Many SBIR/STTR companies reuse an indirect rate from a prior proposal.

 

The rate may have been accepted once. It may be sitting in an old budget spreadsheet. It may have come from an estimate prepared before the company hired employees, added consultants, changed payroll, opened an office, won another award, or started commercial work.

 

But an indirect rate should not be treated as a static number.

 

Before using the same rate in another SBIR/STTR proposal, the company should review whether the rate still reflects actual costs, cost pools, allocation bases, fringe, overhead, G&A, unallowable costs, and current business activity.

 

At Peter Witts CPA PC, we help SBIR/STTR companies strengthen indirect rate strategy so proposal budgets, cost structures, and award accounting are better aligned before the next funding opportunity.

 

Why Indirect Rate Cleanup Matters Before the Next Proposal

 

An indirect rate affects more than one budget line.

 

It influences how the company recovers the cost of running the business while performing federal award work.

 

Indirect costs may include fringe benefits, administrative labor, rent, software, insurance, accounting support, compliance support, facilities, and other shared costs that support more than one project or the company as a whole.

 

If the rate is too low, the company may under-recover real business costs.

 

If the rate is too high or unsupported, the proposal may raise questions.

 

If the rate is built from outdated assumptions, the company may create problems during award performance, invoicing, drawdowns, or review.

 

Indirect rate cleanup helps answer:

• Does the rate reflect actual company costs?

• Are direct and indirect costs classified correctly?

• Are unallowable costs identified?

• Are cost pools clean?

• Is the allocation base appropriate?

• Are fringe, overhead, and G&A treated consistently?

• Does the rate match the next proposal’s work?

• Can the company explain the rate if asked?

• Will the rate support future billing or reporting?

A rate used in one proposal may not be the right rate for the next one.

 

Start With the Current Accounting Records

 

Before building or reusing an indirect rate, start with the accounting records.

 

SBIR.gov explains that indirect rates should be developed from the company’s own accounting system, annual budget, projected cost categories, or other company-specific cost information.

 

Review:

• Profit and loss statement

• General ledger detail

• Payroll records

• Fringe benefits

• Administrative expenses

• Facility costs

• Professional fees

• Software and IT costs

• Insurance

• Travel

• Commercial costs

• Internal R&D costs

• Fundraising costs

• Unallowable costs

• Prior proposal budget assumptions

• Actual spending since the last proposal

The goal is to understand what the company is actually spending now.

 

Do Not Reuse a Rate Just Because It Was Accepted Once

 

A previously accepted rate can be useful history.

 

It should not automatically become the next proposal rate.

 

The company may have changed since the last proposal.

 

For example:

• Payroll may have increased.

• Founder compensation may have changed.

• New technical employees may have been hired.

• Administrative support may have been added.

• Fringe costs may have changed.

• Software costs may have increased.

• Commercial work may have started.

• A new facility may have been leased.

• Another federal award may be active.

• Subawards or subcontractors may now be involved.

• Unallowable costs may have grown.

• Actual direct labor may differ from the old forecast.

SBIR.gov notes that companies should revise estimated allocations as they learn more and as actual costs become clearer.

 

That is the purpose of cleanup before the next proposal.

 

Review Actual Costs

 

The first cleanup step is reviewing actual costs.

 

Actual costs help show whether the old rate still makes sense.

 

Review actual spending for:

• Payroll

• Fringe benefits

• Rent or facilities

• Insurance

• Accounting and legal

• Payroll processing

• Compliance support

• Administrative software

• Cloud and IT tools

• Office expenses

• Travel

• Training

• General management

• Internal R&D

• Sales and marketing

• Fundraising

• Customer-funded work

• Federal award work

Actual costs should be compared to the assumptions used in the prior rate.

 

If actual costs are materially different, the next proposal rate should be reviewed.

 

Review the Time Period Used

 

Indirect rates are based on a period of activity.

 

The company should know what period was used to build the rate.

 

Review whether the rate is based on:

• Prior fiscal year actuals

• Year-to-date actuals

• Current-year budget

• Next-year forecast

• Proposal-period estimate

• A mix of actuals and forecasted costs

FAR 31.203 explains that a base period for allocating indirect costs is the cost accounting period during which costs are incurred and accumulated for allocation to work performed in that period.

 

For proposal planning, the company should make sure the selected period reasonably reflects the period in which the proposed work will be performed.

 

Review Cost Pools

 

A cost pool is a grouping of indirect costs that will be allocated to projects or activities.

 

Depending on the company’s structure, pools may include:

• Fringe

• Overhead

• G&A

• Facilities

• Administrative labor

• Single combined indirect pool

A new SBIR/STTR company may use a simpler structure.

 

A growing company may need more detail.

 

SBIR.gov notes that a single indirect rate can be suitable for new SBIR/STTR firms, while other structures may be appropriate depending on the company and contract environment.

Cleanup should review whether the pool structure still fits the business.

 

Review Fringe

 

Fringe costs may include payroll-related benefits and taxes.

 

Review:

• Employer payroll taxes

• Health insurance

• Retirement contributions

• Workers’ compensation

• Paid time off

• Bonuses, if applicable

• Other employee benefits

• Treatment of founder benefits

• Treatment of part-time employees

• Treatment of contractors versus employees

If fringe is separated from overhead or G&A, the company should confirm that fringe costs are complete, properly classified, and supported.

 

If fringe is included in a broader pool, the company should still understand the components.

 

Review Overhead

 

Overhead usually supports technical work or project performance across more than one project.

 

Overhead may include:

• Indirect technical labor

• Engineering supervision

• Lab facility costs

• Shared technical software

• Shared equipment support

• Technical supplies not tied to one project

• Project support tools

• Compliance costs related to project performance

The company should review whether costs classified as overhead actually support project performance.

 

Costs that support the company as a whole may belong in G&A instead.

 

Costs that support a specific award may be direct.

 

Review G&A

 

G&A generally supports the overall business.

 

G&A may include:

• Executive management

• Accounting

• Legal

• Payroll processing

• General insurance

• Office administration

• HR support

• General business software

• Company-wide compliance

• General operations

The company should review whether G&A includes only costs that support the business as a whole.

 

If direct project costs or unallowable costs are sitting inside G&A, the rate may be distorted.

 

Review Direct Costs

 

Indirect rates depend on direct costs too.

 

The denominator, or allocation base, may be based on direct labor, total direct costs, modified total direct costs, or another appropriate base.

 

That means direct cost cleanup matters.

 

Review:

• Direct labor

• Direct fringe, if applicable

• Consultants

• Subawards

• Materials

• Travel

• Equipment

• Other direct costs

• Customer-funded work

• Internal R&D

• Commercial projects

• Other federal awards

If direct costs are incomplete or misclassified, the rate calculation may be unreliable.

 

Review the Allocation Base

 

The allocation base determines how indirect costs are spread across work.

 

Common bases may include:

• Direct labor dollars

• Direct labor hours

• Total direct costs

• Modified total direct costs

• Total cost input

• Another measurable base tied to benefit received

FAR 31.203 addresses allocation bases for indirect costs and emphasizes allocation based on beneficial or causal relationships.

 

The base should be fair, reasonable, and aligned with how the business operates.

 

If the company has changed, the base may need to change too.

 

Review Whether the Base Includes the Right Activities

 

A common mistake is excluding activities that benefit from indirect costs.

 

For example, commercial work, internal R&D, or unallowable activities may still use management time, facilities, software, accounting, or other shared resources.

 

2 CFR 200.405 states that activities benefiting from indirect costs, including unallowable activities and donated services, should receive an appropriate allocation of indirect costs.

 

This matters because excluding activities from the base can shift too much indirect cost onto federal awards.

 

The rate cleanup should review whether the base includes all appropriate work.

 

Review Unallowable Costs

 

Unallowable costs should be identified before building or reusing an indirect rate.

 

Examples requiring review may include:

• Fundraising

• Investor activity

• Certain lobbying

• Entertainment

• General sales activity

• Non-award commercialization

• Unsupported costs

• Personal or non-business costs

• Costs outside the award period

• Costs restricted by award terms

FAR 31.201-6 addresses accounting for unallowable costs.

 

SBIR.gov also explains that a good accounting system should isolate unallowable costs.

 

Unallowable costs may still need to be visible in the accounting records. The company should not hide them inside indirect pools.

 

Review Directly Associated Costs

 

Some costs may be directly associated with unallowable activity.

 

For example, if a founder spends time on fundraising, related travel or professional support may also need review.

 

Cleanup should look for costs associated with:

• Investor meetings

• Fundraising travel

• Pitch materials

• Sales events

• Entertainment

• Lobbying

• Non-award commercialization

• Customer acquisition

The goal is to avoid allowing a related cost to remain in an indirect pool when it should be identified separately.

 

Review Founder and Management Time

 

Founder and management labor can affect both direct costs and indirect rates.

 

Review whether founder time is classified as:

• Direct award labor

• Direct proposal labor, if appropriate

• Indirect management

• G&A management

• Fundraising

• Sales and marketing

• Commercialization

• Internal R&D

• Customer-funded work

• Unallowable activity

If founder time is not tracked, the indirect rate may be based on assumptions instead of records.

 

Timekeeping helps support whether founder labor belongs in a direct base, indirect pool, G&A pool, or non-award category.

 

Review Payroll and Labor Distribution

 

Payroll is often central to indirect rate cleanup.

 

Review:

• Payroll registers

• Timesheets

• Labor distribution reports

• Direct labor by award

• Indirect labor

• G&A labor

• Fringe costs

• Non-award labor

• Commercial labor

• Internal R&D labor

• Founder compensation

• Payroll tax treatment

SBIR.gov identifies timekeeping and labor distribution as core accounting system requirements.

 

Without reliable labor distribution, indirect rate cleanup becomes much harder.

 

Review Commercial Activity

 

Many SBIR/STTR companies begin commercial activity while pursuing the next proposal.

 

That may include:

• Customer pilots

• Product sales

• Service contracts

• Paid demos

• Commercial product development

• Customer onboarding

• Sales support

• Investor activity

Commercial work may affect both the allocation base and indirect cost treatment.

 

If commercial activity benefits from shared resources but is not included in the rate structure, the federal award may absorb too much indirect cost.

 

Review Internal R&D

 

Internal R&D should also be reviewed before the next proposal.

 

Internal R&D may include:

• Company-funded product development

• Work outside the approved award scope

• Technical exploration for future proposals

• Platform development

• Commercial feature development

• Non-award testing

The company should decide whether internal R&D is treated as direct, indirect, or another category based on its accounting policy and cost structure.

 

It should not be silently mixed with federal award costs.

 

Review Subawards and Subcontracts

 

Subawards and subcontracts can affect the rate base and proposal strategy.

 

Review:

• Whether subaward costs are included in the allocation base

• Whether certain subaward amounts are excluded under the applicable rate method

• Whether subcontractor costs distort the base

• Whether the proposal budget handles partner costs correctly

• Whether indirect costs are applied consistently

• Whether agency-specific rules apply

A proposal with a large subaward may need a different indirect rate review than a proposal built mainly around internal labor.

 

Review Equipment and Large Purchases

 

Large equipment or material purchases may distort an indirect rate if included incorrectly in the base.

 

Review:

• Equipment purchases

• Capitalized assets

• Large materials

• One-time purchases

• Pass-through costs

• Subaward-heavy budgets

• Project-specific tools

• Agency treatment

• Proposed base exclusions, if applicable

The company should understand how large direct costs affect indirect cost recovery.

 

Review Prior Proposal Assumptions

 

The old rate may have been built from assumptions that are no longer true.

 

Review whether the prior proposal assumed:

• Different staffing

• Different founder salary

• Different fringe costs

• No office rent

• Lower insurance

• Fewer software tools

• No commercial revenue

• No subawards

• Lower accounting support

• Different overhead structure

• Different direct labor base

If assumptions changed, the rate should be cleaned up before reuse.

 

Review Agency-Specific Limits

 

Some agencies may limit or scrutinize indirect rates in certain SBIR/STTR contexts.

 

For example, SBIR.gov notes that NIH caps the indirect rate on SBIR/STTR Phase I proposals at 40 percent of all direct costs if the company does not have an approved indirect rate with a federal agency, and NSF limits the combination of indirect and fringe benefits costs to no more than 150 percent of direct labor on NSF SBIR/STTR projects.

 

Before reusing a rate, review:

• Agency instructions

• Solicitation language

• Award type

• Phase I or Phase II rules

• Approved indirect rate agreements, if any

• De minimis options, if applicable

• Proposal budget limitations

• Contract versus grant requirements

A rate strategy that works for one agency may not work for another.

 

Review Whether Actuals Support the Proposal Rate

 

NSF Phase II financial review guidance explains that requested indirect rates should identify the indirect rate being requested, the calculation, the expenses in each indirect pool, and the allocation base. It also notes that, if the most recently completed fiscal year does not reasonably reflect expected performance, a budgeted indirect cost rate proposal may be submitted along with the actual calculation.

 

This is a useful principle for all SBIR/STTR companies.

 

The company should be able to explain whether the proposed rate is based on:

• Historical actuals

• Year-to-date actuals

• Forecasted costs

• Proposal-period budget

• Known upcoming changes

• A combination of actuals and forecast

The support should match the story.

 

Reconcile the Rate to Financial Statements

 

Indirect rate cleanup should include reconciliation.

 

NSF Phase II guidance asks for reconciliation of total expenses in the indirect cost proposal to total expenses in the organization’s financial statements, showing that expenses have been included in pools, bases, unallowable costs, or excluded expenses.

 

Before the next proposal, the company should reconcile:

• General ledger

• Profit and loss statement

• Indirect cost pools

• Allocation base

• Unallowable costs

• Excluded costs

• Direct costs

• Prior proposal schedules

This helps ensure the rate is not built from disconnected spreadsheets.

 

Review Provisional Billing Rate Needs

 

If the company is moving into cost-reimbursable work, provisional billing rates may become important.

 

DCAA provisional billing rate guidance indicates that reviews may compare proposed pools and bases to prior-year and year-to-date pools and bases and consider unallowable expense adjustments when calculating current-year provisional billing rates.

 

Before the next proposal, ask:

• Will this award require cost-based billing?

• Are provisional billing rates needed?

• Can the company support pool and base estimates?

• Are year-to-date actuals available?

• Are unallowable costs excluded?

• Will rates be monitored during performance?

• Can actual rates be compared to billing rates?

A proposal rate and a billing rate may be related, but the company should understand how each will be supported.

 

Review Rate Competitiveness

 

Indirect rates are not only compliance numbers.

 

They also affect proposal competitiveness and project economics.

 

A lower rate may make the proposal look lean, but it may underfund the company’s real support costs.

 

A higher rate may better reflect the business, but it may raise budget questions.

 

Before finalizing the next proposal, review:

• Whether the rate reflects actual operating needs

• Whether the budget can support performance

• Whether direct labor is realistic

• Whether overhead is understated

• Whether G&A is supportable

• Whether agency limits apply

• Whether the company can explain the rate

• Whether the rate aligns with cash flow needs

The goal is not simply to get the lowest rate.

 

The goal is to build a defensible and sustainable rate strategy.

 

Review Consistency of Cost Treatment

 

Consistency is critical.

 

2 CFR 200.403 states that a cost must not be assigned to a federal award as a direct cost if another cost incurred for the same purpose in like circumstances has been allocated as an indirect cost.

 

Before the next proposal, review whether similar costs are treated consistently.

 

Examples:

• Is accounting support always indirect unless clearly award-specific?

• Is software treated consistently?

• Is project management classified appropriately?

• Are shared technical tools handled the same way?

• Is founder management time treated consistently?

• Are proposal and fundraising costs separated properly?

Inconsistent treatment can make a rate harder to support.

 

Clean Up the Chart of Accounts

 

Indirect rate cleanup often requires chart of accounts cleanup.

 

Review whether the accounting system separates:

• Direct labor

• Indirect labor

• Fringe benefits

• Overhead

• G&A

• Unallowable costs

• Internal R&D

• Commercial activity

• Fundraising

• Sales and marketing

• Customer-funded work

• Federal award costs

• Subaward costs

• Equipment and large purchases

If the chart of accounts is too broad, indirect rate schedules may require manual reconstruction.

 

Update Written Policies

 

The company should document how indirect rates are built and used.

 

Policies should address:

• Direct cost treatment

• Indirect cost treatment

• Fringe treatment

• Overhead treatment

• G&A treatment

• Unallowable cost identification

• Allocation bases

• Timekeeping

• Labor distribution

• Cost transfers

• Rate monitoring

• Proposal rate preparation

• Billing rate preparation, if applicable

Written policies help the team apply the same logic from one proposal to the next.

 

Prepare a Support File for the Next Proposal

 

Before submitting the next proposal, create an indirect rate support file.

 

Include:

• Current profit and loss statement

• General ledger detail

• Payroll records

• Labor distribution reports

• Fringe schedule

• Overhead schedule

• G&A schedule

• Allocation base support

• Unallowable cost schedule

• Excluded cost schedule

• Prior-year actuals

• Year-to-date actuals

• Forecast assumptions

• Proposal budget

• Notes explaining changes from prior rates

This file helps the company respond quickly if the agency asks how the rate was developed.

 

Common Indirect Rate Cleanup Mistakes

 

SBIR/STTR companies often run into problems because the rate is reused without review.

 

Common mistakes include:

• Reusing an old rate without comparing actual costs

• Using another company’s rate

• Building the rate only in a proposal spreadsheet

• Not reconciling the rate to the financial statements

• Mixing direct and indirect costs

• Not isolating unallowable costs

• Excluding commercial activity from the base

• Ignoring founder and management time

• Misclassifying fringe, overhead, and G&A

• Applying indirect costs inconsistently

• Ignoring agency-specific limits

• Not updating for new hires or facilities

• Not reviewing subaward impact

• Not preparing support for agency questions

These issues are easier to fix before the next proposal is submitted.

 

Indirect Rate Cleanup Checklist

 

Before reusing an indirect rate in another SBIR/STTR proposal, review:

• Current accounting records

• Prior proposal assumptions

• Actual costs

• Year-to-date costs

• Forecasted costs

• Cost pools

• Allocation bases

• Fringe costs

• Overhead costs

• G&A costs

• Direct cost base

• Unallowable costs

• Directly associated costs

• Founder and management time

• Payroll and labor distribution

• Commercial activity

• Internal R&D

• Subawards and subcontractors

• Equipment and large purchases

• Agency-specific limits

• Financial statement reconciliation

• Provisional billing rate needs

• Written policies

• Support file documentation

This checklist helps ensure the next proposal rate is not just copied from the last budget.

 

Questions to Ask Before Using the Rate Again

 

Before using an indirect rate in another proposal, ask:

• Does this rate reflect our current cost structure?

• What actual costs support the rate?

• What period was used?

• Are cost pools clean?

• Is the allocation base appropriate?

• Are unallowable costs identified?

• Are direct and indirect costs treated consistently?

• Are fringe, overhead, and G&A classified properly?

• Does commercial work affect the base?

• Does internal R&D affect the rate?

• Do subawards or large purchases distort the base?

• Are agency-specific limits relevant?

• Can we reconcile the rate to the books?

• Can we explain the rate if the agency asks?

• Will this rate support performance if we win?

If several answers are unclear, the rate should be cleaned up before the proposal is submitted.

 

Final Thoughts: Indirect Rates Should Grow With the Company

 

An indirect rate is not a number to copy from one proposal to the next.

 

It should reflect the company’s actual cost structure, indirect pools, allocation bases, unallowable costs, labor distribution, commercial activity, and federal funding strategy.

 

Before submitting the next SBIR/STTR proposal, companies should review whether the old rate is still supportable, defensible, and financially sustainable.

 

At Peter Witts CPA PC, we help SBIR/STTR companies strengthen indirect rate strategy so proposal budgets are built on cleaner accounting records and clearer cost assumptions.

 

Need Help Strengthening Your Indirect Rate Strategy?

 

If your SBIR/STTR company is preparing another proposal, Peter Witts CPA PC can help review your actual costs, cost pools, allocation bases, fringe, overhead, G&A, unallowable costs, labor distribution, commercial activity, subaward impact, and proposal rate support.

 

Backed by 35+ years of government contract accounting experience and first-hand DCAA knowledge, our team helps innovators build indirect rate strategies that support federal funding from proposal to performance.

 

Schedule a strategic consultation with Peter Witts CPA PC to strengthen your indirect rate strategy.