When applying to the EPA’s SBIR Phase I program, your budget is just as important as your technical proposal. EPA Phase I awards are capped at $100,000 and issued as contracts, not grants, which means your budget must be precise, fully justified, and compliant with the solicitation’s strict cost principles.
This guide walks you through how to structure and justify your EPA SBIR Phase I budget, covering each major cost category and highlighting key rules to avoid common mistakes. Whether you’re a first-time applicant or refining a returning submission, the tips below will help ensure your budget is fundable, defensible, and aligned with EPA expectations.
Understand Allowable vs. Unallowable Costs
Before diving into line items, it’s essential to understand which costs EPA allows—and which will get your proposal rejected or trimmed.
Allowable costs are those that are directly tied to performing the proposed R&D work. Examples include:
- Salaries for technical staff (e.g., engineers, scientists)
- Fringe benefits like health insurance and payroll taxes
- Materials and lab supplies used in experiments
- Equipment essential for the research
- Travel related to the project (e.g., field testing, required EPA meetings)
- Consultant or subcontractor fees for project-related tasks
These costs must be reasonable, allocable, and necessary. That means they need to be in line with market rates, directly benefit the SBIR project, and clearly support your work plan.
Unallowable costs include anything that doesn’t directly support the research. Common disallowed expenses:
- Marketing or business development
- Patent and legal fees
- Proposal preparation
- General business overhead not allocable to the project
- Entertainment, food, or alcohol
- Student stipends or tuition
EPA follows the federal cost principles under 2 CFR 200, so your budget must comply with those standards across the board. If you’re unsure whether a cost qualifies, check the EPA solicitation or reach out for clarification.
Step-by-Step Budget Construction
Direct Labor (Personnel)
Start by identifying who will work on the project and how much time they’ll spend. For each person, you’ll need to specify:
- Name or Role (e.g., Principal Investigator, Lab Technician)
- Responsibilities: Briefly describe the project tasks they will perform
- Level of Effort: Estimate the number of hours or percentage of time committed over the 6-month Phase I period
- Hourly or Monthly Rate: This must reflect their actual pay or a justifiable market rate
You can include fringe benefits in the labor rate or break them out separately, depending on how your company tracks costs. Just be consistent.
Example:
“Jane Smith, PI – Oversees the project and conducts lab analysis. 300 hours over 6 months at $60/hour (includes fringe). Total = $18,000.”
Be sure the total labor effort aligns with your work plan. Too few hours may suggest your team can’t complete the work; too many may look padded. If your labor costs are unusually high, reviewers will expect strong justification.
Only include U.S.-based employees or contractors, and remember that EPA requires at least two-thirds of the Phase I work to be done by your small business—not subcontractors.
Indirect Costs (Overhead and G&A)
Indirect costs cover the expenses of running your business that aren’t tied to a single project but still support the work—things like rent, utilities, administrative salaries, or IT systems. On EPA’s budget form, these are split into two categories:
- Overhead (OH): Indirect costs related to technical work (e.g., lab space, technical supervision)
- General & Administrative (G&A): Business-level costs (e.g., accounting, HR, office rent)
You can apply separate OH and G&A rates or use a combined indirect rate, depending on your accounting system.
If you have a Negotiated Indirect Cost Rate Agreement (NICRA) with a federal agency, use that rate and identify your cost base (e.g., direct labor, total direct costs). If you don’t have a NICRA, EPA allows you to use a reasonable provisional rate—and many small firms opt for the 15% de minimis rate applied to Modified Total Direct Costs (MTDC).
When using the de minimis rate:
- Apply it only to allowable MTDC elements (excluding large equipment purchases and subcontract costs beyond $50,000)
- Clearly state the base and calculation in your budget narrative
Example:
“Indirect costs = 15% of Modified Total Direct Costs (excluding equipment >$5,000 and subcontract amounts >$50,000). This covers rent, utilities, and admin support. We have no negotiated rate and use the allowable de minimis rate under 2 CFR 200.414.”
Avoid inflating your indirect rates to “maximize” budget—EPA reviewers will spot that quickly. Your proposed rate should reflect actual company operations and stay within norms for small R&D firms.
Information:
EPA allows small businesses without a NICRA to use the 15% de minimis indirect rate on Modified Total Direct Costs.
Other Direct Costs: Equipment, Materials, and Services
This budget category includes all project-specific items that don’t fall under labor, travel, or consultant costs. The EPA budget form separates these into:
- Equipment: Tangible assets costing $5,000 or more, with a useful life beyond one year
- Materials & Supplies: Consumables used during the project (e.g., reagents, prototype parts)
- Other Direct Costs: Specialized services, publication fees, or testing costs
When budgeting for equipment, you must justify why it’s essential and why renting or borrowing isn’t an option. For example:
“Liquid Chromatograph – $15,000. Required for water contaminant analysis. No access available via collaborators; rental over 6 months exceeds purchase price.”
Items under $5,000 (e.g., laptops, small tools) should usually be listed as supplies unless your accounting system classifies them differently.
For materials and supplies, itemize significant categories:
Example:
Reagents and chemicals: $3,000
Prototype components: $2,500
Lab consumables: $1,200
Be sure quantities and costs align with your technical approach. Don’t forget to factor in waste and repeat runs, but avoid inflating estimates.
Other direct costs might include:
- Analytical testing by a third-party lab
- 3D printing or machining services
- Required report preparation or publication fees
Make sure every item is tied to a task in your work plan and doesn’t overlap with indirect costs (e.g., don’t charge for office supplies if they’re included in your G&A).
Travel
Travel is an allowable expense under EPA SBIR Phase I—but only if it directly supports the research or is required by the solicitation. Common reasons include:
- Attending a kickoff meeting (if EPA schedules one)
- Field testing or on-site data collection
- Collaborating with a partner or lab
- Presenting Phase I results at a technical conference (if encouraged)
Every trip must be clearly justified and tied to project objectives. For each, include:
- Purpose
- Destination
- Duration
- Traveler(s)
- Cost breakdown (airfare, lodging, meals, etc.)
Use GSA per diem rates for meals and lodging and economy fares for air travel. Sample justification:
“Trip to Washington, DC for PI to attend required EPA Phase I kickoff:
Airfare $450 + Hotel (2 nights @ $200) = $400 + Per Diem (3 days @ $79) = $237. Total = $1,087.”
Avoid speculative or excessive travel. International trips are almost never approved in Phase I and require advance EPA authorization. Also, personal travel, marketing trips, and site visits unrelated to R&D are unallowable.
Reminder:
Check the EPA solicitation for required Phase I meetings—travel for these must be included in your budget if specified.
Consultants and Subcontractors
Outside expertise can strengthen your proposal, but EPA SBIR rules limit how much work you can outsource. For Phase I, no more than 33% of the budget can be subcontracted. Your small business must perform at least two-thirds of the R&D effort.
Consultants are individuals (not employees) providing services billed hourly or by deliverable. Include:
- Their name and qualifications
- Scope of work
- Hourly rate or fixed fee
- Estimated hours or deliverables
Example:
“Dr. A. Nguyen (Water Chemistry Expert) – 40 hours @ $150/hour = $6,000. Will assist with contaminant testing protocol design.”
Subcontractors are organizations (e.g., universities, research labs) performing part of the work. Include:
- Organization name and point of contact
- Defined scope and budget
- Why this subcontractor is uniquely qualified
Subcontract costs must also be justified in detail, and any amount over $50,000 must be excluded from the base when calculating indirect costs (if using MTDC).
Double-check your totals: EPA evaluates the percentage subcontracted based on total cost (excluding profit). Exceeding the cap—even by $1—can make your proposal noncompliant.
Warning:
If more than 33% of your Phase I budget is subcontracted, your proposal will be rejected as noncompliant (SBIR Policy Directive §4(c)(2)).
Consultants and Subcontractors
Outside expertise can strengthen your proposal, but EPA SBIR rules limit how much work you can outsource. For Phase I, no more than 33% of the budget can be subcontracted. Your small business must perform at least two-thirds of the R&D effort.
Consultants are individuals (not employees) providing services billed hourly or by deliverable. Include:
- Their name and qualifications
- Scope of work
- Hourly rate or fixed fee
- Estimated hours or deliverables
Example:
“Dr. A. Nguyen (Water Chemistry Expert) – 40 hours @ $150/hour = $6,000. Will assist with contaminant testing protocol design.”
Subcontractors are organizations (e.g., universities, research labs) performing part of the work. Include:
- Organization name and point of contact
- Defined scope and budget
- Why this subcontractor is uniquely qualified
Subcontract costs must also be justified in detail, and any amount over $50,000 must be excluded from the base when calculating indirect costs (if using MTDC).
Double-check your totals: EPA evaluates the percentage subcontracted based on total cost (excluding profit). Exceeding the cap—even by $1—can make your proposal noncompliant.
Warning:
If more than 33% of your Phase I budget is subcontracted, your proposal will be rejected as noncompliant (SBIR Policy Directive §4(c)(2)).
Profit (Fee)
Unlike many federal programs, EPA SBIR allows small businesses to include a reasonable profit or fee in their Phase I budget—typically up to 7% of total project costs (excluding profit itself). This line item is optional, but if included, it must be clearly labeled and consistent with the rest of your budget.
Example calculation:
If your total budget (excluding profit) is $93,000, a 7% fee would be $6,510, bringing the total to $99,510.
EPA does not expect you to justify profit the same way as other costs, but your proposal should reflect that this is a contract, not a grant. Reviewers may question high fees if the technical work appears under-resourced.
Tips:
- Don’t label it “contingency” or “padding”—use “Profit” or “Fee”
- Keep it under 7% unless you have a compelling reason to go higher
- Make sure it doesn’t push your total budget over the $100,000 cap
Some applicants choose to request no fee, especially if they’re self-funding additional R&D. That’s acceptable, but requesting a modest profit is standard and won’t hurt your proposal’s chances.
Final Tips for Budget Justification
A well-structured budget is only part of the equation—your proposal must also explain why each cost is necessary and how it supports the project. That’s where the budget justification or narrative comes in.
To strengthen your justification:
- Align costs with your work plan: Every item in your budget should clearly support a task in your technical approach. If you’re buying lab materials, specify what they’re for. If you include travel, explain its role in the research.
- Provide detailed calculations: Don’t just list totals. Break down personnel time, indirect rate applications, and major cost drivers. Transparency builds reviewer confidence.
- Avoid red flags: Common issues that weaken a proposal:
- Vague line items (“miscellaneous,” “contingency”)
- Excessive equipment purchases in Phase I
- Unrealistically low or high labor effort
- Profit that exceeds 7% without explanation
- Maintain internal documentation: Keep vendor quotes, timekeeping systems, and rate calculations on file. EPA may request these during post-award negotiations or audits.
Remember, the goal is not just to stay under $100,000—it’s to build a budget that makes it easy for reviewers to say “yes.” A well-justified, transparent budget signals that your business is ready to manage federal funds responsibly.