Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

Copyright © 2003 by Greenwood Consulting Group, Inc.

The next deadline for submitting grant proposals to the National Instutites of Health (NIH)’s SBIR and STTR programs is August 1^st, so we thought this would be a good time to talk about the cost proposal on a Phase 1 NIH grant request.

Plain and simple, there is no cost proposal "page" or form with NIH grant requests like there is with the other agencies that participate in SBIR. There are bits and pieces of the cost proposal found on several different pages, as described below. A good starting place is to develop your overall cost proposal on a spreadsheet—maybe use the format found in the U.S. Dept of Energy’s Phase 1 SBIR/STTR solicitation as a model (the DOE solicitation even provides a sample completed cost proposal form). Initially set up this cost proposal with whatever indirect rate you have estimated for your firm for the year in which you would work on this project, and see what the bottom line is. Then rerun the cost proposal using an indirect rate of 40% of all direct costs (not just direct labor), see what the bottom line is, then compare that with your first run. The difference between these two runs is important. Why? Because if you are first time competitor for federal funding (grant or contract, R&D, procurement, or whatever) and therefore have not negotiated an indirect rate with the Feds, NIH limits you to the 40% of direct costs as the maximum indirect cost reimbursement they will give you. You may be surprised at how small the 40% is relative to your true indirect costs, but that is the rule with Phase 1 at NIH. If you are not a first time federal government funding recipient, thank your lucky stars, and use your true indirect rate. If you are first comer, drown your sorrows (remember alcohol is an unallowable expense on an SBIR) then use the calculations on the 40% indirect rate sheet as you fill out the cost proposal on your NIH grant request. The difference between your true rate and the 40% becomes your cost share for this project.

Now look at the cover sheet for the NIH SBIR grant proposal. Boxes 7 and 8 are the first places you put parts of your first cost proposal. You may get a deer-in-headlights look when you compare Box 7 and 8, since one talks about "initial grant period" and the other talks about "total grant period." With a Phase 1, initial and total are the same thing, so the numbers in Box 7 should be the same as the numbers in Box 8. However, the numbers in Box 7a better be different than those in Box 7b, and ditto for Boxes 8a and 8b. Why? Because if the dollar amount in Box 7a is the same as the amount in Box 7b, you are saying that your total budget request is the same as your direct cost request, meaning you do not get any indirect cost reimbursement or fee/profit. Trust us, you don’t want to do that! You need some indirect cost reimbursement to cover your costs of being in business, and fee/profit is the only money you get that doesn’t have government strings attached, so as an astute business person you want to ask for both.

Now let’s move to the second place in the NIH Phase 1 grant proposal format in which you put part of your cost proposal. Let’s assume you are asking for $100k or less (if you ask for more than $100k, you have a different form). This is the form with the title "Budget Justification Page, Modular Research Grant Application" across the top. In the boxes at the top of the form, you ignore all but the first one (put all your direct costs from your spreadsheet into this box), and the total box that appears at the far right and below the boxes for annual amounts (should be the same number as what you put in the first box). Then you’ve got the budget narrative—basically you want to write a few sentences of explanation about the three topics offered (personnel, consortium, fixed fee). NIH’s instructions in the SBIR Omnibus Solicitation will guide you on what to put in this narrative.

If you are asking for more than $100k, then you need to complete the "Detailed Budget for Initial Budget Period" (Form Page 4) and "Budget for Entire Proposed Project Period" (Form Page 5). Note these forms are for disclosing direct costs only. Don’t be intimidated by these pages, even though there are some boxes that make no sense to a for profit business (e.g., "type of appointment")—most of the stuff you have to provide should be on that spreadsheet you did in the first place. Never let these forms be the reason for asking for less than $100k on an NIH grant application—they ain’t that big of a deal to fill out.

Now let’s move to the final place where you put some of your cost proposal ona Phase 1 grant request to NIH. It is found innocently buried on the Checklist, the last page in your proposal. Scoot down to Section 3, the Facilities and Administrative Costs (F&A)/Indirect Costs section. You may once again get that deer-in-headlights look as you look over this section. Note in the top half of the box you are supposed to mark one of four categories regarding your F&A or indirect rate (F&A is the term that NIH usually uses to mean what most other agencies call indirect cost). If you have an F&A/indirect rate negotiated with NIH, mark the first box. If you are currently negotiating an F&A/Indirect rate with NIH, mark the second box. If you have an indirect rate negotiated with another federal agency, mark the third box. And if you don’t want any F&A/Indirect cost reimbursement (boo on you!), mark the fourth box. So where do you mark if you have a legitimate F&A/indirect rate but it isn’t approved yet by anyone? Or where do you mark if you realize you are stuck with that 40% indirect rate we mentioned earlier? Neither situation fits this standard NIH form very well. This, unfortunately, is why we think we see so many first time NIH applicants marking the 4^th box and getting no indirect cost reimbursement—the form doesn’t tell them where to indicate that they recognize they can only get 40% if they don’t have an approved rate. NIH’s guidance is to leave these four boxes at the top of Section 3 of the Checklist blank, and go down to the last thing in Section 3 titled "Explanation." Here you can write in something like "F&A rate applied is 40% maximum allowed by NIH for 1^st time applicant for Federal Government funding, although true estimated F&A rate is 92%," where you enter your estimated rate where we’ve shown "92." This explains the 40% you are using, and puts them on notice that this is far below your true cost—again, think of it as an involuntary cost share.

Now in the middle of Section 3 on the Checklist page, under "Calculation," put in your direct cost base on the first blank on line "a", your F&A/Indirect rate in the middle blank, and the result of multiplying the two numbers together in the third blank. If you are using NIH’s maximum 40%, then the first space should have all direct costs (not just direct labor) from your spreadsheet, the second space should be 40%, and the third space should be the product of the two. If you have an approved F&A/indirect rate, then the first number should be either direct labor or all direct costs, depending on which your F&A/indirect rate is based on, and the second number should be that approved rate.

Finally, near the bottom of Section 3 on the Checklist page, you check the box that best describes the basis on which your indirect rate is made. Again, if it is based on direct labor, which is very common with for profit businesses, then you mark the first box. If you rate is based on all direct labor, or if you are using NIH’s standard 40% rate, then mark the second box. If your rate has some other basis (e.g., height of tides, lunar position), mark the third and (try) to explain it.

At this point, you are pretty much done with the cost proposal on your NIH Phase 1 grant request. Except there is one more place you may want to put some cost information: the body of the proposal. We routinely see NIH reviewer comments that suggest some of them do study the budget, although their focus should be the technical proposal. Therefore, you may decide you want to put some justification or explanation in the body of the proposal itself. Or you may opt to not do this, figuring this will definitely open the door to NIH’s reviewers getting into your cost proposal. It is your choice on this one.

To download NIH’s budget forms and instructions, go to  http://grants.nih.gov/grants/funding/phs398/phs398.html. On page 3, and click on "Full Set of SBIR and STTR Forms (Phase I and II).

Good luck as you wrap up your NIH Phase 1 proposals, and make sure you do not commit the ultimate sin—you know, making the dollar amount in Box 7a of the cover page equal the dollar amount in Box 7b (ditto Boxes 8a and 8b). Real men (and women) ask for F&A/indirect cost reimbursement and fee/profit on their SBIR proposals. After all, you need to be compensated for the cost of being in business, or you may not be around as a business long enough to do Phase 2 and commercialize the resulting technology.