On November 14, 1955, the U.S. Secretary of the Army held a lunch meeting with Robert Cutler, President Eisenhower’s former National Security Advisor. While a Department of Defense official meeting with a former NSA would not ordinarily raise eyebrows, the presence of the Assistant Dean of Harvard Medical School made the gathering more unusual. The three men did not meet to discuss a new medical breakthrough, nor did they discuss the health and wellness of America’s manpower pool. Instead, their conversation turned to something much quieter, something almost invisible to the average American: the arcane machinery of indirect cost recovery in federally funded research.
Indirect costs are expenses that cannot be attributed to any single project. In the context of federal research grants, indirect costs are payments intended to reimburse universities for expenses borne in supporting federally funded researchers. The payments compensate universities for facilities, services, and administrative support provided to faculty and research staff, including access to libraries and scientific journals, office space, some laboratory equipment, and accounting assistance. In early 2025, the White House proposed cuts to indirect cost reimbursement rates, bringing unprecedented attention to the topic. Many universities and researchers argued that such cuts would render academic research unsustainable—causing the country to miss out on life-saving or economically valuable discoveries. Those in favor of the cuts argued that reimbursement rates were too high, leading to excessive federal expenditure on ancillary university operations that provide little or no value to most taxpayers.
In the 1950s, the high-profile philanthropist and business executive Alfred P. Sloan argued that indirect costs were “purely a matter of arithmetic,” but historical controversies and subsequent policy developments suggest that math cannot solve this problem. Instead, as I argue, negotiating the moral economy of science is core to solving recurring disputes over indirect costs. Shortly after World War II, many federal agencies began reimbursing indirect costs at a flat rate of 8% or 15% of direct costs. In contrast, many parts of the Department of Defense adopted the more generous Mills Formula, which provided a framework for calculating an indirect cost reimbursement rate correlated with an institution’s self-reported indirect cost expenditures. Cutler and other research advocates generally supported high indirect cost reimbursement and advised all government agencies to adopt the Mills Formula. But unlike many modern advocates who resist efforts to reduce indirect cost payments, Cutler and his colleagues successfully articulated a moral basis for federal support of research universities. Nevertheless, the risks of universities becoming dependent on the whims of the federal government gave even the staunchest advocates cause for concern.
In a memo summarizing the findings of Cutler’s NSF-sponsored committee investigating indirect cost reimbursement, the authors began not with math, but with values. “An educational institution cannot be divided into areas of instruction, research, and community service,” they wrote, “these exist as parts of an organic whole, each contributing to the successful performance of the others.” In his famous report, Science—the Endless Frontier, Vannevar Bush argued that basic research deserved support because it advanced national health, wealth, and security. Moving beyond Bush’s powerful but simplistic articulation, these authors elevated research institutions as beacons of epistemic virtue, providing inherent value as centers of knowledge production. Speaking specifically about teaching and research hospitals, Cutler and his colleagues argued that low indirect cost reimbursements compromise teaching and service programs, threatening to turn universities into mere research labs. In Cutler’s framework, greater indirect cost reimbursement was not a boon for elite researchers or avaricious administrators, but a benefit to the students and communities served by universities.
However, some early science policy advocates had concerns. Alan Waterman, a Yale physicist who served as the inaugural director of the NSF, was far more cautious about the prospect of increasing indirect cost reimbursement. When representatives from several major universities met with NSF leadership on the issue in 1952, he resisted calls for the government to guarantee full reimbursement. According to Waterman and his staff, “it seems most desirable that the institution contribute a portion of the total [indirect] cost” when conducting research proposed and directed by its faculty. This line of reasoning was grounded in a moral suspicion about the university’s ability to fulfill its function in the absence of financial pressures. Later, in 1955, Waterman expressed another concern—the rising threat of universities developing an economic dependence on government. “If the Federal Government is to extend this support in a large measure,” Waterman explained in response to Cutler’s enthusiastic drive, “I believe it is also important to ensure that universities have some equity in the work, both to protect their independence and the soundness of the financing.” In responding to Harvard Medical School’s entreaties on overhead, Waterman expressed sympathy, but ultimately suggested that the university might reduce costs by simplifying accounting procedures or increase income from other sources.
Was Waterman’s stance a reflection of his hostility toward the American scientific enterprise? Given his background and position, that seems unlikely. Waterman was one of the leading proponents of federally funded scientific research in the post-war period. “There seems every evidence,” Waterman opined, “that the need for progress in basic research and the training of scientists and engineers which accompanies this in colleges and universities should be regarded as a fairly permanent requirement for the sake of the county’s welfare and security.” Like Cutler, Waterman tied teaching to research, and placed high social and economic value on university activities. However, he was less convinced that universities could uphold these ideals in the years to come.
In the end, indirect costs are less about finance than about faith—faith in what a university is, and what it ought to be. Cutler and Waterman saw the research university as a cathedral of enlightenment, where teaching, service, and discovery blend harmoniously to lift the arc of human civilization. That shared vision gave moral force to their call for indirect cost reimbursement reform and shaped policies that the NSF and other agencies would adopt in the following years. Yet even at the height of consensus, doubts lingered. Despite his great service and commitment to science, Waterman harbored more caution than conviction.
In the twenty-first century, the doubts have only grown louder. As we consider the question of indirect costs in the present, even the staunchest defenders of the research university must grapple with biting questions: What is the purpose of a university? What value does it provide to society? Can the modern academic enterprise reliably achieve a harmonious integration of teaching, research, and service?
Brice Bowrey