The key to projecting a reasonable indirect rate is driven by how your people charge their time. You KNOW that should match what they actually work on. Watch the video – produced from outtakes of Ed Jameson’s presentation at the National SBIR Conference:
“So now I wanna teach you about a concept called the multiplier. So what’s the multiplier? The multiplier is for every buck that you pay in labor, how much do you charge the federal government? It’s your loaded rate, so if you make $80,000 a year, and there’s 2,000 hours in a year, so you’re paying yourself 40 bucks an hour, 40 times three is 120 bucks an hour, that’s what that looks like, alright? That’s the multiplier. So we’ve been doing this for a while and our established DOD SPIR types, who have escaped the garage and have now gotta some sort of a facility and a couple of employees running around and are starting to look like a legitimate business, I ask them, ‘How’s it going when you proposed that rate to your customer, what kind of feedback did you get?’
So, we ask our clients just a really simple question, ‘Did you get any feedback about your price?’ What they basically tell me, what I hear is, at less than 2.4, there’s no feedback about price, they’re considered inexpensive. At 2.4 to 2.7, there’s a normal business conversation, so this is how much, and then we’ll pay you, and then the guys will perform, and, you know, it’s normal. At 2.7 to 3.0, they start to hear things like, ‘you guys are expensive, so this better work,’ and at more than three, the government stops doing business with them.
There’s no generic answer, everybody’s got a case-specific, so don’t run outta here and go, ‘Ed told me 2.5 multiplier is gold!’ Now, I have a client and their multiplier is 3.4 and the federal government has no problem with them whatsoever because what they do is so leading edge and they have so much internal intellectual property, they have so much mojo that the government goes, ‘I can’t buy this anywhere else, this is dynamite stuff.’ So, they’re an outlier, but they’re competing against you for SBIR phase two funding. And I’m not desensitizing that, I know you’re all competing against one another at some level, right?
When you fill out a proposal, you’re gonna write labor, overhead, materials, overhead on the materials, sub total, fee, total price, right? So I take all my indirect expenses and I divide by direct labor. That’s a single tiered rate, one pool, one tier. You could have two tiers, I’ve got an overhead and a G&A rate. Why would you have an overhead and a G&A rate? Overhead, the denominator for overhead is labor so when my expensive engineers work on this, here’s how much I’m gonna burden them with. However, we also have a lot of materials that go into this and if I only burden things for labor, then how do I pay for the shipping and handling department? How do I pay for the procuring agent that I have in my company, right?
So I might have a separate G&A rate for my subcontractors, materials, travel, somebody booked the travel. So NIH pools costs differently, so what we see as normal for our NIH grantees fringe rates tend to be 28-35%, so you set up indirect cost pools that most appropriately benefit your business. Manufacturing company, there’s lots of stuff going through the facility. An engineering firm, the people are what drive the expenses, right? Our clients that are in San Francisco, 40, they’re competing against Google for labor so whatever you have to do, to get the people to come work for you, you have to do to get the people to come work for you. Google picks them up on a bus, takes care of their dry cleaning and feeds them, so what do you do, right? F&A rate ranges 60-70% as kinda normal, so at certain sizes, the government expects you to become more and more cost efficient, right? You don’t need like, 12 more accountants because you’re doing 20 million in revenue.
So there’s efficiencies, there’s economies of scale. So as you get bigger, they expect your indirect rates to go down unless you’re making some whiz bang stuff. Does that make sense? So all I’m really trying to do is give you and overview of — if I take a dollar in labor and I add all my overhead rates to it, how much do you charge the customer?