SBIR Proposal Writing Basics: Most Common SBIR/STTR Accounting Questions

Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

Copyright © 2007 by Greenwood Consulting Group, Inc.

Because we teach an SBIR cost proposal & government accounting workshop, we hear a lot of questions about Federal budgets and cost proposals.  This month, we're going to address the two questions we get asked most often.

Question #1:  What should my indirect/F&A rate be?

Years ago, we were just starting one of our workshops when an attendee, who we knew personally, asked us “can’t you just tell me what my indirect rate ought to be?” He was a brilliant scientist, but he mistakenly thought there was one correct indirect rate that every company ought to charge. The reality is that every company has a unique indirect rate (also known as F&A rate at some grant agencies like NIH and USDA), and that rate changes over time. So the correct answer to this question is “Yes, the indirect rate you ought to charge is the one that is justified given your company’s circumstances and that is consistent with what the Federal government allows.” Admittedly, that answer is less satisfying than just answering something like “the secret correct indirect rate is 47 percent,” but it is the correct one. Therefore, it is very important that you learn what goes into an indirect rate (and what costs aren’t in it because the Federal government disallows them), then estimate your company’s unique indirect rate given your expenses, revenues, and other relevant variables.

By the way, if estimating your indirect rate seems like a lot of shenanagans to be done only to appease the Feds, then consider two important reasons for doing it. First, if you don’t have an indirect rate, you can’t justify it and the government (at best) will give you some artificially low indirect rate. This means you will lose money as you do your SBIR/STTR work for the government. Second, the indirect rate is very important in all of your pricing decisions, including those involving private customers, because it allows you to charge a client the full cost of doing work for them (including the general costs of being in business). Unless you are charging something akin to an indirect rate on your private customer work, you are (once again) likely losing money.

Question #2: I don’t have to keep time sheets if I get an SBIR/STTR award, do I?

Unlike the first question, there’s a pretty simple and universal answer to this question: that answer is YES. Whether it’s an SBIR or STTR, whether it is Phase 1 or 2, whether it is a grant or a contract, you MUSTtrack your time on a time sheet. And we’re not talking about just tracking the time you spend on your SBIR/STTR project, but tracking every 15 minutes of every day spent on anything company related, including non-project indirect time. Oh, and this applies to everyone in the company, not just the folks who are working on the SBIR/STTR project (there can be some exceptions to this latter point, if you organize your business to separate large unrelated functions like manufacturing from your SBIR/STTR type work).

So do you have to keep time sheets because it’s some dumb bureaucratic requirement? No, that’s not the reason. First, you must keep time sheets to document and justify the indirect rate you claim you are entitled to. Second, for many SBIR/STTR companies, the bulk of their costs are labor-related, and the time sheet is needed to show how the labor was spent, either on projects (direct) or general company operations (indirect). And third, there’s great benefit in keeping time sheets from the standpoint of managing your business: the time sheet will allow you to see how your employees spend their time and, trust us, you will be very surprised how it is spent versus how you think it is used!

Inquiring Minds Want to Know

These are the two questions that we get the most about SBIR/STTR budgets and cost proposals. However, they represent only the tip of the iceberg in terms of what you need to know about the perplexing world of Federal government accounting and SBIR/STTR cost proposals. And if you don’t know this stuff, trust us, YOU WILL LOSE MONEY. That’s because the government knows the rules and is very good at protecting its interests—if you want to protect yours, you better get to know the rules.

If the answers to these two questions surprised you, or if you don’t feel 100% comfortable with your SBIR/STTR cost proposals and accounting, consider a friendly word of advice: GET HELP. Learn more about fun stuff like G&A, overhead, allowables, reasonableness, unjustified costs, fringe rate, and IR&D so you know what the heck it all means and how to protect your interests. And, if dealing with all of this stuff on a daily basis isn’t your idea of a good time, hire some help, perhaps in the form of an accountant who has expertise in Federal government accounting. But beware: like lawyers, CPAs have areas of expertise, and not every accountant is a specialist in Federal government accounting.