As a company prepares a new Small Business Innovation Research or Small Business Technology Transfer proposal application, the project budget needs to be considered at the same time the work plan is developed.
The work plan identifies key project personnel, materials, travel and other resources involved with each research task. The project budget details these required expenses. Work plan sections of SBIR/STTR proposals detail the task-level research that team members need to conduct in order to obtain answers to their research questions.
Direct Costs
Each research task requires a dedicated amount of funds to support costs such as key personnel project hours, equipment, project travel, and project partner efforts (ex. consultants or subcontractors).
Direct costs are specific to the proposed research project and are required to complete the research proposed to the federal government. Often, most of the direct cost is for hourly labor performed by key personnel.
Fringe Benefits
According to Investopedia, fringe benefits are defined as benefits provided by an employer to an employee for the hours working on the job. Examples of fringe benefits for full-time employees include health insurance and payroll taxes.
Among the SBIR/STTR agencies, there is some variation with regard to how fringe benefits need to be allocated within the project budget. Some agencies allow fringe benefits to be considered direct costs if it’s the company’s established accounting practice that fringe benefits be treated as direct costs. In other cases, fringe benefits need to be included as part of the Indirect costs.
Indirect Costs
Indirect costs aren’t directly related to the research project effort but are necessary to maintain day-to-day business operations. These costs also needs to be factored in to the project budget and will ultimately take the form of an indirect rate (more on this to follow).
Before an indirect rate can be identified, the company needs to identify all of its annual company costs.
Examples include rental/lease of company space, phone line, internet for company operations, and the electricity bill. Indirect costs are often needed on a year-round basis for a company, but if the company is selected for SBIR/STTR award, then it needs to determine the portion of these costs associated with the project performance timeframe.
Costs pertaining to operation expenses rather than the production of goods or services are also known as general and administrative (G&A) costs.
Indirect Cost Rate
Some agencies (not all) allow SBIR/STTR applicants to combine their overhead, general and administrative costs, and fringe costs into a single indirect rate figure.
Traditionally, the maximum indirect rate allowed by the SBIR/STTR program has been 40%. However, the National Science Foundation (NSF) permits an indirect rate of up to 50%. This means that fringe benefits for the NSF may reach a maximum rate of 150% of direct salaries and wages.
The funding agency can and often will ask to see financial backing that justifies an applicant company’s requested indirect rate, so it does need to be a figure that can be supported with indirect cost proposal documentation.
SBIR.gov Accounting Tutorial
More information about direct vs. indirect costs and indirect rates can be found on SBIR.gov Course 8 (Accounting and Finance) Tutorial 3, What are Indirect Rates and How Do I Develop Them?. This tutorial is available in three formats: audio/video, multimedia, and PDF.
Innovative Arkansas entrepreneurs who would like guided assistance with preparing SBIR/STTR project budgets are encouraged to contact Rebecca Norman at rxnorman@ualr.edu or 501.683.7700.
