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Brian Ormsby

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Government Contracting 101 - Part 7: How does the government pay for my research?

Posted by Brian Ormsby on Thu, May 18, 2017 @ 09:28 AM

There are several ways that the government can help fund your research.  The first is through a direct need from the government and direct funding under a grant or contract written specifically for research and/or development.  There are many avenues to assist in this type of funding.  FAR Part 35 discusses Research and Development Contracting.  There are also several programs designed for small businesses that we discussed earlier in this blog series in “Blog 4 – What is the role of small business in Government Contracting?”.   These programs include the Small Business Innovative Research (SBIR), Small Business Technology Transfer (STTR) and Federal and State Technology Partnership (FAST) programs designed specifically for this purpose.  There are also solicitations in the Broad Area Announcements (BAA) for fulfilling government needs and desires for developing new products and technologies.

The government will also indirectly fund contractor research and development efforts under the Independent Research and Development (IR&D) costs pool for almost any government contract, whether it is for R&D or not.  IR&D is a General and Administrative (G&A) costs sub-pool.  IR&D is defined in the FAR as follows:

Per FAR Part 31.001 – “Independent research and development (IR&D) cost” – means the costs of effort which is neither sponsored by a grant nor required in performing a contract, and which falls within any of the following four areas:

  • Basic research
  • Applied research
  • Development, and
  • Systems and other concept formulation studies.

How do you know if you are performing an authorized IR&D function?  Per FAR Part 31.205.18 – IR&D costs are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable.  In order for IR&D costs to be allocable, you just have to have an accounting system that is compliant so that IR&D is allocated equally amongst your programs. 

What is the definition of reasonable?  There is some subjective determination on the reasonableness of IR&D costs.  Here are a few rules of thumb:

  • You have some expertise in the area of research. In other words, you aren’t an ASE certified mechanic trying to solve the problems of nuclear waste.
  • You have justification for the costs:
    • Timekeeping to document the amount of efforts
    • Backup documentation for purchasing
    • Statements of Work for Subcontracts
    • Statements of Work for Consultants
  • You have a defined goal that your research is going to achieve
  • You have set measurement criteria for the research to determine if you are advancing

In short, IR&D topics need to be run like any other contract; it is just an internal contract with yourself.  If you are performing any experiment and you don’t have criteria for success or results of measurements, then you aren’t doing research, you are just playing!  The government is not interested in paying for follies of fancy (they want to fund real research, independent or not).

If you have questions about setting up and IR&D project, please contact ReliAscent (303) 999-3802.  We can help you ensure that you are advancing your corporate intellectual property and you can be assured that the costs of that effort will not be disallowed by an auditor in the future.

- Brian Ormsby, ReliAscent

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Topics: Government funding, R&D Funding, Government Funded Research, Getting the Government to Fund Your Research

Government Contracting 101 - Part 6: Agency Differences in Unallowable Costs

Posted by Brian Ormsby on Tue, May 09, 2017 @ 09:05 AM

In the world of Government contracting, the government defines an allowable cost as a cost that they will pay either in full (direct costs) or an allowable portion (allowable indirect costs) of that cost.  An unallowable cost is one that the government has stated that they will not reimburse the contractor for the expense.   All agencies start with the Federal Acquisition Regulation (FAR) Part 31.201-6 to define unallowable costs and discusses how to account for unallowable costs.  FAR Part 31.205 discusses specific costs and discusses whether they are allowed or not (it is not an all-inclusive list, however it is fairly comprehensive).  Each agency can add to this list, however, with agency specific guidelines.   For instance, there are Defense Federal Acquisition Requirements Supplements (DFARS), Department of Energy Acquisition Regulation Supplement (DEARS) as well as similar guidelines for other agencies.  In addition, there are differences in requirements between contracts and grants.  There is further delineation between awards to “For-Profit Organizations” as opposed to “Non-Profit Organizations” or “Educational Institutions” or “State, Local &/or Indian Tribe Governments”.   Here are some examples of other agency restrictions for “For-Profit” Organizations (not all inclusive):

National Institute of Health (NIH) (48 CFR 74.27)

  • All FAR unallowables
  • Limitation on Salary, anything over is unallowable
  • Independent Research and Development (IR&D)
  • Sales and Marketing
  • Business Development, Commercialization costs

National Science Foundation (NSF) (48 CFR 31.201-6 – Contracts & 2 CFR 215.27 - Grants)

  • All FAR unallowables
  • All Patent Costs
  • IR&D
  • Sales and Marketing
  • Business Development

Department of Energy (DOE) (10 CFR 600.317)

  • All FAR unallowables (FAR Part 31)
  • All Patent costs (Phase I SBIR only – Patent prosecution costs for all funding)
  • Foreign Travel

Regardless of which agency you deal with, you must make sure that all the unallowable costs are not billed to the government.  How do you ensure that unallowable costs aren’t billed to the government?  First of all, you must segregate your unallowable costs under general ledger control in your accounting system. You must ensure that all unallowable costs are input into this section and that these costs don’t end up in your direct or your indirect costs that are billed to the government.  When a contractor is dealing with multiple government agencies, this can be a bit tricky as some costs that are unallowable for one agency could be an allowable cost for another agency. 

It is imperative that you handle your unallowable costs correctly.  If you are audited and unallowable costs are found to be in you allowable areas (direct or indirect), they will be disallowed and you will end up owing the government money.  That is not the only implication, generally, your accounting system will also fail the audit based on this finding and you may be debarred from any future Federal Government contracts.

If you have questions about unallowable costs, how to handle them in your accounting system and anything else concerning unallowables, please contact ReliAscent (303) 999-3802.

- Brian Ormsby, ReliAscent

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Topics: Unallowable Cost, DCAA Unallowable cost, unallowable costs

Government Contracting 101 - Part 5: How Does The Government Make You Pay Your Fair Share of Your Indirect Costs?

Posted by Brian Ormsby on Wed, Apr 26, 2017 @ 11:00 AM

 In a cost reimbursable job, we all know how the government will pay for direct labor and materials.  In these awards, they also pay for a “fair share” of your overhead (or indirect costs).  How does the government determine, and pay for, their “fair share” of your indirect costs?

Let’s start with the basics: when you bid on a contract, you figure out how much it is going to take (cost) to make the program work.  You add all your labor hours, materials, equipment, travel, etc.  These expenses are exclusive to this effort and therefore called “direct expenses”.  These costs can only benefit this one contract or, as the government calls it, a "final cost objective."  There is, however, a lot more that goes into running your business.  You have accounting costs, administration costs, printers, electricity, rent, etc.  These are called indirect costs because they benefit more than one final cost objective.  Where are these costs captured?  More importantly, how does the government determine what their “fair share” of these costs are?

The government determines their fair share by having the contractor calculate Indirect Billing Rates.    From a 30,000-foot level, these are complex calculations, determined by regulation, to allow the government to reimburse the contractor some portion of their overhead expenses.  In our next Blog Topic ‘What is an Indirect Rate?  Why would you have more than 1?’, we will go into the definition of indirect rates and how they are calculated.   This blog, however, is an introduction into the concepts of why we have indirect billing rates.

It is easy to take direct costs that you know you will need to run a program and add them up.  The non-direct or indirect costs can get a little more complicated.  If you have only one program and no other activity, then it would be easy; all your allowable indirect costs would go against your one and only program.  In this scenario, the government would know precisely that they were paying their fair share of your indirect costs because all your indirect costs would be the fair amount (since all efforts of the company support only one job).  But what if you have two, three or ten programs going? What if some of these jobs are commercial in nature?  How does the government determine what is fair from one program to another? 

The only way to do it would be to divide the indirect expenses by a fair, equitable determination of direct expenses in a way that creates a ratio that can be applied back to each program.  This denominator in the ratio is commonly called the “base”.  This process spreads all the indirect costs back into all the programs in a manner that is proportionate to the magnitude of each program, thus providing a fair share of indirect costs for each program.  If this is done correctly, the government can look at any of your programs and determine that the fair share of indirect costs is allocated to each and every program.  This can be a simple one rate structure for a small company (covering all indirect expenses) to a multiple rate system for larger companies, with rates for overhead, G&A, Materials & Subcontracting, On-site, Off-site and other potentially complicating evaluations. 

To follow the logic of the previous paragraph, we have created an example based on a one rate structure, using total direct costs as the basis of calculation and a total company indirect amount of $1,200,000.

  Project 1 Project 2 Project 3 Project 4 Company Total
Total Direct Costs $750,000 $200,000 $150,000 $500,000 $1,600,000
Indirect Applied $562,000 $150,000 $112,500 $375,000 $1,200,000
Indirect Rate 75.00% 75.00% 75.00% 75.00% 75.00%
Total Contract Cost $1,312,500 $350,000 $262,500 $875,000 $2,800,000

Using the example above, you can take any one of the projects and quickly see that project is assigned its fair share of the total company indirect costs.  So if Project 1 was commercial, Project 2 was a Government Agency A contract, Project 3 was a Government Agency B grant, and Project 4 was a Government Agency C contract, each agency would be able to view and verify that they were being assigned only their fair share of your total indirect costs.

Depending on the agency, there can be several checks that are instituted in your rating system.  Some agencies only allow you to rate current year using last year’s rates, some required forecast budgets to establish a provisional rate and then an end of year rate based on actuals to make adjustments.  Regardless of the system, each agency is attempting to ensure that they are paying the correct amount of indirect expenses that is fair to their contract and only their contract.

Of course, this is just a very simple example.  Most companies will have a more complex set of calculations where the base of the indirect rates is governed by many different regulations.  There are even some overhead expenses (and direct expenses) that are what the government deems “unallowable”.  The government will not reimburse for unallowable expenses of any kind (we will discuss unallowable costs in future blogs, and ReliAscent does have white papers on the subject as well---visit our White Papers and Checklists page for more information).

- Brian Ormsby, ReliAscent


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Topics: Indirect Cost, indirect costs

Government Contracting 101 - Part 4: What is the Role of Small Business in New Product Development?

Posted by Brian Ormsby on Tue, Apr 18, 2017 @ 11:08 AM

Small businesses are the cornerstone of innovation in the US Government, and  Federal Acquisition Regulation (FAR) Part 19 discusses Small Business Programs.  It sets the size standards to be considered a small business, and it also sets the policies, coordination with the Small Business Administration (SBA), Small Business Set-Asides, subcontracting with small businesses, description of special categories of small business, etc.

Small businesses are on the leading edge of innovation.  In fact, small businesses invent at a rate faster than large businesses. In a patent study[1], it was found that the smaller the company, the greater the number of patents per employee.  This was found to be true all along the scale; as businesses grow, their patent to employee ratio declines.  Small business accounts for 8% of all patents issued, but 24% of all patents in emerging technologies.  The government is interested in emerging technologies as that is how they keep their competitive edge.

Because of this, and other factors, Congress has mandated that small businesses receive 23% of all Federal Government contracting dollars, including 5% of prime and subcontracts to Small Disadvantaged Businesses; 5% of prime and subcontracts to Women-Owned Small Businesses; 3% of prime and subcontracts to HUBZone Small Businesses; and 3% of prime and subcontracts to Service-Disabled Veteran-Owned Small Businesses.

There are some very specific programs designed to enhance the role of small business in government contracting.  Here are a few of the major key programs:

Small Business Innovative Research (SBIR) Program

The SBIR program was established within the National Science Foundation in 1976 with the first awards issued in 1977.   The program was well received and further established in 11 different agencies with the SBIR Development act of 1982. It is designed to enhance the role of small businesses in research and development that has potential for commercialization.  The program has not only generated significant innovation in the country but also been recognized as a significant driver in overall job growth in the United States over the last 30 years.  The non-dillutive funds have helped many small businesses succeed where they might have otherwise failed early on.  Two large success stories from the SBIR program funding are Symantec and Qualcomm.  

The SBIR program currently mandates the 11 agencies set aside 3.2% of their R&D budgets for the program.  In 2016 this translated into 3,029 awards for a total of $1.35 Billion.  The US Small Business Administration (SBA) serves as the coordinating agency for the SBIR program.

Small Business Technology Transfer (STTR) Act

Modeled after the SBIR program, STTR was established in 1992.  The goal of the STTR program is to facilitate the transfer of technology developed by a research institution through the entrepreneurship of a small business concern.  The program accepts proposals where small businesses partner with universities or research institutes.  There are several qualifiers to this program as to the percentage of work performed, employment of the Principle Investigator, etc.  In 2016 there were 567 awards for a total of $192 Million.

Federal and State Technology Partnership (FAST) Program

FAST programs are competitive grants programs designed to strengthen the technological competitiveness of small businesses.  These funds are issues from the Federal Government to the state level where the program is managed.

The emphasis on using small business concerns doesn’t stop at the SBIR/STTR level.  There are several other ways that small businesses can get involved in government contracting.  Some contracts are set up specifically for small businesses (we will discuss these opportunities for small business in a special blog near the end of this series).

Federal contracting with small businesses is a win-win.  Small businesses get the revenue they need to grow their businesses and create jobs, and the Federal Government gets the opportunity to work with some of America’s most innovative and nimble small businesses, often times with a direct line to the CEO.

 - Brian Ormsby, ReliAscent

[1] Patent Trends among Small and Large Innovative Firms during the 2007-2009 Recession, Anthony Breitzman, PhD.  May 2013.


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Topics: government contracting, Small Business, new product development

Government Contracting 101 - Part 3: Can Deferring Wages Get Me Into Trouble?

Posted by Brian Ormsby on Wed, Apr 12, 2017 @ 11:02 AM

Let’s start with the definition of deferred wages – any arrangement where an employee receives wages after they have earned them.

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Topics: Deferred Wages

Government Contracting 101 - Part 2: Who is the DCAA, and What is DCAA Compliance?

Posted by Brian Ormsby on Thu, Mar 30, 2017 @ 11:05 AM

The Defense Contract Audit Agency (DCAA) was founded in 1965 under Robert McNamara, the Secretary of Defense from 1961 to 1968.  Its function is to perform all contract audits for the Department of Defense.  Prior to 1965, each U.S. Military branch had separate contract audit functions and regulations. 

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Topics: DCAA compliance, DCAA

Government Contracting 101 - Part 1

Posted by Brian Ormsby on Mon, Mar 20, 2017 @ 11:07 AM

In this first of a 9-part series, ReliAscent's Brian Ormsby, introduces his "Government Contracting 101" blog series. Topics covered range from DCAA and DCMA compliance, to indirect rates, unallowable costs, government contract management, and funding & commercialization.  We hope you find this series useful, and come back each week to catch Brian's latest blog!

Read the Full Blog Here

Topics: government contracting, DCAA compliance, Indirect rates, dcma compliance, unallowable costs

Preparing a Cost Proposal in the Government Environment

Posted by Brian Ormsby on Thu, Oct 27, 2016 @ 11:17 AM

The following blog is an article taken from our recent ReliAscent Quarterly Newsletter (Volume 5, Issue 3), published earlier this month.

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Topics: Proposal Pricing, Pricing Proposal, Cost Proposal