SBIR/STTR Subcontracting Limits Explained

Introduction

When developing a proposal for an SBIR or STTR award, understanding the rules around subcontracting and consultant costs is essential. These limits are not just formalities—they directly affect your proposal’s eligibility and your project’s execution. Depending on the phase and the program (SBIR or STTR), the federal guidelines strictly cap how much of the work can be outsourced to other individuals or entities. Misunderstanding or ignoring these constraints can result in a disqualified application or a rejected reimbursement request.

SBIR awards require a significant portion of the research work to be completed in-house by the small business.

Understanding Subcontracting and Consultant Roles

Before diving into the specific limits, it’s important to understand the difference between subcontractors and consultants under SBIR and STTR rules.

A subcontractor is typically an organization that performs a portion of the research or analytical work outlined in your proposal. These can be universities, research institutions, or other companies. Subcontractors are generally involved in executing a defined scope of work and contribute measurable deliverables.

A consultant, on the other hand, is usually an individual who provides expert advice, skills, or analysis. Consultants do not usually contribute significant physical resources or infrastructure and are often paid on a per-hour or per-day basis.

Both subcontracting and consultant costs count toward the outsourcing cap, but they play different roles in a proposal. Mixing up these roles—or trying to list the same person in both categories—can raise red flags during review.

SBIR Program Limitations

The SBIR program imposes strict limits on how much of the work can be subcontracted or assigned to consultants. These limits differ between Phase I and Phase II and are designed to ensure that the small business remains the primary performer of the research.

Phase I Requirements:

• At least two-thirds (66.7%) of the total research and/or analytical effort must be performed by the small business.
• No more than one-third (33.3%) of the work may be performed by subcontractors and consultants combined.

Phase II Requirements:

• The small business must perform at least 50% of the total effort.
• Up to 50% of the work may be subcontracted or allocated to consultants.

These percentages are calculated based on the total contract or grant amount. However, each agency may use a slightly different calculation method:

• Agencies like NIH, NSF, and DHS calculate the percentages based on the full award amount.
• The Department of Defense (DoD) subtracts profit or fee before calculating outsourcing limits.
• The Department of Energy (DOE) excludes certain direct costs like equipment and materials before applying the percentage.

STTR Program Limitations

The STTR program was created to formalize collaboration between small businesses and nonprofit research institutions. As such, the subcontracting rules are structured differently—and more rigidly—than those in SBIR.

Fixed Contribution Percentages:

• The small business must perform at least 40% of the total work.
• A single partnering research institution must perform at least 30%.
• The remaining 30% can be flexibly distributed, including to other subcontractors or consultants.

These percentages are statutory and cannot be adjusted, even with agency approval. The collaboration between the small business and the research institution is not optional; it’s a central requirement of the STTR mechanism.

STTR workshare rules are fixed and mandatory—waivers are not allowed.

Consultant Cost Considerations

Consultants play a vital role in SBIR and STTR projects, often bringing specialized expertise that the small business lacks internally. However, their use must be planned and budgeted carefully.

What’s Allowable:

• Consultant fees are typically charged as direct costs and must be reasonable for the services provided.
• Rates should reflect the consultant’s qualifications and prevailing market conditions.
• Proposals must include a detailed justification for each consultant, including their role, rate, and time commitment.

Limitations to Keep in Mind:

• Consultant costs are not exempt from the outsourcing limits. They are included in the combined cap with subcontractors—33.3% for SBIR Phase I, 50% for SBIR Phase II, and 60% (within STTR structure).
• Excessively high consultant rates or vague scopes of work may trigger scrutiny during agency review.
• In some cases, agencies require letters of commitment or signed agreements from named consultants as part of the proposal.

Avoid red flags
Clearly define consultant roles, rates, and deliverables in your proposal.

Best Practices for Compliance

To stay within SBIR/STTR subcontracting limits and avoid costly missteps, small businesses should adopt proactive budgeting and documentation strategies.

Plan Early

• Define which work will be done in-house and what needs outside expertise.
• Identify potential subcontractors and consultants during proposal development—not after award.

Document Everything

• Include detailed budgets and justifications for every subcontracted or consulting line item.
• Provide clear scopes of work and confirm that all participants understand their percentage of the total effort.

Follow Agency Guidelines

• Each agency has its own method for calculating subcontracting limits. Always check the solicitation carefully to avoid misinterpretation.
• When in doubt, reach out to the program officer or contracting officer before submission.

Avoid Common Pitfalls

• Don’t assign the same individual as both an employee and a consultant on the same project.
• Avoid inflating consultant hours or assigning vague deliverables.