SBIR Proposal Writing Basics: Your Indirect Rate is Not Cast in Stone

Gail & Jim Greenwood, Greenwood Consulting Group, Inc.  

Copyright © 2005 by Greenwood Consulting Group, Inc.

Effective January 1, 2005 , businesses must pay social security tax on the first $90,000 of income paid to each employee.  This is up from a cap of $87,900 in 2004.  For a company with an employee earning $90,000, this increase in the taxable wage cap means an increase in social security tax of about $130. 

So why are we telling you this?  One reason could be to caution you against one of the oldest political tricks in the book, namely telling your constituents that you are not raising taxes when actually you are not raising the tax rate but are raising taxes by increasing what is subject to the tax.  But that hasn’t got much to do with writing SBIR/STTR proposals.

The relevancy here is that too many companies develop an indirect rate (or F&A rate as some SBIR/STTR agencies call it, or its component parts of G&A and overhead rates) one time, then assume that rate does not change over time.  The problem is that your costs are constantly changing, sometimes because of things that you do (like improving fringe benefits for employees) and things that are being done to you (like the Feds raising the social security taxable wage base). 

There are two lessons to be learned here.  First, you should be regularly comparing your budgeted costs to your actual costs to determine if your budget (and the indirect rate that is based on that budget) still reflects reality.  If you do not do this, you do not know whether you are over or undercharging the government for your indirect costs—if you do the former, you may have to repay (with penalties and interest, potentially) the Federal government, while if you do the latter you will lose money on your SBIR/STTR projects.

Second, you need to regularly recalculate your company’s indirect rate.  It will usually change at least annually, and for small and start-up businesses it can change dramatically at any time when someone is hired, a new contract is received, or the Feds change the wage base subject to the social security tax.  If done annually, this recalculation needs to be done several months in advance of a new year (calendar year, fiscal year, or other 12 month period for which you are estimating an indirect rate) so that you have ample time to begin using the new indirect rate in proposals for new work in the new year, and to alert on-going customers to the change before you start using the revised indirect rate.

Your company’s costs are constantly changing.  Sometimes you have a say in how they change, while other times the change is beyond your control.  Regardless, it is your responsibility to be aware of the changes and recalculate your indirect rate accordingly.  Of course, if your company is not changing any indirect rate/F&A rate, then  you have a larger, more significant problem that you need to resolve.