Indirect Cost Rates Department of Health Human Services

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

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

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

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

Why IDC rates are needed Ø 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!!! 5

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

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

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

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

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

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

Negotiation Process Contact the Indirect Cost Branch: Ø When? After notification that the grant or contract will be awarded. Ø How? Via email to Ray Woodruff, Chief, Indirect Cost Branch Ø Ray Woodruff’s email address: rw 8 u@nih. gov 12

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

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

The Negotiation Process Proposal Received Is proposal adequate? Yes Assign to Auditor 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 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? No Return to Company Revises Proposal & Resubmits DRAW CONCLUSIONS • Formulate questions • Obtain additional documentation • Resolve questionable items • Determine recommended rates Issue rate agreement Communicate Government position on rates Submit for Supervisory approval Negotiate rates with company Document work papers 15

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

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

Additional Information Visit our website at: http: //oamp. od. nih. gov/dfas. asp or Contact Ray Woodruff at: 301 -496 -2444 rw 8 u@nih. gov 18

Questions / Comments 19