The grant proposal budget is an often-overlooked opportunity to improve the proposal’s chances of winning. The budget is a communication tool to the reviewers, just like any other element of the proposal. What the budget does or doesn’t do is let the reviewers know what you do or don’t understand about your research project in terms of cost and resources, how it fits into the total scope of your business financially, and what you understand about the particular rules and requirements of the grant programs and agency guidelines and rules. The proposal budget can become a make or break for your proposal and business if you don’t understand its role and implications—both during the review process and after an award has been received.
Number One: Understand the Context of the Budget, Both Proposed and Awarded
When submitting a grant proposal, one of the most critical elements (and frequently one of the items that receives the least amount of time devoted to its creation) is the proposal budget. Unfortunately, this part of the proposal can have far-reaching impact on the success of your proposal and ultimately on the financial performance of your business. Taking the time to understand the importance of the proposal budget is –crucial, especially within the context of the proposal as well as in the award process, and—if you are fortunate and receive the award—in the execution of the project.
The proposal budget conveys to the agency and its reviewers what you know about your project, your business, and what it will take to accomplish the scope of work proposed. Keep in mind that you are expected to execute the full scope of work unless the technical aspects of the project are unsuccessful, so the proposal budget showcases the costs that are being submitted to the agency for the project to cover. But these are not ALL the costs of the project or the business.
Number Two: Not All Costs Will Be Allowed and Only a “Fair Share” of Others
This is the second thing that is important to understand: under the grant funding process and rules, the total costs incurred by a for-profit entity will not be covered by the government project. The government grant funding is funding assistance and is meant to cover direct costs as identified, submitted, and approved in the proposal budget, and a fair share of common costs. These common costs are known as the indirect costs. An important point to understand with the indirect,costs (and direct ones) is there are categories of these costs that cannot be included these are specifically unallowable or may be excluded by the agency, program or by agreement.
Number Three: You May Have Only One Project, But That Doesn’t Mean It Gets 100% of the Costs
This is the third thing to understand. While the business will incur costs associated with the project, and it may only have that one grant project, not all costs will be billable to the project. There are different types of costs that from the governments view are not “allowable” as charges to the project directly or indirectly…then there are some charges that the project only gets a “fair share” of. In these cases the business must fund the remaining costs from other sources. This is a critical point to understand. When it comes to costs that are not directly caused by the project and wholly owned by the project then those indirect costs or common business costs must be identified, understood and calculated to be in the indirect rates so as to fairly maximize the costs recovered in each project.
Number Four: Make the Effort to Calculate Your Actual or Projected Indirect Rates
Calculating an indirect rate and negotiating for the rate that reflects your organizations business infrastructure is the fourth thing to remember. Many organizations find it “simpler” to accept the standard or maximum rate that is allowed without having to negotiate a rate and they also accept the base upon which that rate will be applied. For instance, a proposal submitted into the National Science Foundation (NSF) may include a rate up to 50% of direct labor costs as its indirect rate without requiring a negotiation on indirect rates.
Wow! That sounds great, right? What happens if your organization’s business costs and infrastructure are more accurately represented by having a fringe rate of 25% on direct labor; an overhead rate of 37% applied on modified total direct costs; and a general and administrative rate of 10%; how will your business be impacted? Let’s compare. (Note: This is a simplified example of how the rates are applied and meant only to illustrate the compounding of the rates and not necessarily the specifics of the NSF or other agency base definitions.)
Direct Labor: $50,000
Materials: $1.500
Subcontractor: $23,000
Travel: $500
Equipment: $10,000
Total Direct Costs: $85,000
Indirect Costs based on Direct Labor with NSF Indirect Rate Applied: $25,000
Total NSF 50%: $110,000
Direct Labor with 25% Fringe: $12,500
Applying Overhead Rate
Total Modified Direct Costs Base
(includes Subcontracts excludes equipment):
$75000+$12,500=$87,500*37%= $32,375
Applying G&A Rate
$87,500+$32,375=$119,875*10%= $11,988
Total Indirect Dollars: $69,363
Number Five: Accepting the Maximum Indirect Rate without Negotiation Acts as a Ceiling Rate for Most Agencies
If you accepted 50% of direct labor as your indirect rate, only to find that your actual rates were those indicated in the example above, you come up $44,363 short of getting the project to bear its “fair share” of costs. For most agencies, if you don’t have a negotiated indirect rate, then you won’t be submitting to recover the difference because the “standard” or “maximum” indirect rate without negotiation also acts as a cap or ceiling for the award on indirect costs.
So the fifth thing you need to remember: If you accept a maximum indirect rate in your award, then you forfeit the ability to recover the actual costs incurred above that rate. Even if you have a cost reimbursement award, if the award has a ceiling or a maximum rate or dollar amount contained in the award, you will only receive cost reimbursement up to that ceiling amount.
Number Six: Understand the Direct Costs Related to People
The sixth recommendation relates to the direct costs included in the proposal and specifically those direct costs that are related to people. When it comes to including the costs associated with your personnel (employees) and with subcontractors, consultants, consortiums, and subrecipients, it is important to understand the requirements, the rules, and the expectations of what your budget will impose on the business. For instance, the principal investigator must be an employee of the small business concern under the Small Business Innovation Research (SBIR) program. The principal investigator (PI) cannot be a full-time employee of any other organization and be the PI. The minimum level of effort requirement for many agencies/programs for the PI is 10%. When it comes to level of effort, the percentage is applied to the hours worked. If someone works 40 hours, then the level of effort is applied to the 40 hours; if the person works more hours, then the percentage is applied to the higher number of hours.
Also, from an overall project perspective, the proposal budget needs to reflect the appropriate level of effort by each organization. If you are suppose to do at least 40% of the effort as the small business, and 30% of the effort in the research organization (Small Business Technology Transfer Research (STTR) programs) then ensure you are meeting those numbers. However, this effort has to be spent on the technical research as it is conducted, and not on a big, expensive piece of equipment. Make sure that you are appropriately apportioning the work effort and you are translating that information into the proposal, which translates into the budget dollars and how they are spent.
Number Seven: You Live with and Comply with What You Propose.
The seventh and final thing to remember is that money is left on the table and compliance issues are often created by how the proposal budget is written and submitted. Because the proposal budget is often accepted unchanged or with only slight modifications (often made by the agencies themselves without your input), it is important to make sure that the proposal budget is something you can live with and that you understand what it will impose on you when you are executing your project. Changes to the budget will often require approval by the grant manager. For example, if you commit your key personnel to 100% effort on a project to make sure you can charge all of there costs to the project then remember that your key personnel can only work on that project. Don’t box yourself in the budget by treating it as “simple math” and accepting the “default values.” Use the proposal budget as the tool to enable your business and maximize what you will be able to get out of the project, both financially and technically. Make the proposal budget one more reason for the proposal and the project to succeed.
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