Congressional Relief from Indirect Cost Rate Caps for Grantees—Congress Signals a Viewpoint in the NDAA

Early this week, the House and Senate Armed Services Committees released the final negotiated language of the Fiscal Year 2026 National Defense Authorization Act (FY26 NDAA), which the House promptly passed on December 10. Assuming it becomes law in its current form, the NDAA will provide grant recipients working with the Department of Defense (DoD) qualified relief following a year of substantial uncertainty surrounding indirect cost rates. On the one hand, the FY26 NDAA would prohibit DoD from changing or modifying indirect cost rates without first making a certification to Congress—a process that could enhance stability and allow for better planning. On the other hand, the bill signals that Congress does want to see indirect rates below 2025 levels in the future, and that significant changes in accounting practices may be coming. Venable’s Federal Grants Practice Group explains what is in the bill and how we got here.

The final language in the compromise FY26 NDAA retains a provision from the Senate Bill, S. 2296 (Sec. 226), that prohibits DoD from “chang[ing] or modify[ing] indirect cost rates . . . for [DoD] grants and contracts awarded to institutions of higher education [IHEs] and nonprofit organizations . . . until the Secretary makes [a particular] certification” to Congress.

The prerequisite certification is to be made to the House and Senate Armed Services Committees and substantively requires DoD to confirm that, in collaboration with “the extramural research community,” DoD “has developed an alternative indirect cost model” that has the following features:

• Reduces indirect cost rates for all IHE and nonprofit institutions as compared with 2025
• “[O]ptimiz[es] payment of legitimate and essential indirect costs” for DoD research and
• “[E]nsure[s] transparency and efficiency”

The certification also must affirm that DoD has “established an implementation plan with adequate transition time to change budgeting and accounting processes for affected [IHEs] and nonprofits.” 

Although limited to DoD, this language is an important signal from Congress in a turbulent year for indirect cost rates. Below, we recap federal actions on indirect rates and responses to those actions throughout 2025, involving primarily, but not exclusively, rate caps faced by IHEs. This backdrop provides context not just for the NDAA language but also for updates that can soon be expected with respect to the Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (the “Uniform Guidance”), 2 C.F.R. Part 200.

In 2025, potential changes to indirect cost rates, and challenges to those proposed changes, unfolded as follows:

• From February through June, the National Institutes of Health (NIH), National Science Foundation (NSF), Department of Energy (DOE), and DoD issued new policies by which they would impose indirect cost rate caps of various types with varying scopes.^[1]Table 1 provides a summary of each rate cap.
• Throughout the late spring and summer of 2025, certain states and associations representing IHEs brought actions in federal court, successfully challenging the proposed rate caps. In each case, the plaintiffs succeeded in either permanently enjoining or vacating the rate cap policies. The litigation impacting IHEs was brought through various lawsuits in the Federal District Court for the District of Massachusetts. A successful lawsuit pertaining to a DOE rate cap on state and local governments was brought in the Federal District Court for the District of Oregon. Table 2 provides a brief description of each lawsuit.
• Plaintiffs in the rate cap lawsuits largely asserted that the caps were inconsistent with substantive and procedural requirements applicable to indirect cost rate determination under the Uniform Guidance.^[2] In the case involving the NIH rate cap, plaintiffs also successfully pointed to an annual rider in the Department of Health and Human Services (HHS) appropriations act that prevents NIH from changing rate methodologies.
• Against the backdrop of the above-described rate cap policy initiatives and resulting litigation, a group of associations representing the interests of higher education, referred to as the Joint Associations Group (JAG) proposed an alternative approach, referred to as the Fiscal Accountability in Research (FAIR) Model, for recovery of costs traditionally recovered by IHEs and others through indirect cost rates. Largely, the FAIR model calls for moving certain costs traditionally recovered by large institutions through indirect cost pools into a series of allocated joint direct cost pools.
• Additionally, in early summer 2025, several key agency-specific, Senate-initiated appropriations bills contained provisions similar to the NIH provision mentioned above, including S. 2354 (Department of Commerce, National Aeronautics and Space Administration, and NSF, Sec. 542), S. 2572 (DoD, Sec. 8123), and S. 2587 (NIH, Sec. 224).^[3]
• On August 7, the president issued Executive Order 14332, which, among other things, calls upon the Office of Management and Budget (OMB) to revise the Uniform Guidance to “appropriately limit the use of discretionary grant funds for costs related to facilities and administration,” i.e., indirect rates. See Venable LLP Client Alert discussing EO 14332.
• Although initially appealing the adverse NIH and NSF rate cap decisions as well as one of the two adverse DOE rate cap decisions to the First Circuit, the government has since withdrawn its appeal in the NSF case and seems to be focused primarily on its appeal in the NIH case. This may signal that the administration views its best path forward in limiting indirect rates as simply updating the text of the Uniform Guidance to remove barriers initially encountered in litigation. Whether any such updates will, in turn, be challenged in court remains to be seen.

Thus, as grantees approach the end of a tumultuous 2025, the NDAA language, while applicable only to the DoD, is an important and perhaps reassuring signal from Congress that abrupt changes to how indirect costs are handled and reimbursed are a significant issue and that major changes without industry input could endanger the important research of federal partners. Although the language suggests that Congress has interest in finding ways to limit indirect rate costs, it also conveys that Congress understands that indirect costs are real costs of research, is calling for collaboration with the regulated community in evaluating possible alternative models, and is mandating an orderly transition in the event that any alternative model is adopted.

Still, this language signals that regardless of the favorable litigation to date, changes of some sort are afoot. While Congress is attempting to get ahead of this, many organizations’ (IHEs and nonprofits alike) heavy financial investment in their current accounting processes may soon require significant changes. Moreover, grantees other than large IHEs may find their interests could be overlooked in any negotiation of new models designed for large research institutions. Any model that shifts costs from broad-based indirect cost pools toward allocation of numerous joint direct cost pools will necessarily increase the complexity of accounting systems and may lead to difficulties in obtaining consistent treatment by federal funding agencies that have greater oversight over allocated direct costs.

Venable LLP’s federal grants attorneys will provide continued client alerts as indirect rate matters continue to evolve. For any questions about federal grant issues, contact Dismas Locaria, Christopher Griesedieck, and Scott Sheffler.

Table 1: Rate Cap References

Table 2: Rate Cap Litigation (as of Dec. 10, 2025)