Allowable SBIR Costs: Full Guide + Best Practices

Understanding Cost Categories

When budgeting for an SBIR proposal, it’s essential to understand how costs are classified. Every line item must fit into one of three buckets: allowable, allowable with limitations, or unallowable. These distinctions are critical—not just for compliance, but for ensuring your budget accurately supports your project’s goals.

Allowable costs are expenses that can be directly tied to your SBIR project and meet the federal criteria of being reasonable, allocable, and necessary. Examples include employee wages for R&D, necessary lab supplies, and consultant fees for project-specific expertise.

Allowable with limitations refers to costs that are generally acceptable but require additional scrutiny. For instance, travel expenses must be strictly project-related and sometimes pre-approved. Equipment purchases, especially those over $5,000, usually require a clear justification and agency approval.

Unallowable costs are not permitted under any circumstances. These include marketing expenses, general business development unrelated to the SBIR project, entertainment, and lobbying. Charging these to your SBIR budget could not only result in disallowance but may also jeopardize future funding opportunities.

Federal Acquisition Regulation (FAR) Part 31 is the primary rulebook that defines these cost categories. It emphasizes that costs must be consistently applied across projects and supported by documentation. Many agencies also issue supplemental guidance, so always cross-reference with your specific solicitation.

Common Allowable Costs

Allowable costs under SBIR funding are those that directly support the execution of your proposed R&D. They must be clearly tied to project objectives and documented appropriately.

Direct labor is typically the largest single cost. This includes salaries and wages for technical staff, engineers, and scientists working specifically on the SBIR project. Fringe benefits—such as health insurance, vacation time, and retirement contributions—are also allowable if they are reasonable and supported by your organization’s standard policy.

Materials and supplies needed to perform the research—such as chemicals, specialized components, or lab consumables—are fully allowable. Items expected to be consumed during the project should be listed with estimated quantities and costs.

Consultants and subcontractors may be brought in to provide expertise or perform discrete tasks outside your company’s core competencies. These costs are allowable if they are well-documented, project-specific, and accompanied by signed agreements that define scope and deliverables.

Prototyping and testing expenses are also eligible. Whether you’re building a physical prototype or conducting simulations, these costs can be included if they contribute directly to the research goals.

Patent and intellectual property protection costs are allowable only when related to inventions made under the award. Filing fees, attorney time, and associated costs are acceptable if clearly linked to the SBIR-funded technology.

Software licenses, journal access, or technical publications required for the project may be included with appropriate justification.

Agency requirements may vary
Some agencies require prior approval for certain direct costs or impose category-specific caps. Always consult the current solicitation.

Costs Allowable with Limitations

Some costs can be included in an SBIR budget, but only under certain conditions or limits. These “gray area” expenses require additional documentation, justification, or prior approval from the funding agency.

Travel expenses are allowable only when directly tied to project execution. This includes travel to conduct research at another facility or attend a required meeting with the sponsor. However, personal travel, marketing trips, or attending unrelated conferences is not reimbursable. Many agencies also prohibit or restrict travel during Phase I.

Equipment purchases are allowable, but only if they are essential to the research and approved by the agency. The Federal definition of equipment typically refers to items costing $5,000 or more with a useful life of more than one year. For Phase I, many agencies discourage or prohibit equipment purchases unless strongly justified.

Fringe benefits such as employee health insurance, retirement plans, and paid leave are allowable if they’re part of the company’s normal compensation policy. These must be applied consistently and reasonably across your organization.

Indirect costs (or overhead) cover shared expenses like rent, utilities, and administrative support. These costs are not directly tied to a single project but support overall operations. Most agencies allow indirect costs, but they may cap the rate (e.g., NIH caps Phase I indirect rates at 40%). You may be required to provide a government-approved indirect cost rate agreement or use a simplified method with justification.

Profit or fee is also allowed—typically up to 7% of total direct and indirect costs. This amount is discretionary and can be used flexibly, which is especially valuable for small businesses operating on thin margins.

Common Unallowable Costs

Understanding what cannot be charged to your SBIR award is just as important as knowing what can. Unallowable costs are explicitly prohibited under federal regulations and attempting to include them can trigger audits, repayment demands, or jeopardize future eligibility.

Common unallowable costs include:

• Sales and marketing expenses: Costs for promoting your company, advertising, or engaging in business development that isn’t part of the funded R&D are not allowed.
• Entertainment and alcohol: This includes meals unrelated to project work, social activities, or any form of amusement—even if clients or partners are involved.
• Lobbying and political activity: Efforts to influence legislation or secure government contracts through advocacy are strictly unallowable.
• General office equipment and furniture: Unless explicitly justified and directly tied to project needs, routine purchases like desks, chairs, and printers must be excluded from direct costs.
• First-class travel: Only economy or coach fare is reimbursable, and only if the trip is necessary for the project.
• Fines, penalties, and taxes: Costs arising from legal noncompliance, late fees, or most business taxes cannot be reimbursed.
• Internal R&D unrelated to the project: Activities not directly funded under the SBIR award are considered outside the scope.
• Unjustified capital equipment: If you purchase expensive hardware or systems without linking them clearly to project tasks, those costs may be denied.

Compliance Risk
Charging unallowable costs to an SBIR award may result in repayment demands or audit findings under 13 CFR 121.702.

Agency-Specific Budgeting Rules

Each federal agency that participates in the SBIR program has its own budgeting policies and caps. Understanding these differences is crucial for preparing a compliant and competitive proposal. To help you navigate the variations, here’s a side-by-side comparison:

Best Practices for SBIR Budgeting

Creating a successful SBIR budget means more than listing eligible costs. It involves strategy, foresight, and attention to agency-specific details. Here are several best practices to help you build a strong, compliant, and competitive proposal.

Include your fee
Always include a 7% fee (if permitted). It can cover costs that fall outside standard categories and gives you valuable flexibility.