To explain the situation, first let's think about how one would administer a collaborative grant in the ideal world. Let's say Professor Smith is a biologist at University X studying cancer, and Professor Jones is a computer scientist at University Y who has a new method for statistical analysis of cancer cells. They decide to write a grant proposal together, and each of them develops a budget to pay for the people or materials necessary to do the research (let's say $150,000/year for Smith and $100,000/year for Jones). The grant gets a very good priority score from the reviewers, and the agency decides to fund it. In an ideal world, the agency would then send $150,000 to University X and $100,000 to University Y, and each would be treated as separate accounts from the standpoint of financial administration, even if their scientific progress would be judged as a whole.
At some agencies (for example, for collaborative grants from the National Science Foundation), this is how it works. However, for nearly all regular grants at the NIH, the entire grant gets awarded to the lead institution, and then this institution must dole out the money to the collaborators via subawards. This might sound like no big deal, but it causes significant problems in two different ways:
The first problem has to do with "indirect costs" (also known as "overhead"), which are the funds that universities receive for hosting the grant; they are meant to pay for all of the administrative and physical overhead related to a research project. The overhead rates for federal grants are negotiated between each institution and the federal government; for example, at Stanford the negotiated rate is 57%. This means that if the grant was awarded by NIH to Dr. Smith at a university where the rate was 50%, then NIH would send the entire $250,000 in "direct costs" plus $125,000 in "indirect costs" to University X. In the situation above, University X would then create a subaward to University Y, and send them the $100,000 for Dr. Jones's part of the research. But what about the indirect costs? In the best-of-all-worlds model, each institution would take its proportion of the indirect costs directly. In the NIH model, what happens is that the subaward must include both the direct and indirect costs for University Y, which both must come out of the direct costs given to University X; that is, the subaward amount would be $150,000 ($100,000 in direct costs plus $50,000 in indirect costs). This penalizes researchers because it means that they will generally get about 1/3 less direct funds for work to be done on a subaward than work done directly from the primary grant, since the indirect costs (usually around 50%) for the subrecipient have to come out of the direct costs of the main grant. If grant funds were unlimited then this wouldn't be a problem, but many grant mechanisms have explicit caps on the amount that can be requested.
In addition to the reduced budget due to treating subaward indirect costs as as direct costs in the main budget, there is also an added extra expense due to "double dipping" of indirect costs. When the primary institution computes its indirect costs, it is allowed to charge indirect costs on the first $25K of the subaward; this means that NIH ends up spending an extra ~$12.5K in indirect costs on each subaward. This is presumably meant to cover the administrative budget of managing the subcontract, but it is another extra cost that arises for collaborative grants due to the NIH system.
There is a second way that the NIH model makes collaboration harder, which is the greatly increased administrative burden for subaward management for grants lasting more than a year (as they almost always do). When an investigator receives an NIH grant directly, the university treats the grant as lasting the entire period; that is, the researcher can spend the money continuously over the grant period. If they don't spend the entire budget they can automatically carry over the leftover funds to the next year (as long as this amount isn't too much), and the university will also usually allow them to spend a bit of the next year's money before it arrives, since it's guaranteed to show up. For subawards, the accounting works differently. Every year the primary recipient generates a new subaward, which can't happen until after the primary award for that year has been received and processed. Then this new subaward has to be processed and given a new account number by the recipient's university. In addition, it is common for the lead school to not allow automatic carry-forward of unspent funds between years, and sometimes they requite any unused funds to be relinquished, and then be rewarded back in the new year's fund. All of these processes take time, which means that the subaward recipient is often left hanging without funding for periods of time, particularly at the end of the yearly grant period. This is a pretty minimal cost compared to the actual cost described above, but it ends up taking a substantial amount of time away from doing research.
Why can't the NIH adopt a process like the one used for collaborative grants at NSF, in which the money goes directly to each institution separately and indirect costs are split proportionately? This would be a way in which NIH could really put its money where its mouth is regarding collaborative transdisciplinary research.
UPDATE: Vince Calhoun pointed out to me that the indirect costs in the subcontract do not actually count against the modular budget cap. According to the NIH Guide on budget development: "Consortium F&A costs are NOT included as part of the direct cost base when determining whether the application can use the modular format (direct costs < $250,000 per year), or determining whether prior approval is needed to submit an application (direct costs $500,000 or more for any year)...NOTE: This policy does not apply to applications submitted in response to RFAs or in response to other funding opportunity announcements including specific budgetary limits." Thus, while this addresses the specific issue of modular budgets, it doesn't really help with the many funding opportunities that include specific budget caps, which covers nearly all of the grants that my lab applies for.