Phase I Proposal
»Cost Proposal
Cost Proposal
In order to comply with government requirements, it is important to understand the process of preparing a cost proposal and all of the terms involved.
Basic Elements of a Cost Proposal
Each agency has specific requirements for cost proposals, but most contain the same basic elements.
Direct Materials
Similar to direct costs, direct materials are goods and serivces which a company purchases for and uses directly on a specific project.
Direct Labor
This element consists of an estimation of the number of hours that will be spent working on the contract or grant, if awarded, and the cost of paying people for this time. Careful estimations must be made, as this is the most important element of a Phase I proposal and often is the largest dollar amount. This estimation is determined by estimating the number of hours that the principal investigator, key personnel and other employees will be spending on this project and multiplying these totals by the relevant hourly rate.
Overhead Rate
This element refers to the means by which overhead costs are spread among all projects during a period of time, usually a year. The pool and the base are required to determine this rate. The pool is the total overhead costs and the base is the dollar amount of direct labor. It is important to remember that both the pool and the base are calculated for a specific period of time. For this reason, the estimates reflect the expenses for all projects worked on during the specified time period.
Indirect Costs
Indirect costs are not identifiable with a specific project. These costs may include, but are not limited to, rent, office supplies, and fringe benefits. Depending on the purpose, some expenses, such as tools and travel, may be considered direct or indirect. Depending on the size of the company, a company may break down indirect costs between overhead and G&A (general and administrative) costs or all indirect costs may be added together to form the overhead pool.
Other Direct Costs
This category includes all direct costs that can not be categorized as direct materials or direct labor. These costs may include, but are not limited to, consultants, special equipment, and testing costs.
General and Administrative Rate
Commonly known as the G&A rate, this rate is used to spread the general management and administrative costs among the projects. This rate is calculated by dividing the total amount of G&A expenses by the sum of direct labor costs and overhead costs. For small companies, a G&A rate does not need to be calculated because the overhead rate is sufficient.
Profit or Fee
A profit is usually calculated as a percentage of total costs and is available to businesses in the SBIR program. Some agencies give specific details about the fee, but the general requirement is that the fee is reasonable. A requirement for all agencies is that the sum of the proposed fee plus costs may not exceed the maximum award amount specified in the solicitation.
General Rules and Guidelines
Allowable and Unallowable Costs
Generally, costs are allowable if they are reasonable, can be allocated to one or more projects or contracts and if they are not classified as unallowable in the Federal Acquisition Regulations (FARs). Costs that do not meet these criteria cannot be included in cost proposals and will not be paid by the government. Unallowable costs include, but are not limited to, interest and other financial costs, fines and penalties, lobbying costs, most advertising, federal income taxes, organizational expenses and unreasonable compensation.
Travel
Generally, travel is limited to the amount set by the government for travel by government employees. Travel costs generally may not exceed the per diem rates published by the government in the Federal Acquisition Regulations. When preparing a cost proposal that includes travel, it is necessary to consult the per diem rates since they are set by locality. If the actual costs exceed the set limits, they may be allowable a case by case basis with sufficient written justification.
Developing an Adequate Accounting System
When the government reviews a company's accounting system, they are looking to see if the business can properly segregate and accumulate costs. Doing this entails distinguishing between direct and indirect costs and between allowable and unallowable costs and having a system for tracking and accumulating costs by contract. At the very least, a business should have a chart of accounts, the appropriate journals and project cost summaries, and a timecard system with specific codes for projects and indirect labor. It is advised that the business begin with a welll-constructed, detailed annual budget.
Types of contracts
There are two main forms of contracts used in the SBIR program: Firm Fixed Price (FFP) and Cost Plus Fixed Fee (CPFF). Phase I contracts are most often FFP and Phase II contracts are either FFP or cost-reimbursement contracts such as CPFF.
A Firm Fixed Price contract is relatively simple to administer and involves the Government and contractor agreeing to a fixed price which cannot be adjusted due to actual costs. The contractor bears all the cost risk and is required to deliver the end product described in the contract, the "deliverable", even if the actual cost exceeds the amount of the contract for the deliverable. For this reason, the contract must carefully specify what the deliverable is. This contract usually involves more oversight by audit agencies, such as the Defense Contract Audit Agency, prior to the contract being awarded and financing is generally obtained by submitting Progress Payment requests.
A Cost Plus Fixed Fee contract is more complex to administer and requires compliance with more cost regulations. This contract involves the Government reimbursing the contractor for allowable incurred costs plus a fee. The Government bears the cost risk because, even though the contractor is required to make satisfactory progress and typically must deliver the end product to earn the fee, the contractor is not legally required to continue work after all costs agreed to in the contract have been incurred and reimbursed. A pre-award survey may be performed, but there is usually more oversight at the end of a CPFF contract. Before the contractor can recieve the final costs and fee, an "incurred cost" audit is required.
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Page Published: 03/15/2002 · Page Last Modified: 10/18/2004
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