Overview
On April 11, 2025, the Department of Energy (DOE) issued a Policy Flash announcing a 15% cap on the "indirect cost rate" for grants awarded to institutions of higher education (the "Rate Cap Policy").
Through its grant programs, DOE funds research at universities in a range of areas, including energy, infrastructure, materials development, and engineering, with a portion of each grant going to "indirect costs." Indirect costs include facility and administrative costs, which cover building and equipment improvements, operations and maintenance expenses, and other general administration expenses. Historically, the percentage used to determine the extent to which indirect costs could be charged to each grant was an agency-wide indirect cost rate that was typically negotiated by the Department of Health and Human Services or the Department of Defense's Office of Naval Research, whichever provided more funds to the educational institution in question over the most recent three years. The negotiated indirect cost rate must be accepted and adopted by all federal agencies, including DOE, and applied to every grant for the negotiated period unless an agency makes an exception in public guidance that justifies a deviation from negotiated rates. Specifically, an agency may only deviate from negotiated indirect cost rates when required by law or when the deviated rate is approved by the awarding agency and notice of the policies, procedures, and decision-making requirements that justify the deviation is given.
The Rate Cap Policy explains that DOE will no longer use the negotiated indirect cost rate for grants awarded to institutions of higher education, and instead is setting a standardized 15% indirect cost rate for all higher education grant awards. Consistent with the change, DOE is "undertaking action" to terminate all grant awards that do not conform to the 15% cap on indirect costs, apparently including awards for which indirect cost rates have already been set. The Rate Cap Policy indicates that recipients whose grants are subject to termination will receive separate notice and guidance. In DOE's announcement of the Rate Cap Policy, it said that prior to the policy change, the average indirect cost rate for higher education grant recipients was more than 30%. As a result, DOE expects to reduce the approximate $2.5 billion of funding it provides annually to colleges and universities by over $405 million a year.
In response to the Rate Cap Policy, the Association of American Universities, along with nine universities and two other higher education organizations,1 filed a complaint against DOE and a Motion for a Temporary Restraining Order in the District of Massachusetts on April 14, 2025, alleging that the policy violates the Administrative Procedures Act (APA) both with respect to DOE’s approach to implementing the cap and its stated intent to terminate existing awards that do not conform to the cap. The complaint also outlines the forecasted annual losses for each university plaintiff if the Rate Cap Policy is applied to the grants they receive––e.g., $8 million for Cornell University, $32 million for Michigan State University, more than $25 million for the University of Rochester, and between $15 and $16 million for the Massachusetts Institute of Technology. On April 16, 2025, Judge Allison D. Burroughs issued a Temporary Restraining Order, temporarily blocking DOE from implementing the Rate Cap Policy. DOE’s response to the Motion for a Temporary Restraining Orders due the week of April 21, 2025, as is Plaintiffs' optional reply brief, and a hearing on the motion is scheduled for April 28, 2025.
DOE's Rate Cap Policy serves as another example of how the current administration is seeking to cut funding to institutions of higher education. The Rate Cap Policy was announced after Judge Angel Kelly, of the US District Court for the District of Massachusetts, ruled on April 4, 2025, that a similar grant cap policy announced by the National Institute of Health (NIH) violated the APA, and permanently enjoined the NIH from implementing the policy. In contrast to the DOE’s Rate Cap Policy, the NIH policy did not contemplate the termination of existing grants; rather it applied the rate cap to existing grants. It seems likely that Judge Burroughs will conclude that this is a material difference between the DOE Rate Cap Policy as compared to the NIH policy, potentially increasing the likelihood that Judge Burroughs issues at least a partial injunction.
Steptoe will continue to monitor these developments and is available to help your institution navigate these policy changes.
1 The other plaintiffs joining the Association of American Universities are Brown University, the California Institute of Technology, Cornell University, the Board of Trustees of the University of Illinois, the Massachusetts Institute of Technology, the Regents of the University of Michigan, the Board of Trustees of Michigan State University, the Trustees of Princeton University, the University of Rochester, the American Council on Education, and the Association of Public and Land-Grant Universities.
