The U.S. government is poised to cap reimbursement rates for overhead costs incurred by researchers working under Department of Defense grants—a change that could further limit funding for Harvard scientists already strapped for cash.

In a currently pending bill, congressional leaders set on Tuesday the provisional cap on indirect expenses—including administration, building upkeep, and utility costs—at 35 percent, marking an end to a nearly half-century-old tradition of negotiating these rates on an institution-by-institution basis, said Kevin Casey, Harvard’s senior director of federal and state relations.

“This is regrettable because it is an arbitrary cap that replaces a standard accounting-audit-based system of determining the actual overhead it costs to produce the research that we do,” Casey said yesterday. “Establishing a uniform cap is not a policy based on sound reasoning.”

Funding from the Defense Department constitutes 3.8 percent of the University’s federal research funding, making it the third largest source of government grant money, according a 2007 report by Harvard’s Office of Sponsored Programs. Federal awards accounted for 81 percent of sponsored expenditures at Harvard last year.

“The biggest difficulty,” said John P. Huchra, a Harvard cosmology professor who serves as senior adviser to the provost on research policy, “is that if this becomes a bandwagon in Washington, and other agencies are also forced to go with the same kinds of caps on administration and overhead expenses, then it will affect all the research we do that is sponsored by the government.”

Scientists across the nation are already facing fiscal pressures because total grant funding from the National Institutes of Health has not kept pace with inflation.

Most research universities have an indirect-cost compensation rate of about 50 percent, according to the Chronicle of Higher Education, which reported the latest congressional compromise on the bill this week.

Casey estimated the average Harvard rate to be between 60 and 70 percent, though the rates vary for the three schools that receive Defense Department funding—Harvard Medical School, the School of Public Health, and the Faculty of Arts and Sciences (FAS)—to reflect more accurately the “actual cost of research” at each school, he said.

Casey said it would be difficult to determine the exact financial effects of the congressional cap, as it is not yet clear precisely which expenses will be subject to the cap.

This summer, President Bush criticized the language in an earlier version of the bill, H.R. 3222—which would have set a 20 percent cap—as “artificial” and “arbitrary,” according to the Chronicle.

Casey said that Harvard, as well as other universities, have lobbied against this provision both directly and through national associations of universities.

“We’ve actually had some success,” he added, noting that the proposed cap had nearly doubled from 20 to 35 percent.

—Staff writer Aditi Balakrishna can be reached at balakris@fas.harvard.