October 1, 2025

What Are Indirect Costs for Universities?

2025 Guide for Research Administrators

When universities receive research funding, whether from federal agencies, foundations, or industry sponsors, the budget usually includes more than just salaries, supplies, and travel. A critical but sometimes misunderstood component is indirect costs. For research administrators, understanding what indirect costs are, why they matter, and how they are calculated is essential for ensuring compliance and supporting the institution’s research enterprise.

What Are Indirect Costs?

Indirect costs for universities (sometimes called Facilities & Administrative costs, or F&A) are expenses that support research activities but cannot be tied to one specific project. These are the behind-the-scenes costs that keep research running smoothly.

Examples include:

• Building operations (utilities, maintenance, custodial services)
• Research facilities and laboratories
• Library resources and IT infrastructure
• Administrative support (compliance, grant management, payroll, purchasing)

Without these costs being covered, the research itself could not take place.

Direct vs. Indirect Costs

To clarify the difference:

• Direct costs are clearly identifiable with a specific project (e.g., a graduate student’s salary, lab supplies, participant incentives).
• Indirect costs are the shared expenses that benefit multiple projects and departments.

Think of it like running a household: groceries are a direct cost, while electricity and internet, used by everyone in the house, are indirect.

Why Indirect Costs Matter

Indirect costs are sometimes misunderstood by researchers, sponsors, and even the public. But for universities, they play a vital role in:

• Sustaining infrastructure: Research requires facilities, utilities, and safety protocols.
• Ensuring compliance: From IRB reviews to export controls, administrative offices help meet federal regulations.
• Supporting long-term capacity: Indirect cost recovery allows institutions to invest in future research opportunities.

Without adequate recovery of indirect costs, universities would struggle to maintain the resources that make cutting-edge research possible.

How Indirect Costs Are Calculated

Universities negotiate their F&A rate with the federal government. This rate represents the percentage of allowable direct costs charged to cover indirect costs.

For example:

• If a university’s negotiated F&A rate is 55%, and a grant has $100,000 in direct costs, the budget will also include $55,000 in indirect costs.
• The rate is based on actual institutional expenses, audited and renegotiated every few years.

Non-federal sponsors (foundations, nonprofits, industry) may have their own policies about what indirect cost rates they are willing to pay, which can complicate budgeting for research administrators.

Challenges and Misconceptions

• “Indirect costs are overhead or profit.” Not true, these funds do not generate profit. They reimburse real expenses already incurred by the institution.
• “All sponsors should pay the full rate.” In reality, many private funders limit or cap indirect costs, leaving universities to absorb the difference.
• “Researchers don’t benefit from indirects.” Indirect costs provide the very labs, IT systems, compliance structures, and libraries researchers rely on every day.

Best Practices for Research Administrators

• Educate faculty: Provide clear explanations of why indirect costs are included in budgets.
• Know your rates: Stay up to date on your institution’s negotiated F&A rates and sponsor-specific rules.
• Communicate with sponsors: Where allowable, advocate for recovering full indirect costs.
• Plan strategically: Understand how reduced or capped indirect cost recovery affects your institution’s financial health.

Conclusion

Indirect costs for universities are not just line items in a budget, they are the backbone of the research enterprise. For research administrators, fluency in how these costs work is key to supporting faculty, stewarding resources, and sustaining an institution’s research mission.

By helping faculty and sponsors understand the value of indirect costs, research administrators play a vital role in ensuring that groundbreaking discoveries can continue to thrive on campus.