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SBIR 101-1: Understanding the Financial Strings of NIH Grants

March 11, 2011 / Ed Jameson / Blog Posts
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On January 21, 2009 the National Institutes of Health raised the “no questions asked” indirect rate on phase 2 SBIR/STTR proposals from 25% to 40% thereby reducing the backlog of Grantees requiring negotiated indirect rates with the Division of Financial Advisory Services (DFAS).

The NIH SBIR/STTR Grants solicitation specifies “requested F&A cost rates of 40 percent of total direct costs or less will require no further justification at the time of award, and F&A costs will be awarded at the requested rate”.

It would be difficult to find anyone to disagree that it´s easier to build out the infrastructure of your new business with a higher indirect rate than it is a rate that´s too low. Many newer grant applicants will accept NIH´s 40% F&A rate in order to avoid having their financial proposal audited by DFAS, or simply because they don´t have the confidence to project and negotiate a higher indirect rate.

Whether you accept the 40% indirect rate, or negotiate your rate, you must understand the other strings that are still attached to your Government Grant:

• The 40% indirect rate does not take away the need to track your project costs or indirect rate. Grantees still need to accumulate accurate project costs and report all direct and indirect costs incurred at the end of the project on Financial Status Report Form 269 (FSR 269). Any under-spent funds are to be refunded to the NIH, and any overspending must be absorbed by the Grantee.

• The funds drawn down from the Payment Management System (PMS) are required to be accounted for on a quarterly basis on form PSC 272) on an actual incurred cost basis – following the rules of the Federal Acquisition Regulation.

Effective January 1, 2010 NIH has combined the FSR 269 and PSC 272 reporting by requiring the use of Federal Financial Report (FFR) also known as the SF 425.

This form mandates quarterly reporting of the use of the direct and indirect Grant funds expended, increasing financial transparency of the use of all NIH Grant funds.

• If the Grantee organization exceeds $500,000 in annual Grant revenues (irrespective of amount drawn), it will be subjected to an Office of Management and Budget Circular (OMB) A-133 audit. At first read, the OMB A-133 Audit title “The Audits of States, Local Governments, and Non-Profit Organizations” sounds like it wouldn´t apply to for-profit Grantees – but it does!

Not surprisingly, the failure to properly file the FSR 269 and the PSC 272 are top audit findings by the OMB! Failure of the CPA to conduct a proper audit due to lack of the required knowledge of the Federal Acquisition Regulation necessary to perform the audit is another.

The “big benefit” of selecting the 40% F&A rate is that it may speed the funding of your award as DFAS has a large backlog of audit requests. However, in most cases a temporary indirect rate may be issued.

Also, please note that NIH´s Grant scoring system evaluates proposals for:

1. Significance

2. Investigator(s)

3. Innovation

4. Approach

5. Environment

Please notice that cost is not a core review criteria…. and know that it is much more difficult to build your Company with an indirect rate that is too low – so don´t be afraid to ask for what you need!

In closing, as a way to introduce our firm´s unique services, we are happy to provide the following free of charge:

1. provide benchmarking feedback on your indirect rate projection,

2. assist in the preparation of the financial portion of your government proposal,

3. negotiate your initial provisional indirect rate agreement


Ready to Learn More? Speak With A Government Funding Award Expert!
Call Now: 781-862-5170 – or – Schedule A Call


Edward G. Jameson, CPA

The Financial Strings Attached to NIH SBIR/STTR Grant Accounting – The SF 425 and OMB A-133 Audit
UBMI Publications
November 02, 2009

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.