Indirect Cost Rates

1. Indirect Cost Rates Department of Health & Human Services National Institutes of Health Division of Financial Advisory Services, OALM, OD Ray Woodruff, Chief, Indirect Cost Branch Dan Milstead, Deputy Director, DFAS Eleventh Annual SBIR/STTR Conference Omaha, Nebraska June 30 – July 1, 2009

2. Today’s Agenda • About the Indirect Cost Branch • Why Indirect Cost (IDC) rates are needed • Basic definitions • The negotiation process • Important changes to the 25/40 IDC Rule • Case study

3. Indirect Cost Branch • Negotiates Indirect Cost Rates with commercial organizations that receive awards (i.e., grants and contracts) • Negotiates rates on behalf of all of the Department of Health and Human Services

4. Why IDC rates are needed • To provide a uniform method of funding and charging indirect costs to awards • To provide an equitable allocation of indirect costs across all awards

5. Why IDC rates are needed • Because you need to know your rate to keep from going bankrupt!!! An excerpt from a recent letter to Ray Woodruff from an SBIR company: “Somewhat to my surprise, I found that the process of carefully examining and classifying all of our expense transactions for CY/FY 2008, with strict adherence to NIH rules for expense allocation, has resulted in a better understanding of our own business expenses and improved the way in which we will track and react to our costs in the future.” What is this SBIR company really trying to say? We screwed-up! We only asked for 12% at the time of award. Now we realize that our actual rate is 92%. HELP!!!

6. Basic Definitions DIRECT COSTS–easily identified with a specific project: • Direct salary & wages • Material & supplies • Consultants • Subcontracts • Equipment

7. Basic Definitions FRINGE BENEFIT COSTS– allowances and services provided to employees: • Paid absences (vacation, holiday & sick pay) • Payroll taxes • Pension plan • Group insurance (health, life, disability)

8. Basic Definitions INDIRECT COSTS– not easily identified with a specific project: • Executive & administrative labor • Rent & utilities • Depreciation • General lab supplies • Professional fees (e.g., CPA) • Office supplies

9. Basic Definitions ONE TIER SYSTEM • Fringe benefits and indirect costs are combined into one pool. Result: a single rate. • Computation of Indirect Rate: Pool / Base Fringe Benefits + Indirect Costs • An equitablebase; Examples: • Total Direct Costs or • Direct Salaries and Wages

10. Basic Definitions TWO TIER SYSTEM • Fringe benefits and indirect costs are separated into two pools. Result: two rates. • Computation of Fringe Benefit Rate: Pool / Base Fringe Benefits Costs Total Salaries & Wages • Computation of Indirect Cost Rate: Pool / Base Indirect Costs An equitable base

11. Basic Definitions Three types of rates: PROVISIONAL RATES • based on projections for current FY • used for funding & charging FINAL RATES • based on actual costs • Charges adjusted to reflect final rates CEILING RATES • Final rates can not exceed ceiling rates

12. Negotiation Process Contact the Indirect Cost Branch: • When? After notification that the grant or contract will be awarded. • How? Via email to Ray Woodruff, Chief, Indirect Cost Branch • Ray Woodruff’s email address: rw8u@nih.gov

13. Negotiation Process Information Needed: • Representative’s name, title and email address • Company’s name, address and phone number • Grant / Contract number • Grant / Contract Specialist’s name and contact information

14. Negotiation Process And then... • The Indirect Cost Branch will request an Indirect Cost Proposal • The organization submits a proposal • ....the real fun begins!

15. The Negotiation Process Proposal Received • PRELIMINARY REVIEW • Review proposal and develop • understanding of organization • Review prior assignments • Review award documents • to determine funding rates • Check mathematical accuracy • RECONCILIATION • Reconcile the proposal to • audited financial statements • Reconcile the proposal to • a trial balance • Reconcile the proposal to • any supporting schedules Is proposal adequate? Yes Assign to Auditor No • BASE ANALYSIS • Is the base consistent with the • way the award was funded? • Does the base allow for an • equitable distribution of costs? • Any anticipated events that • could impact upon future yrs? • POOL ANALYSIS • Are costs allowable per FAR? • Are costs reasonable? • Are costs allocated equitably? • Did costs change significantly • from prior year? • Any anticipated events that • could impact upon future yrs? Return to Company Company Revises Proposal & Resubmits • DRAW CONCLUSIONS • Formulate questions • Obtain additional documentation • Resolve questionable items • Determine recommended rates Negotiate rates with company Communicate Government position on rates Issue rate agreement Submit for Supervisory approval Document work papers

16. Changes to 25/40 IDC Rule • Old IDC rules on SBIR/STTR grants: • Phase I = 40% max. rate w/out neg. • Phase II =25% max. rate w/out neg. • New IDC rules on SBIR/STTR grants: • Phase I = 40% max. rate w/out neg. • Phase II = 40% max. rate w/out neg.

17. Changes to 25/40 IDC Rule • Absolutely not. You can only request what you can support. • Even though IDC rates are not negotiated at 40% or less, the rates are subject to audit at any time. So, does this mean I can request a 40% IDC rate without justification?

18. Additional Information Visit our website at: http://oamp.od.nih.gov/dfas/dfas.asp or Contact Ray Woodruff at: 301-496-2444 rw8u@nih.gov

19. Questions / Comments