Real Life Examples of a Reasonable Indirect Cost Rate

We created the video above from Ed Jameson’s talk about indirect cost rates and SBIR accounting at the National SBIR Conference. Here’s an overview with the key points you need to know.

In the second video in the series, How to Project an Indirect Cost Rate, we talked about the multiplier, and the kind of feedback our clients sometimes get the from the government.

For our DOD SBIR clients, it goes something like this:

• If it’s less than 2.4, there’s no feedback about price, so we believe they are perceived as inexpensive.
• At 2.4 to 2.7, there’s a normal business conversation. This is how much this will cost, this is how much we’ll pay you, expectation for performance, and so on. Interpretation = Normal.
• At 2.7 to 3.0, our clients start to hear things like, “Wow, you guys are expensive, so this better work.” Interpretation = expensive.
• At over 3.0, the government stops doing business with them.

We also made it clear that this is not set in stone. Every business and innovation is unique and there are always outliers.

Real life examples of indirect cost rates or F & A rates

We want to give you a couple of real life examples, so you can understand there isn’t a magic number, 2.5 isn’t the always the right answer. That’s not how this works.

What happens to a multiplier in a tough, competitive SBIR environment?

Jameson & Co has a client that’s doing IDIQ work and they’re also writing SBIR proposals and they’ve got some really great, high end innovations. When we first met them, we were so impressed, and we developed a perception of what their multiplier would look like. Then they showed us what it really was, and there’s was a complete disconnect.

Our client explained, “When the sequestration was announced the director at Wright Patterson called all the contractors in and said if you want to keep doing business with us you have to do what you’re doing or better at 30% less or we’re not going to do business with you anymore.” My client told me that since that meeting, nobody has won award at Wright-Patt that’s been more than 1% higher than the low cost bidder on any project. That’s the environment he’s working in and it’s a tough one.

Knowing and understanding your federal government customer has its benefits

We have another customer from New York, a really savvy experienced SBIR player. He flies all over the place and talks to the customers about their problems and their ability to fund contracts.  He’s really in touch with his customer’s goals, and their pressures. He has a 3.4 multiplier and they couldn’t care less because he’s solving their problems!

The more innovative and unique the idea, the better the chance for a higher multiplier

We have another client in Texas who has the biggest rate you’ve ever seen. His stuff is so incredible, so complex that when explains it, we can’t even keep up with him. He gets to have a massive rate because he has a big innovation that’s unique, cutting edge, and no one else is doing it.

Undercutting the competition by undercutting your multiplier

Finally, I have the unfortunate case of a client who spun out of a big company. This big company was doing business with the government and they had a multiplier of about 2.8.

Our client decided that he was tired of the big company culture and he was going to take some of the guys from the big company and start his own thing.  He let his federal government customer know, and the government’s next question is “How much are you going to charge me?”

Our client believed he had the perfect mathematical equation. He thought all the government really cared about was that he was going to have the same people working on the project or better and price. So, before he started working with us, he established a multiplier of 1.8.

It wasn’t long before he realized that to build his business.  He needed to make investments in the business – and he needed a higher multiplier and a higher indirect cost rate.

This client developed a strategy of billing at 1.8 and running at 1.9. He’d use his fee to cover most of the cash flow gap, and his vendors to cover the rest of the gap… and then he’ll bill the rate variance once he signed off on the incurred cost submission.

Using the same technique, the next year, his goal is to get his multiplier to 2.0.  The year after that, he’s trying to get his multiplier to 2.1.  After that, he’s trying to get his multiplier to 2.2.

His contracting officer notices the pattern wonders where this is going to end.  So before long, DCAA is at his facility doing a regression analysis on his indirect cost rates.  They conclude that, based on his history, he shouldn’t be raising his indirect rates. In DCAA’s view, nothing had strategically or structurally changed in the organization; he’s at the same facility with the same guys. To the DCAA, he was manipulating his indirect rate higher by charging less to direct labor and more to indirect labor charging and they’re not going to let that happen. He’s stuck at 2.1.

A successful indirect cost rate or F & A rate requires finding the perfect balance

The indirect rate reminds us a lot of the tale of Goldilocks and the Three Bears.  If you opt for a rate that’s too low, you’re going to have cash flow problems and losses (assuming you’re a boot-strapped business). If you try for a rate that’s too high, you could lose the award. But if you do it just right, cost type work can be used to build your business.

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

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!

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This is the fourth 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