SBIR 102-1: How Past Indirect Rates Effect Future Rate Negotiations

In our experience, more than half of the National Institutes of Health (NIH) grantees who accept the SBIR/STTR Omnibus solicitation indirect rate of 40 percent for Phase II SBIR grants will have significant cost overruns on their projects and even greater difficulty growing their company should they happen upon success.

The National Institutes of Health offer a “no-hassle” indirect rate of forty percent (40%) based on all direct costs for Phase II SBIR grants. Many newer grant applicants will accept this indirect rate in order to avoid having their financial system audited by the Division of Financial Advisory Services (DFAS).

While the 40% Omnibus F&A rate is probably fine if you´re working out of your garage, it creates a bit of a trap in future provisional indirect rate agreement negotiations.

PRIOR RESULTS MATTER!

What if you´re developing technology that really seems to work? As you draft your plans for the future, you should consider the facilities, equipment and core technical employees you´ll need to grow, which will lead you into the F&A rate that you´ll need in order to succeed. Let´s imagine for a moment that the number is 80%.

Given human nature, think of how difficult it is to convince the auditor that although you´ve used a 40% F&A rate for the past two years that you now need 80%. Remember, this person has no idea what your technology is or how it works, just that you suddenly want a 100% increase in your indirect cost reimbursement.

Now imagine that for the past two years your actual F&A rate ran at 60% and you´re requesting 80%.

Are we saying that 60% or 80% is the “right” answer? No – in fact, it will be different for every business given local costs for labor and facilities and many other factors. What´s important is that you understand how to calculate the indirect rate that´s right for your business – and create a strategy for your indirect rates given where you are and where you want to go.

What are the consequences of underbidding your indirect rate?

Depending on the order of magnitude, we typically see cost overruns absorbed in the following manner:

1. Reduction of the grant´s fee (which can be used to offset unallowable expenses).

2. Assumption of business or personal debt.

3. Laying off core technical staff when even the most routine funding delay occurs.

4. Closing up shop.

But you already have a grant that is underbid

Depending on the administrative and budgetary constraints of your customer, you may be able to renegotiate your costs and request additional funding. However, if your customer is not able to increase your funding, you must minimize the damage by re-budgeting your grant funds.

While this will reduce the amount of money that you will be able to spend on direct expenses and it may produce a less-than-optimal outcome to your project, it will allow you to live another day.

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

Click here for information on our free resources, our free webinar, or to contact us.

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Edward G. Jameson, CPA

www.jamesoncpa.com

How Prior Actual F&A Rates Impact NIH SBIR/STTR Accounting & Indirect Cost Proposal Negotiations
UBMI Publications
November 02, 2009
www.jamesoncpa.com