NIH Payment Management System Drawdown Scenarios - Effects F&A Rate Fluctuations Have on Your Cash Flow

What are Fringe and F&A Rates Used For?

Before we talk about F&A rate fluctuations, let’s discuss what these rates are used for.

Instead of negotiating the costs of many individual line items such as rent, business insurance, office supplies,
utilities, health insurance and so on, you negotiate one indirect cost rate that covers everything. When this indirect
cost rate is applied to a particular base such as direct labor or total direct costs, the resulting calculation is the
amount to be spent on a bundle of indirect expenses. For example, the fringe rate is applied to labor to calculate the
amount of money available for fringe benefits such as payroll taxes, health insurance, and workers compensation.

How F&A Rates Affect Your Cash Flow

Although it is important to understand your indirect cost rates, when it comes to your day-to-day operations, it’s most
important to understand how F&A rate fluctuations can affect your cash flow. In order to get a good handle on
this, let’s review some essential facts:

1. Provisional Rate is the rate in your award and it’s usually based on your proposal. You may have
   calculated this by meticulously listing each expense included in the fringe or indirect pool, you may have taken the
   agency “safe” rate, or you may have “plugged” the rate using a specific amount of the available funding.
2. Actual Rate is the rate your business runs at using actual allowable spending over a period of
   time. The final actual rate is calculated for a calendar year using accrual basis accounting but don’t wait until
   December to calculate your actual rate. Keep an eye on how the actual rate is running during the year so you can use
   your government funding effectively.
3. Payment Management System is an online tool designed to help grant recipients draw down funds and
   administer certain aspects of their NIH award.

How much money should you draw down from the Payment Management System?

So you’ve received your award from the NIH and signed up with the Payment Management System (PMS). Now you have bills to
pay and you need money. What to do next? You want to take money from the PMS, but how do you calculate how much?

Taking money from the Payment Management System is called “making a draw” and you have a couple of options for making
the calculation. One thing you cannot do is draw just so you have money in your bank account!
For this exercise we will assume you have no activity in your Company other than your NIH award.

Two options for drawing funds from the PMS

Option 1. Draw for actual indirect expenses: You make a draw for the total amount of
allowable direct costs and specific allowable indirect expenses needing to be paid.
Once the draw is made, the funds must be disbursed to the appropriate vendors within three days.

Option 2. Draw for indirect expenses based on your provisional F&A rate: You make a draw for the
total amount of allowable direct costs as well as the proportionate share of indirect expenses and
fee, calculated using your provisional rate. Once this draw is made, allowable direct costs must be paid within three
days. The amount drawn for indirect expenses will be used to pay those expenses as the bills are received.

As an example, let’s say you have a 40% F&A rate and have $10,000 of direct labor on a project. You would draw
$14,000 or $10,000 + the 40% you’ve earned to reimburse yourself for indirect costs.

Know that the option you select to make the draw and how your indirect expenses come in will significantly affect your
cash flow.

Drawing down from the Payment Management System during your first year.

It’s important to recognize that your business will never be static. Every day, month or quarter there will some kind of
fluctuation or change, and you will have specific drawdown needs based on your business cycle, how you operate, your
indirect cost rate, and more.

Here are some typical situations and the impact a drawdown choice makes:

What does it mean to be overdrawn on your grant funds and why does this matter?

When you are overdrawn, it means you have taken money in advance of earning it. You must understand:

This money doesn’t belong to you, it belongs to the government.

The NIH understands that your indirect expenses will not be static over the course of the award so being a little
overdrawn is okay. However, it’s very important for you to keep a handle on the amount drawn for indirect expenses as
compared to the amount budgeted for indirect expenses so the overdraw doesn’t get out of hand. This is especially
important if your final actual indirect rate is greater than the provisional rate. The money to pay for the excess
indirect expense will come out of your fee or your own pockets.

What does it mean to draw at the provisional rate and have extra money on hand?

When you have drawn at the provisional and your actual rate is lower than your provisional rate, you have two choices.

1. Make sure to spend that money on a direct cost of the project
2. Give that money back to the NIH

Another consideration here is Federal and State income taxes. Unspent money at the end of the year may translate to
taxable income if you are a cash-basis taxpayer. Make sure to consult a tax advisor if you have questions on taxes.

Get educated

If you want to learn more about F&A rate fluctuations and how they can impact your FAR Part 31 Compliant Job Cost Report, here’s
another blog post you may find interesting.

Is your business FAR Part 31 compliant?

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