Understanding, designing, and calculating indirect rates in a government contract and grant environment requires equal measure of art and science (math). Along with that comes experience, wisdom, and the ability to carefully interpret oftentimes conflicting regulatory compliance and requirements. Case in point is the new Department of Energy (DOE) 15% Indirect Cost Limit, that along with other restrictions on indirect rates issued by a slew of agencies, has upended decades of reliable, repeatable pricing techniques.
This article examines the new DOE approach to indirect costs as it relates to the DOE SBIR/STTR grant programs.
Before tackling any effort at pricing, it’s critical to review all pricing instructions, from agency policy all the way down to budget requirements in a funding announcement. They don’t always align. A great example is the workshare requirements for SBIR/STTR applicants. While the SBIR/STTR legislation mandates businesses perform 2/3rds of the effort for Phase I contracts and grants, and 50% for Phase II’s, each agency has its specific method of calculating and complying with the workshare requirements. The DOE has changed their calculations at least once.
As another example when calculating fee for DOE budgets, SBIR/STTR Funding Opportunity Announcements (FOA) prior to 2018 had this statement:
“Fees are subject to negotiation and shall not exceed 7% of the total award amount.” (Source: FOA DE-FOA-0001770 dated Oct. 16, 2017)
Applicants would rightfully budget 7% fee ($14,000) on a $200,000 project, irrespective of costs.
Once pointed out to DOE this was not a common pricing convention, they changed their pricing language in FOAs to read:
“Grants may include a profit or fee for the applicant. Fees are subject to negotiation and shall not exceed 7% of the total costs (direct and indirect).”
The FOA’s included an example calculation for clarity:
(Source: DE-FOA-0003202 Jan. 18, 2024)
This assumes a final budget figure reaches $200,000. This approach adheres to the common pricing approach for fee, as expressed in FAR 15.401/15.404-4 for contracts, but is not as clear in the grant-focused Code of Regulations (2 CFR 910.358) for DOE SBIR/STTR grants.
DOE released a Policy Flash dated May 8, 2025, stating, “The Department plans to establish a maximum allowable dollar amount (stated in terms of the percentage of the total project award amount) that it will reimburse for allowable, allocable, and reasonable indirect costs under Awards. Total indirect costs are inclusive of fringe benefit costs. For for-profit organization awards, the maximum percentage is 15%.”
If you are a grant applicant, in this case word problems are your friend. A limitation of 15% on “total project award amount”, although drastic, is mathematically substantially better than the customary application of indirect rates on the basis of project or direct costs. For-profit SBIR/STTR applicants also benefit, since fee is allowed as part of a grant’s “total project award amount”.
The SBIR/STTR Phase I grant limit is currently $250,000. The DOE policy suggests if you calculate a budget up to the $250,000 limit (which is strongly suggested), your indirect cost limit is $250,000 x 15% = $37,500.
DOE grant negotiators have been given guidance and formulas for determining maximum indirect costs on a grant. This guidance still contains the DOE Policy Statement:
“…(implement) and (calculate) an indirect cost percentage cap against the total award costs…” with Total Award defined as “The sum of direct costs (project-specific expenses) and indirect costs, determined by the budget the recipient proposes, and the DOE approves.” (Emphasis added)
Most models provided by DOE for calculating the indirect cap amount are consistent with this policy.
However, one example calculation model provided to DOE negotiators falls back on the customary methods of calculating the 15% cap, that is as applied to total costs before fee. This approach has obvious detrimental implications for SBIR/STTR grantees and should be pointed out to DOE negotiators if they use this model.
Estimated direct costs = $203,169
Indirect costs = $203,169 x 15% = $30,475
Total direct and indirect costs before fee = $233,645
Fee is 7% of total costs = $16,355
Total including 7% fee = $250,000
This pricing example alone reveals the dramatic effect of interpreting DOE policy – a potential $7,025 budget reduction to an already restrictive indirect rate.
As was stated above, DOE models determining an indirect cost cap will derive the cap by multiplying the total budget request (including fee) by 15%. In the case of an SBIR Phase I, the maximum grant amount (without Technical and Business Assistance – TABA) is $250,000. The capped amount is therefore $37,500.
Applying a DOE pricing model to a common SBIR budget submission from an applicant:
Needless to say, a $34,429 decrement from your proposed budget is a tough place to start negotiations. Even if you consider financing part of the grant out of fee, that’s still a hit to the bottom-line profit of $18,074.
For a good many SBIR/STTR DOE applicants, this is their pre-revenue company’s very first foray into government funding. These applicants would rightly suggest all small business costs are project related. Which is a valid argument, except to say this is a one-off example. Federal job cost accounting principles and rules assume applicants may have or will soon have more than one job to keep track of, thereby requiring a technique for equitably allocating allowable business expenses. This can be done the easy way by calculating indirect rates as a way of allocating costs to projects, or the hard way – allocating each and every expense by hand and recorded in the accounting system.
A current statement buried deep in DOE SBIR/STTR pricing instructions relating to project labor appears to open a door as an alternative to allocating project costs:
Analogous to DOE, The National Institutes of Health (NIH) publishes similar and more specific budget instructions:
“Administrative, Secretarial, and Clerical Support Salaries: In most circumstances, the salaries of administrative, secretarial, or clerical staff at educational institutions and nonprofit organizations are included as part of indirect costs.
Inclusion of such costs may be appropriate only if all of the following conditions are met:
(Source – NIH SF424 budget instructions, Section G.300)
These statements, as they apply to labor, could also be applied to non-labor expenses. For example, many applicants have their laboratory and office space approved as a direct cost if:
Other “project-related” approved costs include project-designated computer equipment (under $5,000), as well as subscriptions to computing services related to the project.
Until these statements from DOE and NIH are rewritten, it does appear that what otherwise may be deemed indirect costs could be included as direct or “project” costs. To strengthen this argument, applicants should apply these cost allocation techniques in their accounting and document simple policies and procedures aligning pricing with accounting.
Before the DOE 15% cap on indirect costs, a budget of $250k really meant something far less for the actual project effort after taking into account allocated indirect costs and fee.
The cap on indirect costs now gives an applicant more budget to add labor or other items critical to the project that may sway reviewers when picking grant winners.
The DOE examples include “fringe costs” as indirect costs. However, many fringe costs are either mandated by the Federal government (FICA, Medicare payroll taxes), or each state (mandatory pay for time-off, workers compensation). These costs should flow equitably to project labor costs. This may involve a bit more complexity on the accounting side, but so be it.
Complying with government cybersecurity requirements are also a cost not normally borne by a commercial company. Network charges could be allocated to each project based on some measurable parameter, such as usage or time period.
The role of the Principal Investigator in a small firm already contributes to what might be considered indirect costs in a larger firm:
Taking a more aggressive approach to pricing grants in this manner may not close the gap for covering all indirect costs, but it gets closer to profitability.
Grant organizations using the SBIR/STTR program have historically looked to academia to invest in innovative technologies. As such, academia is a powerful influencer of grant agency policies, as evidenced by the many legal pushbacks to limitations on their own indirect rates.
The Joint Associations Group (JAG) on Indirect Costs, part of the Association of Public and Land-Grant Universities, have already submitted its recommendations to Congress concerning a new model to replace the current one that calculates a “Facilities and Administrative” (F&A) rate.
Named the “FAIR” model, it is designed to “…tailor support that reflects the specific type and cost of each project.” This is an example of how academia may influence the pricing environment of SBIR/STTR grant programs.
Other thoughts on risk reduction and advocacy bearing in mind the fast pace of change:
There have been a slew of recent challenges to small business firms operating in the SBIR/STTR government contract and grant environment. This includes COVID, IRS Section 174 tax implications, tariffs, government shutdowns, and reauthorization of the SBIR/STTR program, to name a few. Add to that the pricing and cost allowability nuances inconsistently applied across government agencies, which may accelerate technology innovation firms searching elsewhere for funding.