Making Sense of Your Dollars and Cents

1. Making Sense of Your Dollars and Cents Office of Acquisition and Logistics Management Lorraine M. Trexler, Director Division of Financial Advisory Services June 30, 2014

2. Making Sense of Your Dollars and Cents (continued) • For-profit organizations must follow Federal regulations and requirements when expending and accounting for Federal funds • Understand the basic accounting and system requirements • Plan to meet requirements before expending funds! • Accounting system • Indirect costs • Audit requirements

3. Accounting System An adequate accounting system provides the Federal agency with confidence that adequate internal controls are in place to ensure accountability for all funds, property, and other assets. FAR Subpart 9.1—Responsible Prospective Contractors 9.103 Policy. (a) Purchases shall be made from, and contracts shall be awarded to, responsible prospective contractors only… 9.104-1 General standards. To be determined responsible, a prospective contractor must— (a) Have adequate financial resources to perform the contract, or the ability to obtain them… (e) Have the necessary organization, experience, accounting and operational controls, and technical skills, or the ability to obtain them…

4. Accounting System (continued) • Issues that you must address before receiving an award: • Project cost (job cost) accounting system Your accounting system must be able to accumulate and segregate costs by project, i.e. the system must identify receipts and expenditures for each contract or grant • Segregation of direct and indirect costs Chart of Accounts must demonstrate: - Direct and indirect costs are segregated; and - Unallowable costs have been separately identified • Adequate timekeeping system Timesheets must demonstrate: - Distribution of labor for ALL employees; and - Account for total hours (direct, indirect and paid absences)

5. Indirect Costs • The fundamental concept • Basic definitions • Cost allocation systems • Federal agency cognizance • When to submit an indirect cost proposal • SBIR/STTR 40% Rule • Negotiation process • Five tips for success

6. Indirect Costs: the Fundamental Concept • Indirect Cost Pool = $500,000: Rent, Utilities, Accounting, Admin. Salary, Office Supplies • Direct Cost Base = $1,000,000: PI Salary, Materials, Consultants and other Direct Costs What does this mean? For every $1.00 of direct cost you charge to your contract, we will reimburse you $0.50 to pay for indirect costs.

7. Indirect Costs: Basic Definitions DIRECT COSTS –easily identified with a specific project: • Direct salary & wages • Material & supplies • Consultants • Subcontracts • Equipment

8. Indirect Costs: Basic Definitions (continued) FRINGE BENEFIT COSTS– allowances and services provided to employees: • Paid absences (vacation, holiday & sick pay) • Payroll taxes • Pension plan • Group insurance (health, life, disability)

9. Indirect Costs: Basic Definitions (cont.) INDIRECT COSTS– not easily identified with a specific project: • Executive & administrative labor • Rent & utilities • Depreciation • General lab supplies • Professional fees (e.g., CPA) • Office supplies

10. Cost Allocation Systems ONE TIER SYSTEM • Fringe benefits and indirect costs are combined into one pool. Result: a single rate. • Computation of Indirect Rate: Pool / Base Pool = Fringe Benefits + Indirect Costs Base = An equitable base: Examples: • Total Direct Costs or • Direct Salaries and Wages

11. Cost Allocation Systems (continued) TWO TIER SYSTEM • Fringe benefits and indirect costs are separated into two pools. Result: two rates. • Computation of Fringe Benefit Rate: Pool / Base Fringe Benefit Costs Total Salaries & Wages • Computation of Indirect Cost Rate: Pool / Base Indirect Costs An equitable base

12. Indirect Costs: Federal Agency Cognizance Generally, • The agency that awards the preponderance of cost-reimbursement funding to a company will be cognizant for the negotiation of their indirect cost rates • Rates are negotiated by the cognizant Federal agency on behalf of all others • Rates are negotiated for the company as a whole, for their fiscal year, not for each contract or grant • Provisional rates are based on estimated costs • Final rates are based on actual costs

13. Indirect Costs: When to submit an indirect cost proposal • After you have been notified by the awarding office that you are the successful offeror or grant recipient • We do not accept unsolicited proposals • We do not negotiate rates with subcontractors or sub-recipients of grants

14. Indirect Costs: SBIR/STTR 40% Rule(NIH, CDC, FDA) • IDC rule on SBIR/STTR awards: • Phase I = 40% of total direct costs (TDC)- the maximum rate without negotiation • Phase II = 40% of total direct costs- the maximum rate without negotiation • For more information see theNIH Policy Change on Threshold for Negotiation of Facilities and Administrative (F&A)/Indirect Costs for Phase II SBIR/STTR Grantspage

15. Indirect Costs: SBIR/STTR 40% Rule So, does this mean I can request a 40% IDC rate without justification? • Absolutely not. You can only request what you can support. • Even though IDC rates are not negotiated at 40% or less, the rates are subject to audit at any time.

16. Indirect Costs: the Negotiation Process Contact the Division of Financial Advisory Services: • When? After notification that the (Phase II) grant or contract will be awarded • How? Via email to: • dfas-idc@nih.gov

17. Indirect Costs: the Negotiation Process (2) Information Needed: • Representative’s name, title and email address • Company’s name, address and phone number • Grant / Contract number • Grant / Contract Specialist’s name and contact information

18. Indirect Costs: the Negotiation Process (3) And then... • The Division of Financial Advisory Services will request an indirect cost proposal (and specified supporting documentation) • The organization submits a proposal (hard copy) • ....the real fun begins!

19. Indirect Costs: the Negotiation Process (4) What happens next? • DFAS preliminary review • Reconciliation • Pool analysis, base analysis • Reasonable/allowable/allocable (per FAR Part 31.2- Contracts with Commercial Organizations) • Draw conclusions, communicate Gov’t position, negotiate rates, obtain concurrence • Document file, submit for supervisory review • Issue rate agreement

20. Indirect Costs: Tips for Success #1 – Hire an expert A recent email from an SBIR Company to one of our Auditors: “Thanks Rod. No news flash there! I have been pulling out my hair over the negotiation submission. The fact of the matter is, I think it is best completed by our accountants. I have FINALLY convinced someone else to take responsibility of it. Perhaps if we can let them know what the issues are, the accountants can come to my rescue, fix the errors, and get it submitted per your expectation. “I apologize for the agony of this submission. I welcome the challenge and the opportunity to attempt something new, but it is now painfully clear that scientists are not financially minded!”

21. Indirect Costs: Tips for Success (2) #2 – Take a class (2 – 3 days) #3 – Use our template on the DFAS Indirect Cost Submission page

22. Indirect Costs: Tips for Success (3) #4 Know the Federal Acquisition Regulation (especially Part 31.2, Contracts with Commercial Organizations)

23. Indirect Costs: Tips for Success (4) #5 Don’t wait until the last minute!!! An excerpt from a recent letter to the Indirect Cost Branch Chief from an SBIR company: “Somewhat to my surprise, I found that the process of carefully examining and classifying all of our expense transactions for the year, with strict adherence to NIH rules for expense allocation, has resulted in a better understanding of our own business expenses and improved the way in which we will track and react to our costs in the future.” What is this SBIR company really trying to say?We messed-up! We only asked for 12% at the time of award. Now we realize that our actual rate is 92%. HELP!!!

24. Audit Requirements Audit? Who said anything about having an audit? • The Department of Health & Human Services did! • HHS specifies requirements for audits of for-profit organizations in Title 45 CFR Part 74.26(d)* • Electronic Code of Federal Regulations

25. Audit Requirements (2) A for-profit organization is required to have an audit if: • it expended $500,000 or more under HHS awards in its Fiscal Year • AND • at least one of the awards is an HHS grant

26. Audit Requirements (3) Title 45 CFR Part 74.26 provides for-profit organizations with two options regarding the type of audit that will satisfy the audit requirement: - a financial related audit of the HHS awards in accordance with Generally Accepted Government Auditing Standards (GAGAS), OR - an audit that meets the requirements contained in OMB Circular No. A-133

27. Audit Requirements (4) • Audit period – The audit period is the awardee’s fiscal year (i.e., not the grant budget period, the grant project period or the Government’s fiscal year.) • Audit due date – The earlier of: • 30 days after you receive the auditor’s report OR • 9 months after the end of your fiscal year

28. Audit Requirements (5) Audit reports should be submitted to: Department of Health and Human Services OIG / Office of Audit Services National External Audit Review Center 1100 Walnut St, Suite 850 Kansas City, MO 64106-2197

29. Points of Contact Indirect cost inquiries mailbox DFAS website Lorraine Trexler, Director Division of Financial Advisory Services 301-496-4401 Lorraine.Trexler@nih.gov

30. Questions