When you hear that your Phase II Small Business Innovation Research (SBIR) proposal has been selected for funding it’s usually an exciting time. But, if your award is from the Defense Health Agency (or other programs managed by U.S. Army Medical Research Acquisition Activity (USAMRAA) you may be in for a shock.
You may be thinking, “What are you talking about? I submitted a proposal to DHA, it was accepted, my fee of 7% of allowable costs (i.e. my profit) was part of the proposal. What could go wrong?” I’ll tell you what can go wrong but first let’s run through the normal timeline of what happens from beginning to end.
- The Department of Defense (DOD) has published it’s list of SBIR Phase II Topics
- You discover that there is a DOD Defense Health Agency (DHA) topic that you believe is well suited for your technology
- You review the DHA’s SBIR proposal instructions and learn that a cost volume is required, along with three other volumes.
- The cost volume instructions do not provide any special considerations or restrictions outside the typical allowable cost guidance provided in the Federal Acquisition Regulations (FAR)
- You submit your proposed costs, including, direct labor, overhead, other direct costs, allocable general and administrative expenses and apply a profit % (fee) to those costs.
- Months pass and you are notified that your proposal has been selected for funding! Great news!
- You perform the work as detailed in the proposal and are paid accordingly
Normally, you would expect that would be the happy ending for having diligently followed all of the (arcane) rules inherent in the SBIR world. But it seems that the DHA has delegated the management of its awards to the U.S. Army Medical Research Acquisition Activity (USAMRAA). And it turns out that even though you followed all of DHA’s rules, USAMRAA has added its own unique spin to these rules. For unknown reasons, USAMRAA is disallowing the profit % allocable to Other Direct Costs (ODC’s). For a Phase II award, ODC’s might run as high as _____x% of your total cost base. On a $750,000 award, this could be as much as $Y. Losing a 7% profit on this amount would cost you $Z. If you have already collected the full contract amount, this means you could be writing a $z check back to the federal government!
Logic might tell you that both these agencies should be on the same page, but, remember, it is the government. When we first discovered this problem, we contacted DHA’s senior management. They told us they had heard of this practice, but they said that when they delegated their contract management to USAMRAA they lost the ability to control how the rules are interpreted When asked why this “interpretation” isn’t included in the solicitation, they said they don’t want to publicize something that might discourage companies from submitting proposals. Go figure! Additionally, USAMRAA’s website does not state anywhere that these types of fees are disallowed . The only way we found out about it is when dealing with USAMRAA auditors in their post-completion reviews-i.e. after its too late.
Hopefully you are reading this before you find yourself in this situation so you can be aware of this when you are initially submitting your proposal. We might consider adjusting your direct labor accordingly on the front end, rather than trying to renegotiate costs after the fact. If you are too late in the process for that, your best course of action would be to work with your contract specialist and ask to submit a revised proposal-i.e. one that would allow you to increase direct labor in lieu of the reduced fee.
Regardless of which agency you are working with, it’s always a good habit to develop an understanding of how the relevant contract administration deals with all aspects of your cost and fee build-up before you submit a proposal. We can help with this process by doing a pre-submission cost proposal review. There is almost always a way to deal with the “gotchas” if you spot them early!