As you apply for a government grant or contract, one of the most important pieces of the cost proposal that is overlooked is what indirect rate to request.
Some government agencies, such as the National Institutes of Health, offer a “no-hassle” indirect rate of forty percent based on all direct costs for Phase II SBIR grants. Many grant applicants will accept this rate because they can avoid having their cost proposal audited during the negotiation process, or because they simply don´t understand how to calculate an indirect rate.
Indirect rates must be customized to each individual company´s needs. Projecting a “materially correct” F&A rate, or indirect rate will often determine the financial stability of your company during the early growth stages.
How do you start?
In deciding what to use for an indirect rate you must TRY to predict the future. The key is to project what “success” will look like from a financial perspective if you receive the grant or contract you are proposing.
Projecting your labor and other costs
As your company receives SBIR or other government funds, you will probably have to hire employees in order to complete the work in a timely manner. In addition to estimating how many employees you will need, it is also critical to determine what percentage of the employee´s time will be spent performing billable work (for this job and all others) vs. the amount of non-billable time they will have preparing other proposals or taking vacation, holiday or sick time.
The single biggest mistake we see is the tendency to be overly optimistic regarding employees´ labor utilization rates (the percentage of time an employee is billable vs. non-billable). In most cases, indirect labor is one of the largest components of the indirect rate and the failure to project enough downtime becomes a recipe for financial disaster.
Once you predict how many employees are required to complete the work, you must then compute the additional infrastructure needed to support the prospective staff. These additional expenses typically include facilities, furniture and equipment, benefits, and utilities as well as supporting administrative staff.
Projecting costs conservatively will generate an equitable indirect rate for your company that will help ensure its financial stability. A CPA with experience in preparing government cost proposals and negotiating indirect cost rate agreements can help you to benchmark your projected expenses – providing you with valuable feedback on what to expect from the Division of Financial Advisory Services (DFAS).
Does asking for a higher indirect rate reduce your chance of being funded?
Your proposal is ultimately judged on the promise of its technology by your peers. The government will reimburse you for costs it believes are fair and equitable. It is your responsibility to accurately estimate those costs and request them from your customer.
Don´t short-change yourself!
Finally, as a way to introduce our firm´s unique services, we are happy to provide the following services 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
Insider Tips to Projecting F&A Rates for Use in Your NIH SBIR/STTR Grant Indirect Cost Proposal
November 02, 2009