Indirect rates: Are you maximizing cost recovery on government grants?
The terms indirect rate, overhead rate, and facilities-and-administrative rate (F&A) are often used interchangeably. Although the terms may be different, all have one common theme. Indirect rates are used as the reimbursement method for company costs that are not directly related to a certain project or grant. There are no hard and fast rules associated with what is considered an indirect or direct cost. It all depends on the grant and circumstance.
We often see companies proposing what they consider industry standards as indirect rates to win Government grants without taking into consideration their actual indirect rates. For example, a 40% indirect rate often is used by National Institutes of Health (NIH) grantees. This rate is commonly used by NIH grantees because an indirect rate of 40% or less normally is not required to be justified with additional indirect rate supporting documentation. However, during actual performance of the grant work, this often leads to an under recovery of indirect expenses and ultimately leaving money on the table. Many grantees are surprised when we calculate their actual rates and they realize their indirect rates are running significantly higher.
The company could be recovering those additional percentage points in indirect expenses. However, companies must provide supporting documentation to propose or negotiate the higher rate with the government grant agency. When you are unfamiliar with the government grant world, the thought of supporting indirect rates to propose a higher indirect rate can be intimidating. Based on our experience, we have identified the following three major areas of concern related to supporting higher indirect rates for government grantees:
- Insufficient and/or unenforced timekeeping policies and procedures,
- An accounting system that is not set up to segregate direct and indirect expenses, and
- Lack of unallowable cost tracking.
Using sound financial data and addressing the major areas of concern identified above may help ensure the creation of adequate indirect rates, and the maintenance of suitable documentation to support the indirect rates. This information can be used to develop and review your actual indirect rates and further understand the company’s profitability. Once you identify whether your company is achieving maximum recovery of the company’s indirect costs, you may then determine whether your company should consider proposing or negotiating a higher indirect rate with your government grant agency.
The company must also ensure that the indirect rate structure aligns with the complexity of the company’s organizational structure. We have seen instances where the Defense Finance and Accounting Services (DFAS) and the government-grant agency have requested the grantee to revise their indirect rate structure or face adverse consequences on current or future awards because their current structure did not equitably allocate costs to federal grants.
Whether it is a single or a multi-tiered indirect rate structure, CohnReznick has many years of experience working with biotechnology and R&D firms in developing, reviewing, and supporting indirect rates on government grants. We can help answer your questions and facilitate the indirect-rate process. While going through the process of understanding your indirect rates, the company will become more familiar with their underlying contract information. CohnReznick also has experience using this underlying contract information for purposes of the R&D tax credit which are applicable to biotechnology and R&D firms.
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