Understanding The Indirect Cost Rate Cycle

We created this video from Ed Jameson’s talk about the indirect cost rate and SBIR accounting at the National SBIR Conference. If you’re not able to watch it, here’s an overview with the key points you need to know.

When it comes to indirect cost rates or F & A rates, you need to understand that this isn’t a one-off deal, this is a cycle. It goes and on and on and on, evolving throughout your business year… and from year to year.  It’s critical that you be vigilant and know how your real indirect rate numbers stack up against your budgeted indirect rates throughout the year. You need to know how your business is performing.

Here are a few examples that demonstrate why.

Scenario 1: F&A or indirect cost rate planning when your indirect cost rate is too high

Let’s say you divide your projected indirect expenses by direct labor, and you come to a 100% overhead rate. You write your proposal, and put in a 100% overhead rate. Then during a pre-award audit you get bumped down to 90%, and you take it.  After you do a month’s worth of work, you submit a bill, take the labor and add 90% for overhead.

At the end of the year, the incurred cost submission comes due.  You do the calculation and your final indirect cost rate is only 85%. The minute you sign and send in the incurred cost submission, you owe the government the 5% that you overbilled them for the whole year.

What our government funding accounting experts would do.

If you were our client, we would have done something called indirect rate planning. In this case, when you’re trying to have a 90% overhead rate but you’re running at 85%, we’d have a conversation and we’d give you some options.

• Option 1. Give the money back.
• Option 2. Let’s do some indirect rate planning to help you get to that 90%. Maybe it’s having some of your people work on writing proposals instead of spending all their time working on your project and charging direct labor. Maybe it’s time to invest in some new equipment that you’ll buy and charge to overhead.

Scenario 2: F&A or indirect cost rate planning when your indirect cost rate is too high

Sometimes, the opposite happens. You’re billing the government at 100%, but you’re running at 120%.  When we call to check in with you and discuss how your business is going, you’ll share your challenges and then we’ll work to solve them. First, we’re going to talk about where you can cut costs to get your indirect cost rate down. Odds are, those cuts will come from labor. If you have five employees and four are performing at a 10 and one is performing at a 6, you have your answer—lose the low-performer and get your indirect rate in line.

Plan ahead for possible variances and changes in your indirect cost rate.

It’s imperative to think about where your indirect cost rate may be heading in the coming months and year.

It’s not always that complicated. Sometimes you’re just getting through a day and Monday turns into Wednesday and then Friday and there’s no real structural changes to the business.

But other times, real stuff happens. You need a new facility, you need to hire five more people, or you can sense structural changes are happening in the company.

At this point, our government funding accounting experts are going to have a lot of questions for you.  How does this affect your indirect cost rates? Do we need to think about how we’re proposing our indirect rates? Do we need to rethink your indirect rate structure?  If that’s the case, we may need to go in and re-budget things, we may need go back to the government and ask to change your overhead rate.

It’s always best to prepare for and resolve a problem, and to stay informed about the state of your business and indirect rate.  Our innovative SBIR-compliant accounting platform, JamesonWorx, was designed to help you do just that. It tracks your indirect rates and provides you with an easy-to-read and access dashboard to help you eliminate surprises and pitfalls.

Get the help you need with your F & A rate or indirect cost rate planning and management.

At Jameson & Company, we are experts at helping our clients propose the right indirect cost rate, and we’ll even help you negotiate it. What’s more, through JamesonWorx, we offer an innovative SBIR-compliant accounting system that tracks your indirect rates to help eliminate surprises and pitfalls.

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Learn more about our free indirect cost projection templates and free cost proposal review service!

Learn more about JamesonWorx Solutions.

This is the fifth of a five-part series about indirect rates.

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