One of the most common mistakes that we see with young government contractors is the use of an indirect rate that is far below what they need to cover their indirect costs. There is a misconception that you are required to ask for your historical indirect rates when writing a cost proposal. For many young companies that will grow considerably if they win a larger grant or contract, their historical rate is not a good fit.
The best way to avoid this problem is to project what your indirect rates will be in the event that you win your grant or contract and to ask for what you need. You will have to take into account items such as new hires or additional facility space. During the award and rate negotiation process, you will have to provide quotes from vendors to substantiate the different elements of your indirect rate request. After the questions have been answered, you will be awarded a rate that reflects your company’s finances and avoids cash flow issues because you didn’t ask for enough.
Brian LaCroix, CPA