July 30, 2023 / Ed Jameson / Blog Posts
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You’ve just received a notice from the National Institutes of Health (NIH) that your SBIR Phase II grant proposal has been selected for funding. As you move through the JIT Process, your grants management specialist will ask “Do you have a negotiated indirect cost rate agreement (NICRA) to support the F&A rate that you requested in the proposal?”

If you don´t have a negotiated indirect cost rate agreement in place, the grants management specialist usually will place a restriction on the amount budgeted for indirect expenses. When a restriction is placed on the funds you requested for indirect expenses, the funds are not made available in the Payment Management System (PMS) until your indirect cost rate is negotiated with the Division of Financial Advisory Services (DFAS).

Fringe Benefit and F&A Rate

The first step in the indirect cost rate negotiation process with DFAS is to provide them your financial information in a reporting package that they prescribe on their website. The package consists of about a dozen schedules and checklists that allow their auditor to gain an understanding of your company so a proper fringe and F&A rate can be established that is fair and equitable to both your company and the government.

Once all of your schedules are prepared and submitted to the DFAS, an auditor will be assigned to your company´s proposal and will start the negotiation process. Initially, the auditor will check to be sure that you calculated the fringe and F&A rate correctly. They will also gain a feel for your understanding of the NIH Grants Policy just by reviewing the manner in which your schedules are prepared.


The auditor will examine all of the cost categories that compose your indirect cost rates and will ask very detailed questions about the nature of each of the expense items and how you arrived at your assumptions. For instance:

• You are asked to list all shareholder salaries with the implicit goal of finding out if you are aware of the NIH salary cap.

• Did you realize that although DOD will fund internal research and development costs, that NIH will not (and you’ve excluded these costs)?

• How many square feet of space have you requested per projected employee?

How you respond to these questions can influence the auditor´s opinion as to whether a cost requested for reimbursement is considered allowable or not. Obviously, it´s extremely important to have a working knowledge of Federal Acquisition Regulation (FAR) Part 31 as well as the NIH Grants Policy Statement in order to have a successful negotiation.

After the auditor has reviewed all your answers and examined any supporting documents that you provided in making your position, they will formulate a conclusion and review the results with their supervisor.


Finally, a negotiated indirect cost rate agreement is prepared and mailed to you for signature and execution.

Since the auditor will determine your indirect cost rate by how you fill out your financial information, we strongly encourage you to consult with us BEFORE you send it to the DFAS. We can help you get the most out of your indirect cost rate and prevent potential pitfalls later down the road.

Ready to Learn More? Speak With A Government Funding Award Expert!
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To better understand “indirect cost rates” please reference the related topics from our Learning Center

  1. How The Wrong Indirect Rate Can Damage Your Business
  2. How to Project an Indirect Cost Rate
  3. How to Project an Indirect Cost Rate For a Phase II Proposal
  4. Real Life Examples of a Reasonable Indirect Cost Rate
  5. Understanding The Indirect Cost Rate Cycle
Ed Jameson, CPA, Managing Member

With over 40 years of experience as a government funding award accounting specialist, Ed is a recognized national expert in the field. In addition to helping hundreds of clients navigate FAR Part 31 compliance. he has been an active speaker and panel moderator at Tech Connect's National SRIR/STTR conferences since 2011. presents at the DOD's Mentor Protégé Summit and presents regularly for several state and local organizations.

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