The Small Business Innovation Research (SBIR) program is essential for scientific and technological advancement, requiring meticulous financial management. Understanding the distinction between allowable and unallowable expenses under this program is crucial for effective fund utilization and compliance.

Understanding SBIR Expenses

Three main groups categorize SBIR expenses: generally allowable, allowable with limitations, and generally unallowable. This categorization is essential for managing SBIR funds effectively, ensuring adherence to federal guidelines.

1. Generally Allowable Expenses

These expenses include direct research and development costs that are necessary and prudent for the project’s execution. The Federal Acquisition Regulation (FAR) classifies these as essential costs like manufacturing, production engineering, and service & warranty costs.

2. Allowable with Limitations

Specific expenses such as labor, fringe benefits, consultants, equipment, travel, and outsourced services fall under this category. Labor costs, for example, must be justified as reasonable and align with industry standards. The NIH Grants Policy Statement and FAR provide frameworks for defining these limitations, ensuring that costs are reasonable and essential for the project.

3. Generally Unallowable Expenses

Costs related to sales and particular intellectual property (IP) expenses typically fall under this category. However, exceptions exist for discretionary technical assistance, where one can secure reimbursement for IP. Selling and marketing costs are generally unallowable unless pre-approved and necessary for the award’s performance.

Cost Categories in Detail

  • Direct Costs: Include salaries, benefits, materials, and other project-specific expenses. The NIH and FAR guidelines emphasize the need for reasonable compensation for personnel involved in the project.
  • Indirect Costs (F&A): Encompass operational costs like rent, legal fees, and insurance. The organization can waive SBIR grants that cover some F&A costs. The NIH caps indirect rates at 40% for Phase I projects unless a recent federal project has approved a different rate.
  • Profit: SBIR policy allows a profit margin, typically capped at 7% of the total direct and indirect costs. This allocation acknowledges the entrepreneurial risk involved in R&D projects.

Discretionary Technical Assistance

This category includes expenses directly benefiting the grant-supported project, particularly IP management costs like patenting. These are the only direct costs under SBIR that can consist of IP expenses.

Proposal preparation expenses are allowable

In accordance with the guidelines provided by the National Institutes of Health (NIH), as outlined in their Grants Policy Statement, proposal preparation costs are considered allowable indirect expenses for Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants. This inclusion under indirect costs recognizes the essential nature of these expenditures in the process of applying for and securing grant funding. The classification of proposal preparation costs as an indirect expense facilitates the proper allocation of these essential costs in the overall budgeting and financial planning for grant applications, ensuring that organizations can effectively manage their resources while pursuing these valuable funding opportunities.

Practical Insights for Managing SBIR Expenses

Effective management of SBIR funds necessitates understanding cost categories and adherence to federal guidelines. Regularly consulting resources like the Federal Register and NIH policy updates is crucial for staying informed about changes in expense eligibility and limits. Maintaining meticulous records and justifications for all expenses is essential for compliance with SBIR’s audit standards.


Navigating the complexities of allowable and unallowable expenses in SBIR funding demands vigilance and a deep understanding of federal guidelines. Grantees must discern these distinctions to ensure compliance and maximize funding potential.

Expert guidance is available for assistance in managing SBIR expenses. Contact our specialized financial advisors for support in navigating these critical aspects of your SBIR project.


  • (n.d.). 7.9 Allowability of Costs/Activities. NIH Grants Policy Statement.
  • Federal Register. (2023). Small Business Innovation Research Program Policy Directive.
  • SBIR/STTR. (n.d.). Accounting & Finance Tutorial 4.
  • SBIR/STTR. (n.d.). Eligible and Ineligible Expenses Tutorial