Ditching high overhead and running your own research institute

This is a guest post by Travis Metcalfe who founded White Dwarf Research Corporation while he was a graduate student. In 2008, with support from several technology companies, he initiated a nonprofit adopt a star program that funds an international team working on observations from NASA’s Kepler/K2 and TESS missions.

More than 20 years after starting my own nonprofit organization, I finally took the leap and began working there full-time. I would have made the transition sooner, but I was intimidated by the administrative hurdles I would need to tackle in order to accept an award from a U.S. funding agency like NASA or the National Science Foundation. In particular, I would need to go through the relatively arduous process of negotiating an indirect cost rate. The indirect cost or “overhead” rate is a percentage of the proposed budget — typically 50% or more at universities — that is supposed to cover the costs of providing facilities and support staff to the principal investigator. This rate is applied to most of the “direct costs” of performing the research: salaries, fringe benefits and taxes, publications, travel and so on. For example, if the eligible direct costs for a project are $100,000, then 50% overhead adds $50,000 and the total budget would be $150,000.

In 2016 the White House Office of Management and Budget (OMB) revised their guidelines to establish a “de minimis” rate of 10% for any organization that had never negotiated an indirect cost rate with the federal government. The move was intended to make it easier for small businesses to receive federal grants, and the guidelines were revised again in 2020 so that even organizations with a previously negotiated rate could adopt the de minimis rate instead. These changes really leveled the playing field for smaller organizations, because it allowed them to compete for grants without having to justify their indirect costs up front. As long as they can get the job done for 10% of the proposed budget, they are allowed to administer the awards — great news for me!

For most of the past ten years, I have been employed by one of the numerous “soft money” institutes that administer grants and provide facilities and staff funded by their indirect cost rate. When I started, the overhead rate was lower than at most universities, but it gradually increased as the organization grew over the years. In 2015 I started supplementing my grant-funded work with support from non-governmental sources administered through my own nonprofit organization. I learned how to process payroll, how to deposit federal and state tax withholding, and how to establish a SIMPLE retirement plan through TIAA. These initial experiences led me to conclude that I could actually spend less time administering funds through my own nonprofit than I spent fulfilling the bureaucratic requirements of the institute that hosted my federal grants.

In 2019 I started submitting new grant proposals through my own nonprofit, while finishing some existing projects through my other employer. The following year, White Dwarf Research Corporation was awarded its first grant from NASA as well as a subcontract to support some new observations with a space telescope. One of the key strategies I found to keep federal award management relatively simple was to focus the budget on personnel. Most organizations have a lot of red tape around equipment purchases and travel, and the reasons for this bureaucracy can ultimately be traced to federal regulations and auditing requirements. By supporting these expenses with non-federal funds, I made my life much easier and helped keep the indirect costs low at my institute.

The actual mechanics of administering a federal grant or subcontract are not much more complicated than online banking or selling some items on eBay. When my institute was awarded a grant from NASA, the federal government made the funds available through a Payment Management System (PMS) operated by the U.S. Department of Health & Human Services. When my organization incurs an expense to the grant — for example, after processing payroll — it requests reimbursement for those expenses along with the indirect costs through PMS. Similarly, under a subcontract my institute sends an invoice to the sponsoring organization to request reimbursement for expenses and indirect costs. I had previously seen and approved such invoices as the principal investigator on an award with a subcontract to a colleague. Some periodic financial reporting is also required, but it’s really just basic accounting.

If I had known how easy it was for a small research institute to administer federal grants, I would have made the transition years ago when OMB initially revised their guidelines. Small organizations are inherently more efficient because the lines of communication are less complex, and with an indirect cost rate of 10% I can now devote more of my budget to science.

Do you have experience or questions about nonprofits or how small businesses can win government grants and contracts? Let’s discuss in the comments.

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