A strong NOAA SBIR Phase I proposal begins with a budget that demonstrates both technical foresight and regulatory compliance. The Phase I award ceiling is $190,000 and covers a 6-month period. Your budget must account for all direct and indirect costs needed to achieve the project’s R&D objectives within that timeframe. Importantly, NOAA does not allow pre-award spending without prior written approval, so expenses must align squarely within the project window.
NOAA follows federal cost principles under 2 CFR Part 200 and mirrors key rules from the SBIR Policy Directive. One core rule is that all costs must be reasonable, allowable, allocable, and necessary. This means each line item should have a clear link to your proposed research and be explained in your budget narrative.
One NOAA-specific rule to keep in mind is the small business participation threshold: at least two-thirds of the total project budget must support work performed directly by your company. The remaining one-third may go to external contributors such as subcontractors or consultants—but not more. NOAA reviewers will examine your budget breakdown to confirm this ratio is respected.
Another policy area that gives NOAA applicants flexibility is overhead. If your business has a Negotiated Indirect Cost Rate Agreement (NICRA), you may use that approved rate. If you don’t, NOAA permits an indirect cost rate of up to 40% of total direct costs with no additional documentation. This is more generous than many other agencies, which limit default indirect rates to 10%.
Finally, NOAA allows firms to request a fixed profit (also called a fee) of up to 7% of the total project costs. This amount is calculated separately from your indirect costs and should be listed under “Other” on the SF-424A form. While optional, most applicants choose to include it, as it offers financial breathing room for the business.
Each of these elements—total cost cap, participation ratios, indirect ceiling, and optional profit—frames your financial roadmap. Missteps in any one of these areas can cause budget rejections or award delays, so it’s worth double-checking early.
Required Budget Categories (with Justification Tips)
NOAA requires all SBIR Phase I applicants to structure their budgets according to standard federal object class categories. Each entry must be itemized and justified. Below is a guide to each category, including NOAA-specific nuances and tips to strengthen your budget narrative.
Personnel
This category usually represents the largest share of a Phase I budget. List each individual by name or role, include their annual salary, and specify the percentage of time they’ll spend on the project over the six-month period. For example, if a principal investigator earning $120,000/year will work 30% time for six months, the direct salary charged would be $18,000. Justify each person’s role with a short explanation—what they’ll do, and why that work is essential. Don’t forget: administrative staff are generally considered indirect costs unless directly tied to the research and justified under 2 CFR 200.413(c).
Fringe Benefits
Fringe includes taxes, health insurance, retirement contributions, and other employee-related costs. If you have an established fringe rate, apply it consistently. Otherwise, calculate expected costs and present them as a percentage of direct salaries. Clearly define your assumptions in the narrative (e.g., “Fringe benefits calculated at 25% to include FICA, health, and unemployment insurance”).
Travel
Travel must be project-related and cost-effective. NOAA expects detail: destination, purpose, number of travelers, number of days, and breakdown by airfare, lodging, per diem, and local transport. Use federal per diem rates as your ceiling. Avoid generalities—reviewers want to see specifics.
Equipment
Capital equipment (over $5,000 per item) is rarely allowed in Phase I. If it is essential, provide a lease-versus-purchase analysis and justify why renting is not feasible. General-purpose equipment (e.g., laptops) is only allowable if it will be used 100% for the project. Many successful budgets list $0 here.
Materials & Supplies
This covers expendables like lab chemicals, prototypes, software, or small tools. If a supply category exceeds $5,000 or 5% of your total budget, NOAA requires a breakdown with unit costs and quantities. Don’t lump together large expenses—be specific.
Consultants
Consultants are individuals, not firms. Provide their name (or placeholder), expertise, hourly rate, and estimated hours. A short explanation of their unique contribution strengthens this section. Include any associated travel under this category—not under general travel.
Subcontracts
You may subcontract up to one-third of your total budget to research institutions, universities, or firms. Each subcontractor should have its own budget and narrative. NOAA looks for clear role definition, budget justification, and reasonableness. Avoid vague collaborations—spell out deliverables and how they complement your firm’s work.
Indirect Costs
If you have a NICRA, use it and attach a copy. If not, NOAA allows you to propose up to a 40% indirect rate (applied to direct costs only, excluding profit). Use a consistent methodology. Make sure your indirect cost pool excludes unallowable expenses and is described clearly in the narrative.
Profit (Fee)
You may include up to 7% of total project costs as profit. This is not part of indirect and should appear in the “Other” category. If you choose not to claim it, state that explicitly. Profit cannot be charged on top of profit (e.g., not on subcontract costs that already include fee).
Indirect Costs & Profit: Maximize Without Errors
Understanding NOAA’s policies on indirect costs and profit can help you optimize your Phase I budget without overstepping federal guidelines. While these categories don’t involve direct R&D work, they play a critical role in making your proposal financially viable.
Indirect Costs (Overhead)
Indirect costs cover your business’s operational expenses—items like rent, utilities, administrative support, and insurance. NOAA’s approach is notably generous: if your firm lacks a Negotiated Indirect Cost Rate Agreement (NICRA), you can propose an indirect cost rate of up to 40% of total direct costs without providing additional justification.
This rate must be applied consistently across your budget. You may choose a lower rate (e.g., 20% or 30%) that reflects your actual overhead structure, but you cannot exceed 40% unless you have a current NICRA. If you do have a NICRA, include a copy with your application. Otherwise, you’ll simply state your chosen rate and explain what it covers in the budget narrative.
One common error to avoid: do not include profit in your indirect cost base. The indirect rate applies only to direct costs (e.g., salaries, supplies, consultants, travel). Misapplying the rate can trigger a budget revision or delay.
Indirect cost base excludes profit.
Apply your indirect cost rate only to direct costs. Profit should be excluded from this calculation.
Profit (Fee)
NOAA allows small businesses to request a fixed profit (also called a “fee”) of up to 7% of total project costs (including both direct and indirect). This amount is added to your total budget and should be listed in the “Other” category on the SF-424A budget form.
While profit is technically optional, most firms include it. It serves as your business’s margin—compensating for risk and contributing to sustainability. If you opt not to request profit, NOAA expects you to state that explicitly in your narrative.
Note that profit is a fixed percentage and not subject to overhead or fringe calculations. You cannot charge profit on top of subcontractor costs that already include their own fees, nor can you apply it to non-reimbursable items.
Best Practice
Treat indirect and profit as separate tools—one for cost recovery, one for growth. Together, they support both compliance and business sustainability.
Allowable vs. Unallowable Expenses
To ensure your NOAA SBIR Phase I budget is accepted and enforceable, every expense must meet federal grant criteria: reasonable, allowable, allocable, and necessary. NOAA adheres to the Uniform Guidance (2 CFR Part 200) and SBIR-specific policies when determining what can—and cannot—be charged to a Phase I project.
What’s Allowable
Allowable costs must directly benefit the research effort and be justifiable in the budget narrative. Common examples include:
- Salaries and wages for R&D staff
- Fringe benefits associated with those employees
- Project-specific supplies, materials, and software
- R&D-related travel, including field testing and NOAA site visits
- Use of consultants or subcontractors, within the one-third cap
- Facility use fees, if necessary for the research
- Indirect costs, up to 40% if no NICRA
- Profit (fee), up to 7%
Each allowable item must have a clear role in achieving the technical objectives of your proposal. For instance, if you include lab supplies exceeding $5,000 or 5% of your total budget, NOAA requires a detailed breakdown—types, quantities, and unit costs.
What’s Unallowable
Even necessary-sounding items can be flagged if they’re deemed unallowable under federal rules. These include:
- Marketing, advertising, or PR (except for recruitment or publishing results)
- Lobbying, political contributions, or legal costs unrelated to the project
- Entertainment or personal travel
- Equipment for general use, like office furniture or non-dedicated laptops
- Bonuses or commissions for securing the grant
- Paying NOAA employees’ travel or expenses
Also note that general business development expenses, like unrelated patent filings or branding efforts, cannot be charged to your Phase I project. Only R&D-specific IP protection may be justifiable, and even then, it should be tied directly to the proposed work.
For capital equipment over $5,000, NOAA typically expects you to rent or use existing assets. If purchase is essential, you must include a lease-versus-buy analysis and clear justification. Misclassifying capital items as supplies is a red flag.
Avoid budget-killers:
Marketing, lobbying, and travel for NOAA personnel are unallowable—and can disqualify your budget.
Practical Tip
As you prepare your narrative, cross-check each line item with Subpart E of 2 CFR 200. If any expense appears ambiguous, ask: Does this serve the proposed R&D directly? If not, it may belong under indirect costs—or not at all.
Final Assembly: Building a Compliant NOAA Budget
Once you’ve itemized your costs and aligned them with NOAA’s rules, the final step is assembling a compliant, review-ready budget package. This includes not only the SF-424 and SF-424A forms but also a detailed budget narrative that connects every dollar to your technical objectives.
Budget Narrative
The budget narrative should walk reviewers through your numbers, line by line. For each cost category, include:
- What the cost is
- Why it’s necessary
- How the amount was calculated
Be specific. For example, instead of “Travel: $2,500,” write, “Trip to NOAA lab in Charleston, SC for prototype testing: airfare $500 × 2 trips, lodging $150/night × 3 nights, per diem $64/day, local transport $100.”
Tie every cost back to a task or deliverable. If NOAA can’t connect the expense to your work plan, they may reject it—even if it’s otherwise allowable.
Forms and Formatting
You’ll submit your budget using two primary forms:
- SF-424: The application cover sheet
- SF-424A: The detailed budget categories
Ensure your totals match across all forms and your narrative. Inconsistencies are a common reason for administrative rejections.
Include any required attachments—such as your NICRA if you’re using an approved indirect cost rate—and label all files clearly. NOAA’s systems can reject improperly named documents or unreadable formats.
Avoidable Pitfalls
Even strong technical proposals can get tripped up by budget missteps. Common issues include:
- Including unallowable costs (e.g., marketing or general IT)
- Misapplying indirect costs (e.g., applying overhead to profit)
- Inconsistent numbers across documents
- Overloading the team with more FTEs than the budget supports
- Subcontracting more than one-third of the award
Avoid last-minute submissions, too. NOAA’s e-submission portals have strict cutoffs, and budget errors can be hard to fix once the window closes.
Final Tip
Have someone unfamiliar with the budget review it. If they can’t trace how each cost supports the work, a NOAA reviewer likely can’t either.