On December 18, 2025, the Fiscal Year 2026 National Defense Authorization Act (FY2026 NDAA) became law. True to each year’s NDAA being a sprawling piece of legislation, the FY2026 NDAA contains many priorities of the current Administration. Nestled among its myriad provisions, federal grant recipients should take note of Section 230, the “Prohibition on Modification of Indirect Cost Rates for Institutions of Higher Education and Nonprofit Organization.” This section provides a speed bump for rapid changes to indirect cost rates for Department of Defense grantees and reflects congressional sympathy to grantee concerns, particularly those of institutes of higher education (IHEs).
What the Section Clarifies
Section 230 is aimed at addressing long-standing concerns among IHEs regarding sudden or unilateral changes to indirect cost rates (also referred to as facilities and administration (F&A) cost rates), applied to Department of Defense grants and contracts.
Section 230(a) prohibits the Secretary of Defense from changing or modifying “indirect cost rates (otherwise known as facilities and administration cost rates) for Department of Defense grants and contracts awarded” to IHEs and nonprofits until the Secretary makes the required certification under Section 230(b).
The Section 230(b) certification framework requires:
- The certification must come from the Department of Defense to “congressional defense committees.”
- The certification must reflect the development of “an alternative indirect cost model” that not only reduces applicable indirect cost rates compared with indirect rates for FY25 but also focuses on the “optimized payment of legitimate and essential indirect costs involved in conducting Department of Defense research to ensure transparency and efficiency.”
- The Department of Defense has established an implementation plan with adequate transition time to the alternative indirect cost model.
Importantly, the Department of Defense must develop the alternative indirect cost model “working with the extramural community, including representatives from universities, university associations, independent research institutes, and private foundations.” (Emphasis added.)
Why This? Why Now?
Reducing indirect costs for federal financial assistance has been an overarching goal of the present Administration as noted in a previous post on Executive Order 14332, “Improving Oversight of Federal Grantmaking” (EO 14332). Through EO 14332, the federal government seeks to limit indirect costs, such as F&A, contending that a “substantial portion” of many grants to universities goes to F&A rather than supporting “project applicants or groundbreaking research.”
While EO 14332 directed the Office of Management and Budget (OMB) to revise the Uniform Guidance to limit grant funds related to indirect costs (with no such formal action yet taken as of the date of this post), the Administration has pursued rate cuts by fiat and, so far, without success. For example, earlier this year, the National Institutes of Health (NIH) attempted to implement a 15 percent indirect cost rate cap, but a federal district court order permanently enjoined implementation of the policy, which was recently affirmed by the US Court of Appeals for the First Circuit. See Massachusetts v. NIH, Nos. 25-1343 et al., 2026 WL 26059 (1st Cir. Jan. 5, 2026); see also New York v. Dep’t of Energy, No. 6:25-cv-1458, 2025 WL 3140578 (D. Or. Nov. 10, 2025) (holding that the US Department of Energy’s policy impermissibly imposed an indirect cost rate in violation of the Uniform Guidance, underscoring that agencies may not impose indirect cost limitations that conflict with negotiated rates or applicable federal regulations, even when pursuing broader policy directives).
Given the tug-of-war over indirect costs playing out in the courts, Section 230 appears to be a congressional response to the Administration’s rush to slash indirect cost rates and highlights a concern that upending the reliance interests of grantees in short order is too disruptive. As a Senate Report from 2017 observed in connection with a proposed 15 percent rate cap for NIH grants:
The methodology for negotiating indirect costs has been in place since 1965, and rates have remained largely stable across NIH grantees for decades. The Administration’s proposal would radically change the nature of the Federal Government’s relationship with the research community, abandoning the Government’s long-established responsibility for underwriting much of the Nation’s research infrastructure, and jeopardizing biomedical research nationwide. The Committee has not seen any details of the proposal that might explain how it could be accomplished without throwing research programs across the country into disarray.
The FY2026 NDAA addresses the concern recognized by Congress from an abrupt shift in policy. By requiring the Department of Defense to work with the “extramural community” in general and IHEs in particular to develop an alternative indirect cost model, Section 230 has provided some guardrails for change, giving impacted parties a voice in how to restructure funding and operations for foundational research.
How to Prepare
While Section 230 is limited on its face to grants and contracts with the Department of Defense, recipients of federal financial assistance can recognize that the engagement here can have meaningful impacts across the federal government, such as to civilian agencies where research overlaps with defense efforts, like the Department of Energy. Any alternative indirect cost model developed pursuant to Section 230, once certified by the Secretary of Defense, is likely to be closely scrutinized by other federal agencies that fund research with overlapping infrastructure and compliance requirements. While recognizing that the federal government is interested in reducing indirect rates, recipients will have an opportunity to justify indirect costs as necessary for their operations. IHEs should be prepared to use this consultative process to articulate how their negotiated indirect cost rates reflect legitimate, allocable, and essential costs required to support federally sponsored research, including facilities, compliance, security, and administrative infrastructure. Institutions should ensure that their existing indirect cost rate agreements, cost allocation methodologies, and supporting documentation clearly demonstrate compliance with the Uniform Guidance and the operational necessity of indirect cost recovery.
There is no doubt, however, that 2026 will bring more change and continued scrutiny of indirect costs for recipients of federal financial assistance. As noted above, we expect the OMB to revise the Uniform Guidance to address indirect costs, and such changes will extend beyond IHEs to many other types of organizations, regardless of whether they have agreements with the Department of Defense. Institutions should monitor these developments closely and be prepared to assess how any regulatory changes interact with existing rate agreements and award terms. Given imminent change, recipients should develop strategies now to best position themselves to manage their existing awards and prepare to win their next opportunities. This includes coordinating finance, sponsored research, facilities, and compliance functions to present a clear and consistent explanation of how indirect costs support research activities and preparing leadership to engage constructively with federal agencies during any formal consultation process required under Section 230. Immediate and careful attention to these issues will help institutions manage risk, preserve funding stability, and respond confidently to evolving federal expectations and demands.