Rates, rates, rates! Indirect rate, overhead rate, fringe rate, G&A rate, F&A rate, provisional rate, actual rate, negotiated rate, so many rates. It all seems so complicated, but it’s designed to be just the opposite.
The purpose of indirect cost rates in your government grant proposal.
The concept of indirect rates was developed to simplify the proposal process. Instead of negotiating the costs of many individual line items such as rent, business insurance, office supplies, utilities, health insurance and so on, you negotiate one indirect rate that covers everything. When this indirect rate is applied to a particular base such as direct labor or total direct costs, the resulting calculation is the amount to be spent on a bundle of indirect expenses. For example, the fringe rate is applied to labor to calculate the amount of money available for fringe benefits such as payroll taxes, health insurance, and workers compensation.
Indirect cost rates and your cash flow
Although it is important to understand your indirect cost rates, when it comes to your day-to-day operations, it’s most important to understand how fluctuations in these rates can affect your cash flow. In order to get a good handle on this, let’s review some essential facts:
- Provisional Rate is the rate in your award and it’s usually based on your proposal. You may have calculated this by meticulously listing each expense included in the fringe or indirect pool, you may have taken the agency “safe” rate, or you may have “plugged” the rate using a specific amount of the available funding.
- Actual Rate is the rate your business runs at using actual allowable spending over a period of time. The final actual rate is calculated for a calendar year using accrual basis accounting but don’t wait until December to calculate your actual rate. Keep an eye on how the actual rate is running during the year so you can use your government funding effectively.
- Rate Structure is determined by the indirect cost pools you use for your proposal/award. The simplest rate structure uses one overhead rate. The typical NIH rate structure has a fringe rate and an F&A. There are more complicated rate structures but we’ll stick with the typical NIH rate structure for now.
- Payment Management System is an online tool designed to help grant recipients draw down funds and administer certain aspects of their NIH award.
How much money should you take from the Payment Management System?
So you’ve received your award from the NIH and signed up with the Payment Management System (PMS). Now you have bills to pay and you need money. What to do next? You want to take money from the PMS, but how do you calculate how much?
Taking money from the Payment Management System is called “making a draw” and you have a couple of options for making the calculation. One thing you cannot do is draw just so you have money in your bank account! For this exercise we will assume you have no activity in your Company other than your NIH award.
Two options for drawing funds from the PMS
Option 1. Draw for actual indirect expenses: You make a draw for the total amount of allowable direct costs and specific allowable indirect expenses needing to be paid. Once the draw is made, the funds must be disbursed to the appropriate vendors within three days.
Option 2. Draw for indirect expenses based on your provisional F&A rate: You make a draw for the total amount of allowable direct costs as well as the proportionate share of indirect expenses and fee, calculated using your provisional rate. Once this draw is made, allowable direct costs must be paid within three days. The amount drawn for indirect expenses will be used to pay those expenses as the bills are received.
As an example, let’s say you have a 40% F&A rate and have $10,000 of direct labor on a project. You would draw $14,000 or $10,000 + the 40% you’ve earned to reimburse yourself for indirect costs.
Know that the option you select to make the draw and how your indirect expenses come in will significantly affect your cash flow.
Drawing down from the Payment Management System during your first year.
It’s important to recognize that your business will never be static. Every day, month or quarter there will some kind of fluctuation or change, and you will have specific drawdown needs based on your business cycle, how you operate, your indirect cost rate, and more.
Here are some typical situations and the impact a drawdown choice makes:
What does it mean to be overdrawn on your grant funds and why does this matter?
When you are overdrawn, it means you have taken money in advance of earning it. You must understand:
This money doesn’t belong to you, it belongs to the government.
The NIH understands that your indirect expenses will not be static over the course of the award so being a little overdrawn is okay. However, it’s very important for you to keep a handle on the amount drawn for indirect expenses as compared to the amount budgeted for indirect expenses so the overdraw doesn’t get out of hand. This is especially important if your final actual indirect rate is greater than the provisional rate. The money to pay for the excess indirect expense will come out of your fee or your own pockets.
What does it mean to draw at the provisional rate and have extra money on hand?
When you have drawn at the provisional and your actual rate is lower than your provisional rate, you have two choices.
- Make sure to spend that money on a direct cost of the project
- Give that money back to the NIH
Another consideration here is Federal and State income taxes. Unspent money at the end of the year may translate to taxable income if you are a cash-basis taxpayer. Make sure to consult a tax advisor if you have questions on taxes.
Of course, if you have any questions about government grant accounting and your provisional or other rates, contact Ryan at [email protected] or 781.862.5170 ext. 2106.
If you want to learn more about your rates and how they can impact your FAR Part 31 Compliant Job Cost Report, here’s another blog post you may find interesting.
About the Author:
Caroline Crosby, CPA, MST, Manager, is a tax specialist with over 29 years of experience working with regional and national accounting firms in tax and accounting, helping small privately held C and S Corporations.
She frequently works with small business clients to design, implement, automate and improve their FAR Part 31 accounting function, as well as provide year-end analysis to ensure complete and accurate financial reporting. Caroline is one of our go-to trainers for new clients that need to get their accounting systems up to speed quickly.