Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

Copyright © 2000 by Greenwood Consulting Group, Inc.

As part of your SBIR/STTR Phase I or II proposal, you are given the opportunity to request a fee or profit. This amount is usually calculated as a percentage of all the other costs you are including, and usually appears near the bottom of the cost proposal form.

The fee or profit is an amount that compensates you for being (and trying to stay) in business. In other words, your salary compensates you for your time on the project, your indirect costs compensate you for the general expenses incurred in having a business, and the fee or profit is the "reward" you are entitled to for the risks that you take everyday when you are in business. Your firm cannot advance if you are just getting reimbursed for your actual costs.

All 10 SBIR and five STTR agencies allow you to include a fee or profit in your cost proposal. This is a relatively new situation: in early years of the SBIR program, some agencies did not give you the opportunity to request a fee or profit. A typical rate that you can request and receive is seven percent (7%) of the total direct and indirect costs you are including in your cost proposal. One agency, the Environmental Protection Agency, allows a more generous 10 percent. However, these amounts are not automatically accepted by the agencies during negotiations: a shrewd government contracting officer may propose to you a lower fee or profit rate based on their conclusion that your project is less risky (or otherwise less deserving of a "higher" rate like 7%). To avoid having your fee or profit reduced, we suggest that you (a) be prepared for this being a possible issue during negotiations of your SBIR/STTR award, and (b) familiarize yourself with the federal regulations that the government’s negotiator may rely on in concluding that you don’t deserve the full amount of fee or profit you requested and have your counter arguments, based on those regs, ready in case the issue comes up. Those regulations are found in the Federal Acquisition Regulation at FAR 15.404-4, although companies working with the Department of Defense SBIR/STTR programs will need to follow the supplemental guidance found in the Defense Federal Acquisition Regulation at DFAR 215.404-4. You can find the FAR and DFAR on line, by the way, at http://www.arnet.gov/far.

We often hear from have someone who does not think that his or her little firm deserves or needs the fee or profit that is allowed on an SBIR/STTR. We strongly disagree. First, you deserve a reward (as modest as 7-10% might be) for the risks that you are assuming in performing R&D, particularly if it is being done for a fixed price. Second, there are legitimate business costs that you cannot charge either directly or indirectly to your SBIR/STTR project, known as unallowable costs—by charging a fee or profit, you can use the resulting money to pay for some of these costs. And finally, while there are reams of regulations about what you can and cannot do in terms of the direct and indirect costs you are billing on the SBIR/STTR project, the fee or profit is not subject to those rules—as long as it is not illegal, immoral or fattening, you can spend the money you collect as a fee or profit any darn way you want to.

This last point is so important that we recommend that you always request the full amount of fee or profit that is allowed by the SBIR/STTR agency to which you are proposing, even if it means trimming back some of the other parts of the cost proposal. For example, if the agency allows a maximum of $100,000 on a Phase I and your total direct and indirect costs in your proposal are $95,000 then that only gives you $5,000 for your fee or profit, or only about 5.3%. We would suggest that you go for the full fee or profit allowed, which would be about $6542 assuming this agency allows 7%, which leaves you $93,458 for the direct and indirect costs. You would reduce the cost of performing the Phase I project, as presented in the cost proposal, by $1,542 (this would be a combination of reducing labor, materials, subcontracts, or other part of the direct cost of performing the work and the indirect rate multiplier on that direct cost). Having done this, you now have an additional $1,542 of fee or profit to use as you wish. If you truly need it to perform the SBIR project, then you can apply it there, but if you don’t need it for the project you can apply it towards filing patents, doing marketing, adding ".com" to your company name, holding a company retreat in Tahiti or whatever you want.