When preparing a Phase I SBIR proposal for the Department of Homeland Security (DHS), your technical idea is only part of what gets evaluated. The cost proposal—often treated as an afterthought—can make or break your submission. DHS limits Phase I awards to around $150,000, so your budget must be both lean and strategic.
This guide breaks down each cost category in the DHS budget template, from direct labor to optional commercialization assistance. It also outlines DHS-specific rules, such as the 33% subcontracting cap, and offers tips to avoid the most common budgeting mistakes that can lead to rejection.
Whether you’re new to SBIR or looking to refine your approach for DHS specifically, this article will help you structure a budget that aligns with your work plan, complies with agency rules, and makes every dollar count.
Direct Labor: Estimating Personnel Costs
Your labor estimates should directly reflect the personnel needed to perform the work you’ve proposed—and align with the technical narrative in your application. DHS expects clear, role-based budgeting tied to the work plan.
Start by listing each person who will contribute to the project. For each, include:
- Name or Title (e.g., Principal Investigator, Research Engineer)
- Position Type (technical, management, etc.)
- Number of Hours over the 5–6 month Phase I period
- Hourly Rate based on actual salary or historical company data
For example, a full-time contributor over 5 months would typically be budgeted at 800 hours. Part-time contributors should have appropriately reduced hours. Every person listed should be essential to at least one task in the technical plan.
Make sure the Principal Investigator (PI) is meaningfully involved—DHS reviewers often flag proposals where the PI appears only marginally allocated.
The Principal Investigator must be actively involved.
Budget at least 20–30% of the PI’s time to demonstrate hands-on project leadership. DHS expects the PI to play a central role in Phase I.
This section lays the groundwork for both budget accuracy and proposal credibility. DHS evaluators expect your labor cost assumptions to be realistic—not inflated or tokenistic.
Fringe Benefits: How to Handle Them
Fringe benefits—such as health insurance, paid leave, and retirement contributions—are part of the real cost of employing your team. DHS allows these to be included in your Phase I budget, but how you present them depends on your accounting setup.
Option 1: Rolled Into Labor Rate
Many small businesses simplify budgeting by rolling fringe into their fully burdened labor rate. For instance, if your software engineer makes $50/hour and fringe adds about 25%, you might budget $62.50/hour. This approach keeps the budget cleaner and avoids extra calculation.
Option 2: Separate Line Item
Alternatively, you can list fringe as a separate line under Direct Labor. If you choose this method, you’ll need to specify:
- Your fringe benefit rate (e.g., 25%)
- The labor base it applies to (e.g., all direct labor)
- The total dollar amount calculated
This method is more transparent and may be preferred if you already track fringe separately in your accounting system.
Whichever method you use, include only actual benefits provided to staff working on the project. DHS expects consistency with your internal payroll practices and will question fringe entries that seem arbitrary or inflated.
Other Direct Costs (ODCs)
Other Direct Costs (ODCs) cover everything in your budget that isn’t labor or overhead—but still directly supports the research. DHS requires a breakdown of each category, and vague or unjustified entries are a common red flag for reviewers. To keep this section clean and easy to digest, we’ll organize the key subcategories using an accordion layout.
Include any consumables or components essential to completing your work—e.g., chemicals, circuit boards, 3D printing filament. Provide quantity and unit cost for significant items. For small or miscellaneous purchases, a lump sum is acceptable with a clear justification (e.g., “General lab supplies—estimated $500”).
DHS discourages large capital purchases in Phase I unless absolutely essential. Equipment over $5,000 must be fully justified, clearly linked to project tasks, and explained in your Facilities section. Consider renting or using shared university equipment via subcontract if it’s more budget-efficient.
DHS Phase I typically requires two in-person meetings in Washington, D.C.—a kickoff and a final close-out session. Budget airfare, hotel, per diem, and local transportation for 1–2 team members per trip. Government per diem rates apply. Add additional travel only if directly tied to research tasks, not general networking or conferences.
If any portion of the work will be done outside your firm, you must list those costs here. Subcontracts can be with universities, labs, or commercial partners; consultants are usually individuals billing hourly or per diem. Important: no more than 33% of your total budget can go to external parties. Provide quotes or labor breakdowns as needed.
Use this line for things like:
- Specialized testing or lab analysis
- Cloud computing or software fees
- Prototype fabrication services
Each must tie directly to a Phase I task. Provide a cost estimate and brief rationale.
Technical and Business Assistance (TABA)
TABA is an optional line item in your DHS SBIR budget that allows you to request up to $6,500 in Phase I for help with commercialization. These funds are in addition to your $150,000 technical budget, and they can cover services like market research, intellectual property consulting, or business strategy support.
If you choose to include TABA:
- List the full $6,500 as a separate budget line
- Identify the vendor or service (e.g., “XYZ Consulting for market analysis”)
- Do not apply any overhead or profit to the TABA amount
You are not penalized for skipping TABA, but many firms find it worthwhile—especially those looking to sharpen their commercialization plan ahead of Phase II.
If you plan to pursue Phase II or need help identifying your market or protecting IP, TABA can be a smart addition. Just be sure you know which vendor you’ll use and what they’ll provide.
Indirect Costs: Overhead, G&A, and Rates
Indirect costs—also known as overhead or General & Administrative (G&A) expenses—represent the cost of running your business that indirectly supports the SBIR project. This can include office rent, utilities, HR, accounting, and similar functions. DHS allows these to be included in your Phase I budget, but they must be reasonable and clearly explained.
Combined vs. Itemized Rates
Small firms often use a single indirect cost rate (sometimes called a “safe rate”) for simplicity. A typical range is 30% to 60% of direct labor. If you itemize, you might show:
- Fringe on labor (e.g., 20%)
- Overhead on labor + fringe (e.g., 30%)
- G&A on total costs (e.g., 10%)
If you don’t have a DCAA-audited rate or a formal negotiated agreement, you can propose provisional rates—but be prepared to support them if asked.
No approved rate? Use a realistic provisional one.
DHS will accept a reasonable indirect cost estimate if you don’t have a formal rate agreement—but it must reflect actual expected expenses.
Choosing the Right Base
Make sure to define what your indirect rate is applied to:
- Direct labor only
- Labor plus fringe
- All direct costs
Avoid “double-dipping.” Each cost should appear in only one category—either direct or indirect—not both.
How to Justify Your Rate
Use historical data if available. For example: “Our proposed 50% overhead rate is based on our FY2024 actual costs of $100K in overhead against $200K in direct labor.” If you’re a new company, base your rate on anticipated costs and explain your assumptions.
Profit or Fee
Unlike grants, SBIR contracts—such as those issued by DHS—allow you to include a profit or fee in your budget. This is a fixed amount added on top of your allowable direct and indirect costs, typically ranging from 5% to 10% of your total budget (excluding TABA).
Here’s how to do it right:
- Apply your fee only to the sum of allowable direct + indirect costs
- Do not include TABA in the base used to calculate profit
- Enter the fee as a separate line item in your cost proposal
A common approach is to request 7% of the project’s technical budget. For example, if your total eligible costs (excluding TABA) come to $145,000, a 7% fee would add $10,150—bringing your total request to $155,150, which fits within the DHS Phase I budget cap.
Don’t worry that requesting a fee makes your proposal look “expensive.” DHS does not view SBIR awards as price competitions. A reasonable profit is expected—and helps you manage risk and sustain your business.
Allowable vs. Unallowable Costs
Not every business expense qualifies for reimbursement under a DHS SBIR contract. Knowing what’s allowable—and what isn’t—can save you from costly mistakes and ensure your proposal passes cost review.
What You Can Include
Allowable costs must directly support the R&D effort. These include:
- Direct labor and fringe benefits
- Materials, components, and prototypes
- Subcontracts and consultant fees (within the 33% cap)
- Equipment (if essential and justified)
- Required travel
- Testing services and lab fees
- Software or cloud services directly tied to project execution
Some patent-related costs are also allowable—particularly if tied to R&D (e.g., provisional filing to protect a design you’re prototyping)—but general prosecution and legal fees are typically not.
What to Avoid
The Federal Acquisition Regulation (FAR Part 31) prohibits using federal funds for certain expenses. Common unallowable costs include:
- Alcohol, entertainment, and meals not tied to travel
- General marketing or advertising
- Lobbying or political activity
- Bonuses or unusually generous fringe benefits
- Foreign travel (unless explicitly justified and approved)
- General office improvements (e.g., a laptop for your CEO)
Don’t include unallowable costs like entertainment, lobbying, or foreign travel.
These items violate federal cost principles (FAR 31) and can lead to proposal rejection or repayment demands if awarded.
Also note: If subcontractors include profit in their quote, that’s fine—it counts as part of their total. But you cannot add your own fee on top of their fee.
Tips for Realistic Budgeting
With only ~$150,000 to work with in Phase I, every line in your DHS SBIR budget needs to justify its existence. These best practices can help you align your budget with the technical goals—and pass the cost realism review.
Align Budget to Work Plan
Start with your project’s task list. For each task, ensure that:
- Labor hours are assigned to appropriate staff
- Materials or testing services are included where needed
- Travel or subcontracting is reflected if the task depends on external resources
This kind of task-by-task alignment demonstrates forethought and helps reviewers understand how your funds will be used.
Avoid Under- or Overestimation
Budgets that are unrealistically lean (e.g., one engineer for a complex AI prototype) or bloated (e.g., $20,000 for vague “consulting”) raise red flags. Use benchmarks, quotes, and prior experience to support your estimates.
Be Consistent Across the Proposal
Your budget and technical sections should mirror each other. If you mention a key individual or test plan in your narrative, they should appear in the budget too—along with appropriate labor hours and costs. Reviewers will check for mismatches.
Consistency also applies across budget categories. If you list someone’s salary under direct labor, don’t also include them in overhead. And if you itemize fringe, make sure it matches your rates elsewhere.
Final Review: Common Mistakes to Avoid
Before submitting your DHS Phase I SBIR proposal, double-check your budget for these frequent pitfalls. Avoiding them can be the difference between an award and a rejection.
- Omitting Required Travel
DHS expects you to attend two in-person meetings in Washington, D.C. Failure to budget for these trips may be seen as noncompliant. - Exceeding the 33% Subcontract Limit
In Phase I, no more than one-third of your total budget can go to outside subcontractors or consultants. Going over this threshold without approval risks disqualification. - Inconsistent Cost Allocation
Every cost must be classified as either direct or indirect—not both. Review your labor, fringe, and overhead entries for duplication or overlap. - Unjustified Indirect Rates
A 70% overhead rate with no supporting data can sink your proposal. Use historicals or a provisional estimate grounded in real expenses. - Applying Profit to TABA
Profit/fee cannot be applied to the optional $6,500 in TABA funds. Doing so is a technical error that may lead to a required revision.
A solid DHS SBIR budget isn’t just about hitting the right total—it’s about showing reviewers that you understand the scope of work, the rules of the program, and the financial discipline needed to execute your R&D plan effectively.