SBIR Indirect Cost Rates and Fees: A Guide for Small Companies

1. Direct and indirect costs

A direct cost is one that can be identified specifically with a particular award or other final cost objective, such as the salary of an engineer for the hours she spent on the project, or supplies bought for it (2 CFR 200.413). An indirect cost is incurred for a common purpose that benefits more than one cost objective and can't be readily assigned to one without disproportionate effort (2 CFR 200.1). Administrative and clerical salaries are normally indirect.

The rule that matters most is consistency. There's no universal list of which costs are direct, so each cost incurred for the same purpose in like circumstances must be treated the same way every time, either direct or indirect, so nothing is charged twice. The FAR says the same for contracts (FAR 31.203). A company that charges some rent directly to an award while also putting rent in its overhead pool has a problem, whatever the rate.

2. Fringe, overhead and G&A pools

Indirect costs are grouped into pools, and each pool is spread over a base that reflects who benefits. The rate is simply the pool divided by its base. DCAA's Information for Contractors manual describes the usual pools on a contractor's incurred cost proposal: fringe, overhead and general and administrative (G&A).

For a small SBIR company the structure can be simple: a fringe pool, one overhead pool, and G&A, or even fewer. What matters is that the pools are defined in writing, the accounts feed them the same way every month, and unallowable costs (entertainment, for example) are kept out of them. Our guide to SBIR accounting system requirements covers how to set up the accounts so the pools can be computed straight from the books.

3. Provisional rates and final rates

You don't know your true rate for the year until the year is over, so federal awards use two stages. During the year you bill at a provisional (billing) rate. After year-end, a final rate is set from actual costs, and the difference is settled. For contracts, FAR 42.704 says billing rates should be as close as possible to the final rates expected for the period, and can be revised by agreement; DCAA explains that once final rates are set, an adjustment is made for any variance between billing and final rates. The Uniform Guidance defines the rate types this way:

4. The de minimis rate (2 CFR 200.414)

For awards governed by the Uniform Guidance, a company that has never negotiated a rate has a simpler option. Under 2 CFR 200.414(f), as the eCFR shows it (current as of September 24, 2026):

• A recipient that does not have a current federally negotiated indirect cost rate (including a provisional rate) may elect a de minimis rate of up to 15 percent of modified total direct costs (MTDC), and may choose its own rate up to that limit.
• It needs no documentation to justify it, and it may be used indefinitely.
• Once elected, it must be used for all federal awards until the recipient chooses to negotiate a rate.
• Costs still have to be charged consistently as either direct or indirect, never both.
• It must not be applied to cost-reimbursement contracts issued directly by the federal government under the FAR.

MTDC is not all your direct costs. It counts direct salaries and wages, their fringe, materials and supplies, services, travel, and a limited first portion of each subaward, and leaves out items such as equipment, capital expenditures, rental costs and participant support costs (2 CFR 200.1). Apply the rate to the wrong base and the indirect charge is wrong even when the percentage is right.

The catch for SBIR companies: the Uniform Guidance is written for non-federal entities, and agencies apply it to for-profit companies only as their own rules permit (2 CFR 200.101). So check your agency before electing the de minimis rate. NIH, for example, says in its Grants Policy Statement that for-profit organizations must have an established indirect cost rate before they can charge indirect costs, with a separate default that applies only to SBIR and STTR applications. SBIR.gov's accounting tutorial also notes that some agencies set their own limits on indirect costs in SBIR/STTR awards. The solicitation and your award terms are the first place to look.

5. Negotiated indirect cost rates

As a company grows, a negotiated indirect cost rate agreement (often called a NICRA) replaces guesswork. The company submits a proposal built from its actual pools and bases, and the cognizant agency for indirect costs, the one federal agency responsible for reviewing and approving it on behalf of all agencies, negotiates the rate (2 CFR 200.1). For for-profit companies with HHS awards, NIH says that negotiation is handled by its Division of Financial Advisory Services. For DoD contractors, DCAA audits the contractor's annual incurred cost proposal, which lays out its fringe, overhead and G&A rates for the year.

The payoff is that a negotiated rate travels with you: under 2 CFR 200.414(c), negotiated rates must be accepted by all federal agencies, unless a statute or regulation requires otherwise or the awarding agency approves a different rate under its published policy. The cost is that you need books that can produce and defend the pools every year.

6. The SBIR fee

On top of direct and indirect costs, an SBIR or STTR award can include a fee, meaning profit. SBA's SBIR/STTR Policy Directive says that, except as expressly excluded or limited by statute, awarding agencies must provide for a reasonable fee or profit on SBIR/STTR funding agreements, consistent with normal profit margins for research and development work. Each program solicitation must state its fee policy, so the amount and how it's calculated come from your solicitation and award, not from a rule of thumb.

SBIR.gov's accounting tutorial notes that most agencies express the fee as a percentage of total direct and indirect costs, so an error in your indirect costs carries straight into the fee. For how the pieces come together in each draw, see our guide to grant accounting for SBIR, STTR and federal awards.

We set up indirect cost pools and rate calculations for SBIR and STTR companies, and help them decide between the de minimis rate and negotiating one. More on how we work: SBIR and STTR grant accounting services.

7. Common questions