What Indirect Rates Should I Bid For SBIR/STTR Phase I and II?
The first step in the budget process is to find out where indirect rates are reflected on a budget form. Budget forms vary greatly between agencies. Grant agencies either use the SF424 budget form on Grants.gov, or a similar version in various electronic formats. These typically include a fringe rate (applied to project labor), and an “Indirect Rate(s)” after all job costs are calculated. This is generally true for both SBIR/STTR phases as grants historically are organized for research institutions and other non-profits.
The DoD Phase I and some Phase IIs use the DSIP (Defense SBIR/STTR Innovation Portal) input portal. This portal includes an array of possible indirect rates to choose from:
- Fringe rate
- Labor Cost Overhead rate
- G&A rate
- Material Cost Overhead rate
- Other Direct Costs Overhead rate
IMPORTANT: Just because a rate is shown in the portal doesn’t mean every rate has to be filled out.
Some DoD agencies may require a different budget model to be filled out. These may also have a multitude of indirect rates expressed.
Indirect Cost/Rate Definition
Simply put, indirect costs are those that, while not project related, contribute to the functioning of the company and indirectly supports the project. The government is willing to pay for allowable and reasonable business costs as a part of the project budget. Indirect budget costs are created mathematically by applying an “indirect rate” to a particular budget line item.
Example: Budget Fringe costs = Project labor x Fringe rate (expressed as a percentage - %).
Rates versus a rate structure
The first decision is what rate structure your firm wants or needs. In the simplest form, a single indirect rate structure is:
Budget G&A = Project costs x G&A rate. $37,500 G&A = $150,000 project costs x 25% G&A rate.
In this case, you would choose a G&A rate that derives a G&A budget that would sustain the business operations over the life of the grant/contract.
The point here is every business is different and has different needs. The indirect G&A rate you choose is your financial fingerprint unlike any others.
As you add rates to your indirect rate structure, calculations get much more complex. Even if you are already knowledgeable on how indirect rates work, you should reach out to a professional to make sure both the indirect rate structure and indirect rate levels are appropriate.
REMINDER: Just because a rate is shown in a budget model doesn’t mean every rate has to be filled out.
Other Common Indirect Rates Mistakes
Not bidding any indirect rate: This is a recipe for economic disaster unless you’re willing to donate your time and cash out of pocket (or those of your investors) to cover common business costs such as employer-paid payroll taxes, accounting, legal, dues, licenses and subscriptions.
Choosing the de minimus 10% Indirect Rate: You may be offered a 10% indirect rate by an agency in exchange for no further scrutiny. This is almost as bad as not bidding any rate. Agencies (USDA) may insist you either have a pre-approved rate from another agency or default to the de minimus rate. This is of course patently unfair for first time applicants and lazy on the agency’s part and should be resisted.