SBIR caught in fallout as NIH announces indirect cost rate of 15%

A Feb. 7 memo from the Office of the Director of the National Institutes of Health (NOT-OD-25-068) announced the decision to implement a flat 15% Facilities and Administrative fee (F&A), also known as an indirect cost rate, ”across all NIH grants.” Public statements from the Association of American Medical Colleges (AAMC), Association of American Universities (AAU), American Council on Education, (ACE) and Association of Public and Land-grant Universities (APLU), among others, outlined their objections to the move, highlighting the impact it would have on medical research.

Press coverage has focused on the impact on institutions of higher education, but it is important to note that SBIR grantees will be covered under this directive as well. The notice is contradictory, however, as to when the policy will go into effect for grantees that are not institutions of higher education.  

Historically, the average rate NIH has paid for F&A has been 27-28%, according to the memo. In the past, the actual rate reimbursed by a grantee could be negotiated for awardees who submitted documentation to NIH in accordance with federal law and accounting regulations justifying their indirect costs. That information is then examined and approved in part or whole by NIH.

NIH has previously allowed private small businesses that do not have a negotiated F&A rate with NIH to charge up to 40% for F&A on their SBIR/STTR awards without further justification. The NIH argument for the flat fee is, historically, especially for innovation-based small businesses, that there is an expensive lift to conduct life science, biotechnology, and medical device R&D, particularly in the startup, no/low revenue phase of a company’s trajectory. The 40% policy is likely used by many SBIR/STTR awardees, particularly Phase I winners, because the process to get a NIH-negotiated rate is expensive, time consuming to prepare, and can take several months before review and rate setting are finalized.

It follows, then, that the immediate implementation of the official memo is likely to create hardship for many current SBIR/STTR winners and disrupt the health care innovation culture being nurtured by life science-oriented TBED programs across the country.

The notice is contradictory on the exact timing for grantees that are not an institution of higher education. In one section, it states, ”NIH may deviate from the negotiated rate both for future grant awards and, in the case of grants to institutions of higher education … for existing grant awards.” This language would indicate that only future SBIR grants would be impacted.

However, later in the notice, NIH states, “This policy shall be applied to all current grants for go forward expenses from Feb. 10, 2025 forward as well as for all new grants issued.”

SSTI has asked for clarification from the Division of Grants Policy and will update this article when they respond.

As with several other recent actions by the new Administration, legal challenges are expected, which may delay or cancel the memo’s implementation.

NOT-OD-25-068 lays out the Director’s argument for why a 15% F&A fee is reasonable. It points to several of the largest philanthropic organizations supporting life science research at institutions of higher education—including the Gates Foundation, Chan Zuckerberg Initiative, Rockefeller Foundation, and Robert Wood Johnson Foundation, among others named—as not allowing reimbursement for indirect rates to exceed 15%. The NIH memo states, but does not cite, a sample of 72 institutions to conclude only the Massachusetts Institute of Technology, University of Alabama at Birmingham, and the University of Michigan were the only institutions “in the sample that refused to accept indirect costs lower than their federal indirect rate.”

The NIH Director’s memo also suggests that the move to a low flat rate should save billions of dollars each year. It cites NIH expenses to support grantee indirect costs as totaling $9 billion in Fiscal Year 2023. The figure is 25.7% of the $35 billion NIH awarded to external research partners that year.