Research VC explains true costs of research

The partnership between federal and state governments and North Carolina’s outstanding research institutions has been the cornerstone of progress in human health and medicine, and a vital driver of our state’s economy. These shared investments have yielded incredible scientific and competitive breakthroughs, leading to exponential decades of growth for our state. 

The recently released “Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Costs” has sent shockwaves through the research community. While a temporary restraining order is currently in place against the new rate, the proposed 15% cap on indirect cost reimbursement for federally funded research is deeply concerning. It falls drastically short of the 55% we currently charge to support the essential infrastructure required for world-class, life-saving research. 

Facilities & administrative (F&A) costs – or indirect costs – represent real costs that are covered by sponsors as a part of funding awards. Without F&A, research at universities would not be possible. 

They aren’t simply about keeping the lights on. They support our nation’s competitive edge in critical fields like biomedical research, engineering, and technology, and they support life-saving research on diseases like cancer, diabetes, heart disease, and Alzheimer’s. 

A massive reduction in the F&A rate would strike at the heart of a research university, slowing down progress, hindering innovation, impacting job creation, and ultimately harming human health and our nation’s economic future. North Carolina, a leader in NIH funding, would be particularly vulnerable to such cuts. 

Not just research would be affected. Key elements of the educational training and experience that draw students to Carolina and give them the quality education they deserve would also be stripped away. 

So what are indirect costs and why are they crucial to our research enterprise? For answers to these and other frequently asked questions, please see below. 

What are indirect costs (or F&A costs) in federal grants, and why are they necessary? 

For each research grant the University receives, the direct costs of that program, including salaries of the researchers and the necessary supplies and equipment to carry out the research, support only a piece of the research. What is missing? The essential costs that support the facilities and research administration that are the foundation of our research enterprise. This includes the compliance and regulatory aspects that the government itself requires of us. For arcane reasons, the government requires us to split these costs into a separate category: the facilities and administrative (F&A) costs, also known as “indirect costs.” 

For an analogy, to drive a car one needs gas, tires, and money for tolls – the direct costs. But you can’t drive the car (at least without getting in trouble) without the indirect costs – car insurance, registration, taxes, maintenance, and depreciation. 

While “direct costs” like lab supplies, researchers’ salaries, and equipment are readily apparent, F&A costs are the essential, behind-the-scenes expenses that make research possible. These costs are often too complex to assign to individual projects, but they are vital to supporting the entire research ecosystem. Direct costs are the visible components of a research project, whereas the F&A costs are the foundation, the electrical wiring, the plumbing, and the support staff – everything that makes the research enterprise functional and sustainable. 

Why does the federal government support indirect costs? 

The government has a long history of contributing to F&A costs of universities because of the significant return on investment of this shared partnership which has made the U.S. an international leader in advancing science. We lead in discoveries and innovations that save and transform lives, protect and defend our national security, feed our nation, and ensure our global competitiveness because of it. 

Add to this, the significant investment of the North Carolina general assembly, enabling our state to become a leader in life sciences and biotechnology and boasting a public university system that is the envy of the country. This shared investment provides the quality ecosystem that attracts the best and brightest students to our campus and provides them with the highest quality education and makes them highly sought after when they compete for jobs. 

At UNC-Chapel Hill, research employs over 11,000 employees from 94 counties with an annual payroll of over $450 million. As our largest funding source, research sponsorship from the National Institutes of Health contributes the most to these impressive statistics. 

Because of our flourishing biotechnical ecosystem that includes Research Triangle International, Duke University, North Carolina Agricultural & Technical University, North Carolina State and others, our state gets more bang for its buck from these federal research dollars than almost any other state in the U.S. 

Per a 2024 study from United for Medical Research: 

• Carolina creates 6,000 jobs and $1.4 billion in economic impact from our $600 million NIH portfolio.
• NIH dollars create 12 North Carolina jobs for every one job they create outside of our state borders.
• As a comparison, ratios for other larger states include: 6:1 in New York, 5:1 in California, and 3:1 in Texas.
• The University’s contributions are part of an overall $2.3 billion NIH investment in North Carolina that delivers some of the highest in-state economic returns in the nation.
• Those grants and contracts directly supported over 25,000 jobs and spurred $5.34 billion in economic activity in North Carolina in FY2023. 

How does the federal government set indirect costs? 

Every 3-5 years, universities negotiate the indirect cost rate with the federal government. The F&A indirect rate proposal is a formula-based proposal that includes certain research infrastructure and support costs for a chosen year and is divided into “facility costs” and “administrative costs.” It’s important to note that research administrative costs cannot exceed 26% regardless of actual costs. The formula has remained the exact same despite regulatory requirements that have increased dramatically since 1991. The federal government reviews our F&A rate proposal, which it scrutinizes and negotiates, ending in a rate that is invariably lower than what is proposed. This is all regularly reviewed to ensure dollars are spent appropriately.  

While not intended, the way the federal government requires separate direct and indirect costs can lead to a lack of transparency. 

What are indirect costs used for? 

Indirect costs, which are separate from the total costs of a research grant, cover expenses such as: 

• Lab infrastructure: This includes specialized equipment like fume hoods, microscopes, lab benches, and the maintenance and repair of these crucial tools. It also encompasses the costs of specialized research facilities and their upkeep.
• Research computing: In today’s data-driven world, robust computing infrastructure is essential. F&A covers the costs of data networks, high-performance computing clusters, secure data storage and management, and the specialized personnel to maintain these systems.
• Safety and compliance: Research must be conducted ethically and responsibly. F&A funds support proper hazardous waste disposal, security measures, grants compliance officers who ensure adherence to regulations (including those related to human subjects, animal research, and toxic substances), and reporting officers who compile necessary reports. This also includes costs related to research security and export control compliance, as required by federal law.
• Building maintenance and operations: This encompasses the costs of cleaning, repairs, utilities (electricity, water, etc.), and debt service for laboratories and research facilities. Keeping the lights on and the labs running smoothly is a significant expense.
• Research administrative support: A well-functioning research enterprise requires substantial research administrative support. F&A funds cover research-related payroll and HR functions, grants management, purchasing departments for lab supplies and equipment, and other essential research administrative functions.
• Library infrastructure: Access to journals, research databases, and other scholarly materials is crucial for researchers. 

While these indirect costs support research administration and facilities, they are force multipliers for the campus. They provide a rich ecosystem that gives students the opportunity to engage in research with our top faculty. This is the beauty of our nation’s research universities. 

What happens without indirect costs? 

The U.S. model of university-based research is unique and incredibly successful. Unlike many other countries, the U.S. relies on universities to conduct research in the national interest. Universities, not the government, bear the risk of building the infrastructure necessary to support federal research. They make upfront investments in facilities, equipment, and personnel which enables their scientists to compete for and execute federal grants.   

For this vital partnership to thrive, the federal government must cover both the direct and indirect costs of research. Without F&A reimbursement, universities would struggle to maintain the necessary infrastructure, jeopardizing the entire research enterprise and ultimately hindering scientific progress.     

What are some common misconceptions about F&A costs? 

Several misconceptions often surround F&A costs: 

• They are not arbitrary: F&A rates are not simply made up. They are rigorously negotiated between universities and the federal government, based on documented costs incurred by the institution. These rates are reviewed periodically, ensuring transparency and accountability. 
• Universities also invest heavily in research: Universities are not simply relying on federal funds. They also contribute significant funding to research, sometimes exceeding federal support. This demonstrates their commitment to research and innovation.
• F&A is not a slush fund: As described, our F&A dollars are heavily prescriptive – they must cover the facilities and research administrative costs as laid out in the federally approved negotiated rate.  They are specific to research-related costs and functions.
• F&A rates are not a percentage of the total project cost: This is a key point of confusion. F&A rates are applied to the Modified Total Direct Costs (MTDC), which excludes certain direct cost items like equipment and subawards. This ensures a more equitable distribution of F&A costs. 

What’s next? 

Carolina is a serious steward of taxpayer investments, and we handle those funds with rigor and accountability.  The Office of the Vice Chancellor for Research is committed to working with our legislative partners and member associations to proactively identify improvements to the F&A model that increases transparency. We will also continue providing practical guidance and support to our research community to navigate impacts of federal funding executive actions.   

To that end, we continue to prioritize continued funding for our researchers, enabling them to continue making the groundbreaking discoveries that have earned our world-class reputation. Tar Heels have a history of overcoming challenges and succeeding, and we will continue striving to ensure the advancement of scientific discovery for our state, nation, and world. 

For more information, visit UNC Research’s Executive Actions and Federally Sponsored Research resources page.