Preparing a budget for your NSF SBIR Phase I proposal isn’t just about filling out forms—it’s a test of how well you understand the rules and how clearly you can justify your financial assumptions. The National Science Foundation (NSF) allows up to $275,000 total for Phase I awards, and that amount must include all direct costs, indirect costs, and your optional small business fee. There is no wiggle room above this fixed-price cap, and overshooting it will likely get your proposal flagged or rejected during administrative review.
NSF Phase I budgets must follow specific federal cost principles—primarily 2 CFR §200 Subpart E or FAR Part 31 if your firm is for-profit. These regulations require that costs be reasonable, allocable, allowable, and consistent with your standard accounting practices. If a cost doesn’t meet all four standards, it doesn’t belong in your budget.
One of the biggest differences between NSF and other SBIR agencies is that NSF does not permit equipment purchases in Phase I. That includes any item with a unit cost of $5,000 or more and a useful life of a year or longer. Similarly, foreign travel and participant support costs are not allowed. Your budget must align with NSF’s priorities: support for early-stage research and development within a small business—not infrastructure build-out, marketing, or general overhead.
This guide explains each eligible budget category in detail, how to calculate appropriate amounts, and how to justify them effectively in both the NSF budget forms and the required narrative PDF.
Important:
NSF Phase I budgets must not exceed $275,000, including fee.
Direct Costs Breakdown: What’s Allowed and How to Justify It
NSF SBIR Phase I direct costs include salaries, fringe, travel, materials, consultants, subawards, and a few specialized services. Each line must be supported by a simple, transparent calculation and a justification that explains why the cost is necessary and allocable to your proposed R&D.
- Personnel
- Travel
- Supplies
- Consultants
- Subawards
Personnel
NSF requires you to list each team member’s name, title, effort, and base salary. Break effort into person-months (e.g., “PI: 6 mo @ $120k/year = $60,000”). Include only actual employees. Do not list university researchers here—they go under subawards. You may also include other staff like engineers and technicians.
Travel
Domestic travel is allowed but must be limited to R&D needs. You must include at least one trip to the NSF SBIR grantee workshop (estimate $2,000 per person). Additional travel (e.g., field tests) must be itemized: who’s going, where, why, and how much.
Supplies
Materials under $5,000/unit are allowed (e.g., lab consumables, prototype parts). NSF may ask for vendor quotes if a line exceeds $5,000 total. List quantities, unit prices, and label costs clearly (e.g., “100 sensors @ $50 = $5,000”).
Consultants
You may pay outside experts up to $1,000/day (8 hrs). Consultants must not be employees and must provide a signed commitment letter. List the consultant’s name, rate, and days of effort in your justification. Example: “Dr. Smith: 5 days @ $800 = $4,000.”
Subawards
If your project relies on a university lab or nonprofit collaborator, use a subaward. SBIR rules require that the small business perform at least 2/3 of the work. Subawards need their own budget and justification. Example: “University Lab: 3 mo support, $20,000.”
Each of these categories must be explicitly tied to your proposed R&D activities. Overbudgeting or vague justifications are common reasons NSF proposals get returned without review.
Indirect Costs and the 7% Fee: How to Calculate Both Correctly
NSF allows you to recover indirect costs as part of your Phase I budget, but only if they’re calculated using acceptable methods. Indirect costs typically cover business operations expenses like rent, utilities, administrative support, or HR—costs that aren’t directly tied to R&D but support it.
There are two main options for claiming indirect costs if your company does not have a Negotiated Indirect Cost Rate Agreement (NICRA):
- 50% of Total Salaries (Line A + B only), or
- 10% de minimis rate on Modified Total Direct Costs (MTDC)
Choose whichever yields a higher dollar amount for your situation. If you do have a NICRA, attach it with your proposal and use your approved rate.
Example: If you’re paying $100,000 total in salaries (Line A + B), then 50% of salaries = $50,000 can be claimed as indirect. If you use the 10% MTDC method instead, you’ll first calculate the MTDC base (which excludes items like subawards over $25K, equipment, or participant support costs) and apply 10% to that base amount.
You must clearly describe your method in the budget justification. If you’re using 50% of salaries, show the math and specify that this reflects your actual operational needs.
Then there’s the Small Business Fee, often misunderstood. NSF allows you to include up to 7% of your total costs (direct + indirect) as a fixed fee—but you do not enter this fee directly in the FastLane or Research.gov budget forms. Instead, it should be described and calculated in your budget justification PDF.
Example Calculation:
If total allowable costs (direct + indirect) = $260,000
Then 7% fee = $18,200
Final budget = $260,000 + $18,200 = $278,200 → too high
→ You’ll need to scale back costs to keep the full total ≤ $275,000.
Note:
The small business fee is not entered on the NSF budget form but must be justified.
Carefully balance your indirects and fee to avoid exceeding the cap—and remember, the fee is your only path to any profit in Phase I.
How to Enter Budgets in Research.gov or FastLane
Entering your NSF Phase I budget in Research.gov or FastLane requires precision. The system helps prevent major errors, but many applicants still run into avoidable mistakes—especially with how they label costs, handle fringe, or upload justifications.
Before submitting, double-check that the total is ≤ $275,000 and that all disallowed categories (equipment, foreign travel, publications, participant support) are zeroed out.
Strategic Tips to Strengthen Your Budget Justification
A strong budget justification doesn’t just back up your numbers—it shows reviewers you understand what NSF funds and why. This short PDF (max 5 pages) is read carefully by both administrative and technical reviewers. Clarity, precision, and direct alignment with your proposed R&D are critical.
Start by organizing the document by budget line (e.g., “Line A: Senior Personnel,” “Line G.1: Materials and Supplies”). For each item, explain:
- What the cost is (e.g., “PI salary for 6 months”)
- How it was calculated (e.g., “0.5 yr × $120,000 = $60,000”)
- Why it’s necessary for the R&D work
Avoid vague language like “for general operations” or “as needed.” Instead, tie each expense to a deliverable, milestone, or technical task in your proposal.
For consultants and subawards, include specifics about scope of work and required documentation (signed letters of commitment, mini-budgets, etc.). If you’re claiming TABA or I-Corps funding under G.6, clearly state the amount and purpose (e.g., “TABA for market strategy support: $6,500”).
Indirect costs should include your chosen method and math (e.g., “50% of $100,000 in salaries = $50,000”). And although the 7% small business fee is excluded from the budget form, it must be justified in this document.
Reviewers notice consistency. Make sure your narrative doesn’t conflict with the budget form, your technical proposal, or your Facilities and Resources section.
Best Practice:
Every non-zero line item must be explained in the Budget Justification PDF.
Invest the time to make this document clean, logical, and reviewer-friendly. It’s one of the few places you can directly advocate for your budget.