Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

Copyright © 2003 by Greenwood Consulting Group, Inc.

One cost allowed by many SBIR/STTR agencies is called Independent Research and Development, or IR&D. From experience, we know this is a cost category that is of interest and value to many SBIR/STTR competitors, but many companies do not know about it or how to request it in their cost proposal.

IR&D is defined simply as research and development that you want to perform but which is not being paid for by any client. A good example would be the cost to develop a new software package that you think has considerable commercial potential in the future, but for which you have not been able to find outside funding to develop.

IR&D is considered an indirect cost, or a general cost of being in business. To be more specific, IR&D is part of the General and Administrative (G&A) cost category. Therefore, to be able to secure some IR&D funding for your internal R&D efforts, you need to build in a budget for it as part of your G&A rate (or indirect rate if you do not differentiate overhead from G&A) that you charge on the SBIR project.

Several cautions about IR&D: First, not all agencies allow you to charge IR&D on their SBIR/STTR projects—NIH and NSF are notable examples. These agencies make their SBIR/STTR awards as grants, and may feel that they already are giving you grant money to pursue your innovations and will not give you IR&D to pursue even more ideas.

Second, you must be able to justify the amount of money you are asking for as part of IR&D. You will need to indicate how much time you have set aside for IR&D and how you estimated both that time and the other expenses you are requesting as part of your IR&D budget.

Third, the amount requested must be "reasonable," which is an ambiguously defined term that means in this context that it can’t cause your G&A or overall indirect rate to become "unreasonably" high. SBIR/STTR companies that get greedy and try to fund a lot of IR&D through their indirect rate may find that the government’s negotiators will disallow some of the request.

Fourth, you will need to document the time and expenses you spend on the IR&D activities (yes, that means keeping time sheets). Just because the government is providing funding to pursue your own ideas through IR&D doesn’t mean that they don’t want to know exactly what you did with those IR&D dollars that they gave you.

Finally, IR&D should be used for serious research with a valuable purpose. If companies use it to just fund futzing around in their laboratory, then it is a waste of taxpayer dollars.

Independent Research & Development is an additional valuable tool that can be used by SBIR/STTR companies to develop important products for defense, counterterrorism, health, energy, education, transportation and other applications. We highly recommend that you include IR&D in your future G&A/indirect rates, provided it is an allowable expense with your SBIR/STTR agency.