Research at any cost?

If you work at a research institution receiving federal funding and are in possession of an internet connection, chances are you’ve been nervously following the legal and political battle over recent, drastic changes to the way that the National Institutes of Health (NIH) funds scientific research in the U.S. One controversy revolves around a specific metric called the indirect-costs rate, and an executive order standardizing and reducing this rate for all current and future NIH-funded research grants. I certainly count myself among the ranks of scientists biting their nails over these potential changes; however, in my endless doom-scrolling through various news outlets, forums, and official NIH documents (which are so dense that they may as well have been written on papyrus with an ink quill), I quickly realized that I know very little about what indirect-costs rates are and how they work, both in general and specifically at Fred Hutch. If you can relate, join me on a brief foray into the fascinating world of finance, where I hope to dispel some potential myths and misunderstandings and help us all get a better grasp on this pressing issue.

Many names for the same thing

Let’s get one thing straight: I’m someone whose cortisol spikes the one time a year that an envelope arrives in the mail with the words ‘W-2’ on it, so I shouldn’t be teaching anyone about money. Instead, I talked to someone who probably fills out tax forms for fun over his morning coffee: Mr. David Browdy, Chief Financial Officer of Fred Hutch. So, David, could you take us through the basics?

“Sure—when you write a grant to the NIH asking for money for a specific research project, you are required to define and justify the costs of undertaking the proposed work. These costs fall into two broad categories: direct costs and indirect costs. If you were the owner of a restaurant, your direct costs would include the price of the ingredients that go into each dish, as well as the salaries that you pay to the cooks making the dishes. But you also need to pay for electricity and water, the walk-in freezer, ovens, hoods and the service contracts for those, the rent on your building, and a host or hostess to seat guests: these would be examples of indirect costs.”

Now, if we were in charge of a ‘research restaurant’ serving up ‘discovery burgers,’ we can appreciate the analogy: direct costs on NIH grants include the prices for lab materials and reagents (the ‘discovery burger’ ingredients) and salaries for the scientists (‘chefs’) doing the work, while indirect costs include things like building rent and maintenance, shared scientific resources, and environmental health and safety. But why draw a distinction between direct and indirect costs in the first place? Wouldn’t it be easier to just build everything into a single, overall cost?

“The reason for distinguishing direct from indirect costs comes down to accounting,” continues David. “Just like it would be difficult to figure out the cost of heating and electricity ‘per dish’ at a restaurant, it’s infeasible to divide up costs like rent, vivarium staff, and laboratory gases—which collectively support the research going on at a place like Fred Hutch—to individual projects. In other words, they’re called indirect costs because they are not directly attributable to any individual project.”

In practice, indirect costs are determined by adding a percentage to certain direct costs associated with a project—this percentage is called the indirect-costs rate. For example, if I receive a grant from the NIH to fund the creation of a new breed of aquatic mice (a long-standing dream of mine) which included direct costs of $1,000,000, an indirect cost rate of 50% would mean that the total value of the grant would be $1,000,000 of direct costs + $500,000 of indirect costs = $1,500,000. Indirect costs are also sometimes known as overhead costs or facilities and administrative (F&A) costs, but these terms generally refer to the same thing.

One size fits none

Among institutions receiving NIH funding, indirect-costs rates differ and vary widely—from about 20% to over 75%. These rates are negotiated with the federal government and are institute-specific, meaning that Fred Hutch and the University of Washington—despite being physical and intellectual neighbors—have different indirect-costs rates. Fred Hutch sits at the high end of this spectrum, with an indirect-costs rate of 76% for the most recent fiscal year. Why is it so high at the Hutch, and what sorts of factors go into deciding these rates?

“Well first, it’s important to note that Fred Hutch actually has two distinct indirect-costs rates: a 76% rate for ‘on-site’ research (occurring on the physical Fred Hutch campus) and a 32% rate for ‘off-site’ research (including off-campus community initiatives),” notes Browdy. “When determining these rates, the NIH looks at a variety of factors: how much of an organization’s costs come from research, how much of their research is federally funded, and even the type of research that’s being conducted. This is all meant to incorporate the reality that it costs different amounts of money to do experimental versus computational research, as well as look at an organization’s overall financial structure. Since Fred Hutch is a research institute, the vast majority of our revenue comes from federally funded research, and much of that research is cutting-edge experimental research using state-of-the-art (read: expensive) technology and model systems, which contributes to our high indirect costs rate for on-site work. If you notice that the University of Washington’s indirect cost rate is lower than at Fred Hutch, you also have to consider that UW has distinct sources of revenue—tuition, state appropriations, a college and sports program, among other things—and that federally funded research takes up a different proportion of their overall institutional budget.”

Here, it’s also important to consider that certain costs are mandated by the government, which affect the minimum overall costs incurred by an institution. “For example,” notes Browdy, “the government mandates that our institution has sufficient facilities for the safe disposal of hazardous waste generated in our laboratories, and it mandates a system to track gifts and travel given to individual principal investigators. It mandates that we have these systems, but it doesn’t provide funding for them—so all of those services contribute to our indirect costs rate as well.”

Deal or no deal?

It’s important to realize, though, that indirect-costs rates aren’t just a number that the NIH imposes on an organization after punching some of these factors into a calculator. Just like you might negotiate with someone on Facebook Marketplace to buy that used 2003 Honda Civic with the broken alternator, the indirect-costs rates are actively negotiated between an institution and the NIH on a yearly basis.

“Every year, we sit down with NIH representatives and present our case—a nearly 200-page document—which breaks down what it costs for us to perform our research and—importantly— justifies these costs based on a variety of factors,” says Browdy, “To ensure that our projected costs are accurate and fair, we are routinely audited by outside accounting firms, and of course close attention is paid by the NIH negotiators, who are incentivized to hold us accountable for the money we are asking for. After looking at all of this information, the NIH proposes an indirect-costs rate that they consider fair.”

And because this is a negotiation, it’s also a compromise, and neither party walks away with 100% of what they wanted. “What many people may not appreciate is that, while we get 76% in indirect costs from the NIH, our actual costs of facilities and administration are higher than this—more like 84%. The difference between what we get from the NIH and what we spend on our research has to be made up from other sources, including things like philanthropy, intellectual property revenue, and earnings on our investments,” Browdy notes.

A financial ecosystem

One argument floated in support of the recent proposed cuts to indirect funding relates to the fact that other research funding sources—including foundations like the Gates Foundation—pay much lower indirect-costs rates than the NIH. According to Browdy, however, the comparison is a little more nuanced than that. “For example, a major reason why foundations have been able to get away with lower indirect-costs rates has been the very existence of NIH grants and their higher indirect rates, which can make up for the difference.” Non-federal funders are also not bound by federal definitions about allowable costs so more direct costs can be obtained from those sponsors. A good example of that is a federal cap on salary recovery that does not apply to private funders.

So maybe the best way to think about institutional finances isn’t as a bulleted list of static costs and revenues on a spreadsheet, but as a dynamic ecosystem made up of different funding sources that interact with each other. And if there’s anything scientists have learned about ecosystems, it’s that they are at once robust and fragile: mess with a single species and the system as a whole may adapt; push it too far in one direction, however, and you might have an environmental catastrophe on your hands.

Browdy agrees. “As an institution, we are constantly managing, projecting, and predicting a financial picture which includes all kinds of different funding sources with different volatilities, regulations, and behaviors. We actually modeled a cut in indirect rates to 50%, initially considering this our ‘worst case scenario,’ though right now that’s looking quite optimistic. Even more concerning than the possibility of losing 51% of our indirect rates is the suddenness of the change—there’s always room to reevaluate things and make sure that we couldn’t be more efficient with our grant money, and given some time to adapt to a lower indirect rate we could perhaps try to make up the losses with different funding sources, but losing this many dollars overnight is a challenge beyond our wildest projections—literally.”