SBIR/STTR Indirect Rates: What You Need to Know
When preparing your SBIR or STTR proposal budget, one critical area to understand is indirect rates. This rate is key to building an accurate budget that will allow your project to remain supported while you execute your work. While technical details are crucial to your proposal, it's also essential to set up a financial structure for adequate funding and business sustainability.
What Are Indirect Rates?
An indirect rate, typically applied as a percentage of direct costs, helps cover day-to-day operating expenses like rent and administrative support. Direct costs are those that are attributable to a specific project (such as labor on or lab supplies for a project), whereas indirect costs are essential operating expenses that are not attributed to a specific project. Accurate indirect cost rates are crucial for maintaining business operations and project sustainability.
Allowable and Unallowable Indirect Costs
When considering indirect costs, it’s important to understand what is and is not allowed to be included in indirect rate calculations. Indirect costs are typically categorized as:
generally allowable
allowable with limitations
generally unallowable
Generally allowable indirect costs are the overhead expenses mentioned above – the costs required to continue the day-to-day activities of your business. These can include:
Rent and utilities
Phone and internet
Administrative labor and supplies
Accounting and legal
Insurance
The allowable with limitations cost category can vary or have specific limitations depending on the agency. These are often seen as costs like health insurance, vacation/PTO costs, or travel, and are considered fringe benefit costs.
Unallowable indirect costs are expenses that cannot be covered in the scope of your proposal budget. These include items like sales and marketing, internal research and development, and international travel.
How to Calculate Your Indirect Cost Rate
To calculate a single-tier indirect cost rate, you’ll need to follow the following steps:
Itemize your entire company costs (ideally for a year’s duration)
Designate each cost to the appropriate category (indirect versus direct, and if indirect whether or not they are allowable)
Divide the total indirect costs by the total direct costs to get your indirect cost rate - Indirect Rate = (Total Indirect Costs) / (Total Direct Costs).
Key Points:
Indirect costs are expenses incurred to maintain the daily operations of your business – like rent, utilities, and administrative supplies
Indirect costs are classified as generally allowable, allowable with limitations, and unallowable
Single-tier indirect costs for an SBIR/STTR proposal are often calculated as: Indirect Rate = (Total Indirect Costs) / (Total Direct Costs).
Deep Dive Resources:
Indirect Rates for Federal Awards: What are They and Why Do I Need Them?
What are Indirect Rates and How to Develop Them
Navigating the SBIR and STTR application process can feel overwhelming. Find out more about our expert services, resources and events to help you submit a successful proposal.
