Dear Mr.----------:
     I am writing to express my serious concern about the limitation on indirect expenses connected with research grants included in the pending Department of Defense Appropriation Bill for fiscal 1963. The bill as passed by the House of Representatives would limit the amount which could be included in such grants for indirect expenses to 15 percent of the direct costs of a grant. In my judgment this provision would seriously hamper colleges and universities in the conduct of research supported by the Federal Government.
     Progress in applied science and technology upon which the country relies for military strength, medical advances and the development of our civilian economy is heavily dependent upon the continuous flow of new scientific knowledge. Basic research efforts need to keep pace with our rapidly growing applied scientific activities. Universities and technical institutions have been the principal source of this basic knowledge. About half of all basic research is carried out in academic institutions. The Government has also maintained its own research laboratories and has permitted basic research as an overhead item in many industrial contracts.
     In addition to supporting research, grants to universities are vitally important because of the close relationship which research bears to graduate education and to the development of an adequate supply of trained scientists and engineers. During the next decade it will be necessary to increase our scientific research efforts substantially and to increase the number of engineers and scientists. For this we will also depend heavily upon the interest and support of our educational institutions. This spring I sent to the Congress a message on education¹ which stressed the need to increase the Nation's capabilities in the field of higher education, emphasizing that our colleges and universities do not have the financial resources to meet these growing needs. This problem would be aggravated if the cost limitation on research grants were allowed to stand.
     These grants are not intended to give general financial support to colleges and universities; rather their purpose is to assist them in carrying out important national programs. In making grants Federal agencies define those costs which are allowable. The indirect costs involved, frequently described as overhead costs, cover such items as plant maintenance, heat and light, and administrative expenses in carrying out federally supported research projects. They represent expense items which must be provided in the budgets of these institutions. They are just as much a part of the cost of research as the salary of the scientist or technician. If the actual cost of these items is greater than a fixed percentage established by the Congress, these institutions must finance the difference.
     It is the policy of the executive branch that in no case should grants for research include a profit or fee either as a direct or indirect cost. A Bureau of the Budget Circular dated January 7, 1961, establishes for all Government agencies . a common basis. for determining allowable costs for research sponsored by the Federal Government, applying generally accepted cost accounting principles and practices. A statutory limitation is, therefore, unnecessary if the purpose of the Congress is to prevent windfalls to research institutions.
     A flat statutory limitation on the amount which can be paid for overhead or indirect costs is undesirable for the following reasons:
     1. An institution, in an effort to meet the statutory limitation, may be forced to draw funds away from other educational or research programs in order to meet the total cost of federally supported research. I do not believe that the Congress intended that this burden be placed on the colleges and universities.
     2. A flat rate does not recognize that research projects differ greatly in character and in the nature of their indirect costs. For example, a research activity involving substantial physical facilities such as animal quarters for biological research or particle accelerators requires considerable space or electrical power with consequent high indirect costs. On the other hand, theoretical studies may require little supporting assistance beyond administrative help. Clearly a single inflexible rate for indirect costs would treat unfairly those institutions whose research work is such as to need substantial indirect services.
     3. While total costs for a given project may be the same from one institution to another, the allocation between direct and indirect costs can vary widely. This stems from the fact that institutions do not follow common accounting practices. Therefore, it is not surprising that indirect cost rates vary considerably among institutions. I do not believe it is desirable to force these institutions to conform to a common accounting system otherwise inappropriate to their needs. And it does not follow that work done at an institution with a higher indirect cost rate will necessarily result in higher total cost to the Government or that the institution is less efficient than one with a lower rate.
     4. The legislative limitation applies only to research grants and does not apply to research contracts. In many cases grants are more appropriate and simpler to administer than contracts. Therefore we encourage the use of grants particularly for basic research where it is not desirable or profitable to exercise the same degree of detailed supervision as in the case of applied research and development for which contracts are normally used. I do not believe it is desirable to turn to the use of contracts in place of grants in order to avoid such a legislative limitation.
     A statutory limitation for indirect costs is now in effect for research grants made by the National Institutes of Health and other parts of the Department of Health, Education, and Welfare. The record is clear that this limitation has imposed serious financial difficulties particularly for many of our medical schools. In my Health Message to the Congress of February 27 of this year I renewed my recommendation of last year "that the current limitation on payment of indirect costs by the National Institutes of Health in connection with research grants to universities and other institutions be removed."
     I urge the Congress to remove the limitation in the case of the Department of Health, Education, and Welfare and refrain from establishing a similar limitation in the appropriations to the Department of Defense of other agencies.
             Sincerely,

NOTE: This is the text of identical letters addressed to the Honorable Lyndon B. Johnson, President of the Senate, and to the Honorable John W. McCormack, Speaker of the House of Representatives.