We’ve been speaking at the National SBIR conferences for years.
We’ve had the privilege of meeting impressive entrepreneurs who are trying to educate themselves on the strings attached to Federal Government funding vehicles (SBIR/STTR, ARPA-E, R01, BAA, BARDA, etc.).
In most start-up situations, they eventually ask our thoughts on using the NIH and NSF “safe rates” if they are considering proposing to those agencies.
Companies ask, Should I take the Safe Rate? We like to use the Socratic Method here and ask in return, What is the indirect rate you’ve projected to properly run your business? Typically, we get a blank stare.
Despite the fact that it’s just one line item on your cost proposal, it is the most important one for ensuring your business stays cash flow positive. To better answer this question, let’s take a deeper dive into understanding the safe rate.
Pros & Cons of the Safe Rate
The Safe Rate Structure for NIH and NSF is broken down as follows:
- NIH – 40% of all direct costs
- NSF – 50% of direct labor costs
The safe rates were created as a way to reduce the government’s administrative burden. Sometimes shortcuts can be beneficial, but other times they can cause severe problems.
So, why do some companies take the safe rate?
- You just started your business and not accepting this rate is effectively checking a box that says “please audit me,” which seems counter-intuitive
- Seems like the rate might be okay
- You don’t really know how to project an indirect rate, so this sounds good enough
- Fear using a higher rate reduces your chances of winning the award
Your business may have indirect rates that actually run at 40% and 50% respectively—but, it’s highly unlikely! The problem most companies have is that they haven’t properly projected their indirect rate to know if the safe rate is a good option for them. In fact, our analysis shows that 98.3% of start-ups get indirect costs radically wrong!
Underbidding Can Lead to Severe Cash Flow Problems
What happens if you take the safe rate and your actual rates run higher? You will have cash flow problems to the extent of the “miss.” Meaning, if your indirect rates actually run at 70% and you took the 40% safe rate, your cash flow problem is approximately 30%….which could lead to insolvency. The FAR requires indirect costs to ultimately be reported and reimbursed at the lower of actual costs, or your negotiated indirect rate—which is capped if you use the safe rate.