection, and foreign influence reporting have expanded, the cost of compliance has grown, but the federal reimbursement limit has not.[4][7]

The Association of Public and Land-grant Universities (APLU) emphasizes that without F&A cost reimbursement, institutions would be forced to divert funds from other critical areas, such as undergraduate tuition or state appropriations, to keep their research laboratories operational.[4]

Despite its necessity, the F&A rate is frequently a source of tension on campus. Principal investigators often view the rate as a tax levied by the university administration on their hard-won grant dollars. In 2017, the MIT Faculty Governance coalition published an editorial addressing this exact friction, attempting to explain to scientists why these deductions are essential for institutional survival.[5]

A common misconception among researchers is that a 50 percent F&A rate means half of their total grant goes to overhead. In reality, the rate is applied only to Modified Total Direct Costs (MTDC), a specific accounting basis that excludes several major expense categories.[2]

Under the MTDC formula, capital equipment purchases over $5,000, student tuition remission, and the portion of any subaward exceeding $25,000 are completely exempt from F&A charges. If a scientist uses $100,000 of a grant to purchase a specialized mass spectrometer, that specific expenditure generates zero overhead for the university.[3]

Furthermore, not all federal agencies honor the fully negotiated rate. In May 2025, the University of Wisconsin-Madison published a summary of indirect cost rates, highlighting that certain agencies, such as the Department of Agriculture, cap F&A recovery at lower statutory limits. When an agency pays less than the negotiated rate, the university must absorb the difference, further straining the institutional budget that supports the scientific enterprise.[6]