SBIR Proposal Writing Basics

SBIR Proposal Writing Basics: Factors in Pricing Your Phase 1 SBIR/STTR Proposal

Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

So this month’s topic is how to price your Phase 1 SBIR/STTR proposal. Now you may be snickering, because you “know” that the maximum is $100k, and you “know” that you just write down some labor, material, and subcontractor costs that you will incur doing the research and make sure they sort of add up to $100k. Well, we’re sorry to have to tell you that you “know” just enough to be dangerous to yourself and your company. Let us explain.

First, there is no single maximum dollar amount that applies to all of the SBIR/STTR agencies. The SBA has recently authorized the agencies to spend up to $150k per Phase 1 award. Therefore, some agencies have increased their limit to $150k. Others, however, have maximum amounts far below the SBA-authorized $150k cap, and will toss your proposal into the nearest trash can if you ask them for more than their maximum of $80k, $95k, $100k, or whatever is the maximum that they want to allocate to any given Phase 1 project. Then there is NIH, which believes it has the authority to exceed the SBA cap and fund Phase 1 grants at whatever dollar amount is “reasonable” given the nature of the project proposed. Note this NIH flexibility applies only to grants, which means can’t do this with an NIH contract, and it does not apply to special Program Announcements (PAs) or Requests for Application (RFAs) that have stipulated maximums. Therefore, the first thing you have to do is carefully read the agency’s solicitation/funding opportunity announcement to understand the maximum that they allow.

Second, that maximum dollar amount is the cap allowed for three categories of cost: direct, indirect and fee/profit. Direct costs are what you will incur to do the research project you are proposing to the agency—typical Phase 1s are mostly labor, with some materials, subcontracts, and other costs as required to accomplish the work. Indirect costs are the “general costs of being in business,” such as rent, cell phone, utilities, office supplies, support labor, and general management and accounting. It is usually expressed as a percentage of direct costs or direct labor, and should be calculated at least annually for your company. And do we really have to explain fee/profit to you? All SBIR/STTR agencies allow you to ask for and receive fee/profit, with 7% of the sum of direct and indirect costs being a typical amount that you can ask for. Fee/profit is a very important category in your budget, because it can be used to cover any cost, either within the proposed project or in some other part of your business And when we say “any cost,” we include things that are “unallowable” items if called out specifically in your proposal—once you receive fee/profit, it can be used to cover legitimate business expenses that the Feds refuse to cover as direct or indirect costs.

When you add together your direct costs, indirect costs and fee/profit, they should not exceed the maximum dollar amount allowed by your agency. Yeah, this is obvious to some of you, but we get the question a lot so we wanted to make it “perfectly clear” here.

Therefore, if you ask for $100k, and you ask that the government to only pay for your direct costs, then you are saying you will spend the entire budget on the R&D and have none available for indirect or fee/profit. That is a real bad idea, because every SBIR/STTR company has indirect costs, and every SBIR/STTR company has valuable uses for the fee/profit. We recommend that you take the maximum dollar amount allowed, subtract about 7% for fee/profit, subtract an amount to cover a reasonable fraction of your company-wide indirect costs, and see what is left over—that becomes your budget for the actual R&D you will propose in your Phase 1. A quick example: supposed the agency has a $100k cap, and suppose you have an indirect rate of 75% of direct costs; i.e., for every $1 in the cost of doing the proposed research, you need $.75 to help cover your costs of being in business. Divide the $100k by 1.07 for the fee/profit, for a net of $93,500k. Now divide the $93,500 by 1.75 to get down to about $53,400. That is the amount of money you can actually spend on the R&D in Phase 1. Our suggestion is to first calculate this amount, which determines your Phase 1 R&D budget, and then scope out a project that fits the budget.

Third, you need to realize that some agencies only give you their maximum Phase 1 funding if you propose both a base project and an option project. Navy, Army, and MDA do this: you are to propose a base project ($80k at Navy, $100k at Army and MDA) in which you prove feasibility of your innovation. You then can propose an option project (up to $70k at Navy, and $50k at Army and MDA) for additional work. Let us elaborate on this a bit, since many folks don’t understand how these options work: you do the base project, hopefully proving feasibility and convincing the agency that you are a great company to work with. If they decide they want to fund you in Phase 2, then they will exercise the Phase 1 option to give you some money and tasks to work on to advance the project beyond feasibility. Therefore, do not include in the option any task required to prove feasibility, and do not assume that the option work will continue on immediately following completion of the Phase 1 base project. A more basic question: should you include an option in your Navy, Army or MDA proposal? The answer is emphatically YES, because it demonstrates your intent to pursue this project vigorously and it gives you additional funding that will not otherwise be available to you.

Finally, don’t think you will have a competitive advantage if you propose a cheap project relative to the maximum. Virtually everyone will propose a budget at or within 0.5% of the maximum, both because they realize there is no competitive advantage to be cheaper, and most SBIR/STTR Phase 1 projects need every penny available to cover the work necessary to prove feasibility. In fact, a really cheap project looks odd, and makes the reviewer wonder about your budgeting skills, the quality of your team, the quality of your research, and otherwise hinders rather than helps your proposal. If you have requested indirect costs and fee/profit in your budget, and if you are still below the agency’s maximum, then consider adding additional worthwhile tasks that will make for a better project or a stronger conclusion about its feasibility.