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Proving the 41% F&A Rate vs. the 40%

January 11, 2011 / Ed Jameson / Blog Posts
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One of your main goals with government funded R&D should be to acquire and build out the infrastructure your business will need.  If done properly, the key technical people, facilities and equipment you’ll need to build your business will be around long after your grant funds expire.

When writing the cost portion of a proposal, NIH grantees are confronted with the question of what indirect rate to ask for.  You are capped at a 40% F&A rate on Phase 1 SBIR proposals and are discouraged from asking for more than 40% in Phase II.

Our monthly webinars are packed with Grantees who want to learn the inside scoop on how to negotiate an indirect rate.  There are two key reasons why you’ll want a negotiated indirect rate.

First, you may be leaving money on the table.  This is one of the main features of our webinar and is covered extensively.  The second reason is not as obvious.

With a negotiated rate, you have the right to re-budget monies into indirect expenses.

There are two key reasons why you’ll want this flexibility.

First, let’s start with the basic premise that one of your main goals with government funded R&D is to acquire and build out the infrastructure your business will need.  Technically speaking, anything that you purchase as a direct cost on a government contract is the property of the government.  They may choose to take possession of that asset – or not, but your best case is that you have imperfect title to that asset.  However, if an asset’s cost is recovered through your indirect rates – your business owns clear title to that asset.  We once had a DoD contractor lose his laptop (that he purchased as a direct cost on a contract) to a contracting officer at the end of a phase II because it was newer than the computer the contracting officer had on his desk!

Second, one of the keys to negotiating a higher indirect rate and not leaving money on the table is to have an actual indirect rate history to support your claim for an even higher indirect rate.  Because the 40% rate acts as a cap, it does not allow the flexibility to re-budget into the indirect cost bucket, you will be forced to lose money on existing grants to make your case for future grants!

In a typical $1MM phase II, you want the right to re-budget 25% or $250,000 from any budget category into indirect expenses so you can carefully structure the assets you want to make sure your business owns and give yourself the option to build a case for a higher future rate, and larger grant awards.

This right to re-budget from one direct cost category into indirect expenses will only exist if you have a negotiated rate… order to get a negotiated indirect rate agreement, you must request at least 41% on the cost portion of your next phase II grant proposal.

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Ed Jameson, CPA, Managing Partner

I’ve been in practice for over 40 years helping our small business clients procure, manage, and survive audits on more than $6 billion in federal government contract and grant funding. We’ve been featured presenters and panel moderators at Tech Connect’s National SBIR/STTR conferences since 2010, and I’ve presented at the DOD’s Mentor Protégé Summit and present regularly for several state and local organizations.