Will Your Indirect Cost Rate Bankrupt Your Business?

Mistake #4: Overspending on Indirect Cost Rates

When you receive a Phase II SBIR, STTR, RO1, ARPA-E, BARDA or BAA grant or contract, you need to comply with the Federal Acquisition Regulation (FAR) Part 31, and specifically FAR 52.216-7. 

After more than 30 years of specializing in government award accounting, we know the mistakes government grantees and contractors make, and how to prevent them. This 10-part blog series, “Top 10 Mistakes Government Awardees Make,” is designed to help you avoid trouble and protect your business.

SAFE RATES FREQUENTLY LEAD TO LOSING MONEY

When you submitted your proposal to your federal funding agency, you either proposed an indirect cost rate or used a safe rate if you proposed to NIH or NSF. When you received your grant, that provisional (aka budgeted) indirect cost rate was embedded into your award.

You have the funding, you are doing the work, incurring expenses, and drawing down from the payment system.

It’s critical to understand that your provisional (budgeted) fringe and F&A rate will not be the same as your actual indirect rate.

TRACKING YOUR ACTUAL FRINGE AND F&A INDIRECT COST RATES

Because you have a cost-reimbursable federal grant or contract, you must comply with the Federal Acquisition Regulation (FAR) Part 31. Compliance mandates that you maintain an acceptable accounting system for your government award.

Tracking your actual indirect rates on a monthly basis is part of a FAR-compliant accounting system.

 “SEASONAL” INDIRECT RATE FLUCTUATIONS VS. STRUCTURAL DEVIATIONS

It’s critical for your CFO to not only properly track your indirect cost rates, but to know how to identify when you are experiencing normal, “seasonal” indirect rate fluctuations and when you may be structurally deviating from your financial plan.

By seasonal indirect rate fluctuations, we mean specific timing-only events that create indirect cost rate spiking or dipping, for example:

• Everyone is highly billable for getting major projects out the door
• Everyone is highly un-billable taking vacations around the holidays or writing proposals
• Direct materials to be used over a 12-month period are received in one month

A structural change is more significant/permanent.  Some examples are:

• Facilities changes
• Significant spikes or cuts in headcount
• Changes to expensive material costs

If a structural change is taking place, management must decide if active grants and contracts can be re-budgeted, and what the potential cost impact is on recently completed contracts and grants – and the customer(s) needs to be alerted and approve these changes

Obviously, all grant and contract awards, as well as commercial projects must bear their proportional share of any variance between the provisional and final actual indirect rates, which can run into the tens and hundreds of thousands of dollars.

Before you consider billing your government customer for those funds, you must consider the potential political ramifications of billing your funding agency vs. absorbing the financial hit.

GET THE HELP YOU NEED

Talk to an expert.

If you’re concerned about your actual indirect rate and whether it’s tracking properly, do not wait until the end of the year to address it. There are a multitude of ways to help you avoid trouble and expense, and we are well-versed in all of them.

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Learn more about our FAR-compliant accounting system, JamesonWorx and all it offers. Start with this blog and get more details in this one.

To learn more about FAR-compliant job cost reports, including indirect rate tracking, read this blog.

Top 10 Mistakes Government Awardees Make:

1. Mistake #1: Taking The NIH Safe Rate
2. Mistake #2: Not Having a Far Part 31 Compliant Accounting System
3. Mistake #3: Overspending on Direct Costs
4. Mistake #4: Overspending on Indirect Cost Rates
5. Mistake #5: Audit Findings
6. Mistake #6: Spending Too Much on Accounting Staff
7. Mistake #7: Improper Allocation of Costs
8. Mistake #8: Not Paying Attention To Agency-Specific Rules
9. Mistake #9: Timekeeping and Uncompensated Overtime Issues
10. Mistake #10: Spending Too Much on Accounting When You’re Not a CPA