Creating a budget for a DOT SBIR Phase I proposal isn’t just a paperwork exercise—it’s a test of whether your team understands the scope of the work and how to deliver it with the resources available. Unlike grants, DOT SBIR awards are fixed-price contracts. That means you must estimate all project costs upfront, with no opportunity to ask for more funding later. This article walks you through the structure, line items, and common pitfalls of building a DOT-compliant Phase I budget—so you can submit a clear, defensible proposal that meets agency expectations and stays within the $200,000 cap.
Understand the Structure of a DOT SBIR Phase I Budget
Before building your cost proposal, it’s critical to understand DOT’s budget framework. Phase I awards are capped at $200,000 and typically cover a six-month feasibility study. Your entire proposal—direct costs, indirect costs, and profit—must fit within this cap. There are no exceptions unless a specific topic explicitly allows more.
DOT SBIR awards are issued as Firm-Fixed-Price (FFP) contracts, not grants. That means the amount you propose becomes the total contract price if awarded. You won’t be able to revise your budget or ask for supplemental funds later. Everything you need—labor, materials, testing, subcontractors—must be estimated upfront.
Additionally, all costs must comply with Federal Acquisition Regulation (FAR) Part 31. This restricts unallowable expenses like entertainment, alcohol, and marketing. Proposals that include disallowed costs will be rejected or corrected by DOT, potentially weakening your submission.
Lastly, remember the SBIR workshare rule: for Phase I, at least two-thirds (66.7%) of the total budget must reflect work performed by your company. No more than one-third can be allocated to subcontractors or consultants. DOT enforces this ratio strictly, and exceeding the limit is grounds for disqualification.
DOT SBIR contracts are fixed-price.
You must justify all costs upfront because there’s no chance to request additional funds later.
Key Budget Categories and Allowable Costs
A DOT Phase I SBIR budget is organized into clear cost categories, each with specific expectations. These categories correspond to DOT’s cost proposal template and must be fully justified in both narrative and spreadsheet form.
Direct Labor (Personnel Salaries)
This is often your largest budget item. List each team member by role (e.g., Principal Investigator, Engineer), with their hourly rate and number of hours worked. Reviewers will expect to see time commitments that match your work plan—and realistic rates backed by data, such as payroll records or industry benchmarks. If the PI is critical to the project, their time must reflect that.
Fringe Benefits
Fringe covers employer-paid benefits and payroll taxes. You can calculate this as a percentage of labor costs or fold it into your hourly rates. If you don’t have a formal fringe rate, justify your estimate using a breakdown of actual costs. Include a brief rationale, e.g., “Fringe is estimated at 22% to cover payroll taxes, health insurance, and 401(k) contributions.”
Indirect Costs: Overhead and G&A
DOT separates indirects into overhead (applied to labor) and general & administrative (G&A, applied to total cost). If you don’t have a negotiated federal rate, estimate your percentage based on actual expenses and explain your method. A combined fringe and indirect rate under 50% of labor is typically safe from scrutiny.
Materials and Supplies
Include any project-specific items: raw materials, test parts, lab consumables. Group small purchases together and document larger costs with vendor quotes or online pricing. Justify how each item supports the proposed work.
Equipment or Special Testing
For Phase I, major equipment purchases are discouraged. Instead, consider borrowing or renting. If small equipment or external testing is essential, provide details and quotes, and explain how it supports the research goals.
Travel Costs
Travel is rarely required in DOT Phase I projects. If you must include it, stick to federal per diem rates and only budget for project-essential trips. Do not include travel to DOT headquarters or for kick-off meetings.
Don’t budget for a Phase I kick-off trip
DOT doesn’t require one, and including it may hurt your credibility.
Subcontractors and Consultants
All third-party costs must be documented and must not exceed one-third of your total budget. Include quotes or letters of commitment and clearly describe each subcontractor’s or consultant’s role and value.
Workshare Violation
DOT will reject proposals that violate the SBIR workshare rule. Your company must perform at least 66.7% of the total work by cost.
Other Direct Costs
Capture any remaining items like cloud services, software licenses, or testing fees. Justify each one individually and attach documentation where available.
Fee (Profit)
You may request a profit—typically 6% to 10% of total costs. Justify it briefly based on project risk and norms: “We have applied a 7% profit to reflect project complexity and standard SBIR practice.”
Use DOT’s Cost Proposal Template (Appendix C)
DOT requires all Phase I applicants to use its standardized cost proposal template, known as Appendix C. This Excel-based file contains multiple schedules (A–H) and a narrative section (Schedule I). Each schedule corresponds to a major budget category and must be completed precisely.
Here’s what each schedule covers:
- Schedule A: Budget summary
- Schedule B: Direct labor details
- Schedules C–H: Breakdowns for materials, commercial items, equipment/testing, subcontracts, travel, and other direct costs
- Schedule I: Narrative justifications
Accuracy here matters. DOT uses this template to validate compliance with SBIR rules and to confirm your calculations align with your budget narrative. Discrepancies—even minor ones—can lead to delays or rejection.
Before submission, use the provided Cost Proposal Checklist to ensure every required field and attachment is complete. It’s a straightforward way to avoid administrative errors that could derail an otherwise strong proposal.
Final Tips to Strengthen Your Budget Narrative
A strong budget narrative does more than list numbers—it reinforces your understanding of the work and builds reviewer confidence in your ability to manage federal funds. Here’s how to make yours stand out:
- Align narrative with the spreadsheet: Reviewers will cross-check the two. Any mismatch between totals, hourly rates, or labor hours can raise red flags.
- Use simple, direct explanations: Avoid boilerplate language. Instead, explain each cost clearly in terms of project need: “We require $3,000 in sensor components to build the prototype described in Task 2.”
- Attach supporting documents: Include vendor quotes, pay stubs, consultant letters, or rate justifications in appendices. DOT doesn’t require this by default, but it adds credibility—especially for first-time applicants.
- Stick to reasonable rates: If your fringe or indirect costs exceed typical ranges (e.g., 50% of labor), justify them with real data. High costs without rationale invite scrutiny.
- Avoid “padded” budgets: DOT reviewers are looking for smart use of funds. Inflated labor hours, vague travel, or high consultant rates will work against you.
Done well, your budget narrative is not just a compliance document—it’s a chance to demonstrate that your business is both technically capable and fiscally responsible.