Budgets
Indirect cost rates in SBIR budgets, explained
Indirect rates decide how much of your award funds overheads and how much funds science. How de minimis, provisional and negotiated rates work, and which to choose for a first SBIR budget.
What indirect costs cover
Direct costs are the salaries, materials and equipment you can assign to a specific project. Indirect costs are the shared expenses that keep the company running: rent, utilities, accounting, insurance, administrative salaries and general laboratory overheads.
Federal awards allow you to recover a share of those shared costs through an indirect rate applied to a defined base. Getting the rate right protects the research budget, because every dollar of unrecovered overhead is a dollar of science the award no longer funds.
The three routes available to a small business
The de minimis rate is the simplest option for companies without a negotiated agreement: a fixed percentage applied to modified total direct costs, with no supporting rate proposal required. It is quick, predictable and sufficient for many first-time applicants.
A provisional rate is a rate you propose and the agency accepts for the period, subject to later true-up. A negotiated indirect cost rate agreement, signed with a cognizant federal agency, is the most durable option and usually the most favourable for companies with real facilities costs.
Choosing for your first award
If your overheads are modest and you want the submission to move quickly, the de minimis route is a reasonable choice. If you run laboratory space, specialist equipment or a growing administrative team, model both options before you decide, because the difference across a Phase II can reach six figures.
Companies planning several awards usually benefit from starting the negotiated rate conversation during the first Phase II, when the accounting records that support it already exist.
Keeping the accounting audit-ready
Whichever route you take, the cost accounting behind it must be consistent: the same expense cannot appear as both a direct charge and part of the indirect pool, and timesheets need to support the effort you bill. Agencies review this at award and again at closeout.
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