SBIR (Small Business Innovation Research) and STTR awards are not administered under a single, uniform set of cost-accounting rules. Which regulatory framework applies to indirect costs — and how much mechanical friction that framework imposes on the small business — depends on what kind of award instrument the participating agency uses, not on the SBIR program itself. Some agencies (NIH, NSF, and most of USDA and ED among them) fund SBIR through grants or cooperative agreements. Others — most consistently DoD, NASA, and DHS — fund SBIR primarily through FAR-based procurement contracts. See SBIR Contracts: When the Award Is a Contract, Not a Grant for the agency-by-agency breakdown of which instrument each uses and why.
This guide covers the mechanics that apply specifically when an SBIR award is a contract: how indirect cost rates get set, billed, and finally settled under the Federal Acquisition Regulation (FAR), and how that differs structurally from the 2 CFR 200 (Uniform Guidance) process that governs indirect cost rates for university and nonprofit grant recipients elsewhere on this site (see Indirect Cost Rate Proposal and Indirect Cost Rate Agreement (NICRA)).
Why the award instrument decides which cost rules apply
The cost principles that govern a federal award attach to the instrument type, not to the SBIR program as a category. FAR Subpart 31.2 states its own scope directly: it applies to costs under contracts and contract modifications negotiated with organizations other than educational institutions, construction and architect-engineer contractors, and state, local, and nonprofit organizations. By elimination, that leaves commercial, for-profit organizations — the entity type every SBIR small business is required to be — as the population FAR Part 31 (48 CFR Part 31) actually governs. Source: FAR Part 31, Contract Cost Principles and Procedures, Acquisition.gov.
2 CFR 200 Subpart E (the Uniform Guidance cost principles) was built primarily around institutions of higher education, nonprofit organizations, and state/local/tribal governments — its rate-setting appendices (Appendix III for IHEs, Appendix IV for nonprofits) don’t include a for-profit-entity counterpart. When a for-profit small business receives an SBIR award structured as a grant or cooperative agreement rather than a contract, the awarding agency’s own grants policy typically specifies which cost principles apply to that for-profit recipient — commonly FAR Part 31 by cross-reference, even though the award itself is a grant, not a contract. This varies by agency and by the specific terms of the award — always confirm the applicable cost principles against your Notice of Award or contract clauses rather than assuming.
Fixed-price vs. cost-reimbursement: when rate mechanics actually bite
A second variable, independent of grant-vs-contract, determines how much the indirect rate mechanics below actually matter in practice: the contract type. See Cost-Reimbursable vs. Fixed-Price Contracts for the general comparison; the SBIR-specific consequence is this:
- Firm-fixed-price (FFP) contracts (FAR 16.202): the government pays the agreed contract price regardless of the contractor’s actual incurred costs. Indirect rates are used once, during proposal pricing, to build up a cost estimate that supports a fair-and-reasonable price — FAR 31.2 itself notes that for fixed-price work, applying the cost principles during cost analysis “shall not be construed as a requirement to negotiate agreements on individual elements of cost.” There is generally no post-award reconciliation of billed vs. actual indirect costs on a pure FFP contract. Many agencies use FFP for SBIR Phase I, given its smaller dollar value and shorter period of performance.
- Cost-reimbursement contracts (including cost-plus-fixed-fee, common for larger or higher-risk SBIR Phase II awards) incorporate FAR 31.2 by reference as the actual basis for determining what the government will reimburse, and carry the FAR 52.216-7 “Allowable Cost and Payment” clause, which is what triggers the full provisional-to-final rate lifecycle described below.
In short: a small business holding only FFP SBIR contracts may never go through a formal final-rate settlement at all. A small business holding cost-reimbursement SBIR contracts — or FFP contracts with cost-reimbursement line items or options — will.
The FAR indirect rate lifecycle: provisional, incurred cost submission, final
For cost-reimbursement SBIR contracts, indirect cost rates move through three stages, all within FAR Subpart 42.7 (Indirect Cost Rates):
- Provisional (billing) rates (FAR 42.701, 42.704). A billing rate is an indirect cost rate set temporarily for interim reimbursement while performance is ongoing, established “as close as possible to the final indirect cost rates anticipated,” based on the contractor’s forecast or prior-year actual experience. Billing rates can be revised during the year by mutual agreement or unilaterally by the contracting officer/auditor if experience shows they’re materially off. For a contractor that hasn’t billed the government before, DCAA guidance allows billing rates to be based on budget projections or a comparable contractor’s experience when no history exists yet.
- Incurred cost submission (ICS/ICE) (FAR 42.705(b)). Within six months after the close of each fiscal year (extendable in writing for exceptional circumstances), the contractor must submit a proposal reconciling actual incurred direct and indirect costs against what was billed provisionally during the year. This is the annual “true-up” step — it is the FAR-contract analogue of the indirect cost rate proposal a university submits to its cognizant agency under 2 CFR 200 Appendix III, but on an annual cycle tied to actual incurred costs rather than a multi-year negotiated rate agreement.
- Final indirect cost rate determination (FAR 42.705-1 and 42.705-2). Two distinct procedures exist, and which one applies depends on the contractor’s size and structure, not on SBIR status specifically:
- Contracting officer determination (42.705-1) applies to multidivisional corporations, business units that have a resident Administrative Contracting Officer (ACO), educational institutions, and state/local/nonprofit entities.
- Auditor determination (42.705-2) applies to business units not covered by the above — in practice, this is the procedure most single-site SBIR small businesses without a resident ACO go through. DCAA (or another cognizant auditor) reviews the incurred cost submission, prepares an advisory report, and negotiates directly with the contractor to reach agreement on final rates.
Once final rates are settled, the contractor has 120 days to submit a completion invoice reflecting the settled amounts, closing out that fiscal year’s billing.
Source: FAR Subpart 42.7, Indirect Cost Rates, Acquisition.gov.
Unallowable costs under FAR 31.2 that commonly trip up small businesses
FAR 31.2 lists specific categories of cost that cannot be included in an indirect cost pool charged to the government, regardless of whether they were legitimately incurred for business purposes. The ones that most often surprise a small business building its first government-contract indirect rate structure include entertainment and alcohol, contributions and donations, most forms of interest expense, federal income taxes, contingency reserves, and a large share of lobbying costs. Independent Research and Development (IR&D) and Bid and Proposal (B&P) costs are allowable but must be tracked and allocated separately under FAR 31.205-18 rather than folded silently into general overhead — a distinction that matters directly for a small business writing its next SBIR proposal, since B&P costs for a specific proposal effort are treated differently from general marketing overhead.
The Uniform Guidance side: SBIR grants and the 15% de minimis rate
For SBIR awards structured as grants or cooperative agreements under 2 CFR 200 (rather than FAR contracts), a small business without a current negotiated indirect cost rate agreement (NICRA) with any federal agency can generally elect the 15% de minimis rate under 2 CFR 200.414(f), applied to modified total direct costs (MTDC), unless the specific funding opportunity says otherwise. This option has no FAR equivalent — it exists only on the Uniform Guidance side of the grant/contract divide this guide describes, and is not available to a small business whose SBIR award is a FAR-based contract.
Practical checklist for SBIR contractors
- Confirm your award instrument first — grant, cooperative agreement, or contract — from the award document itself, not from the agency’s general reputation (see SBIR Contracts: When the Award Is a Contract, Not a Grant).
- If it’s a contract, confirm the contract type — firm-fixed-price or cost-reimbursement — since that determines whether post-award rate reconciliation applies at all.
- If cost-reimbursement, set up provisional billing rates before you start billing, and revisit them if actual experience diverges materially from the forecast during the year.
- Track direct and indirect costs by consistent cost pools from day one — reconstructing a year of cost allocation retroactively for an incurred cost submission is far harder than maintaining it contemporaneously.
- Calendar the six-month incurred cost submission deadline after each fiscal year-end; missing it is a compliance finding, not just an administrative delay.
- Exclude FAR 31.205-series unallowable costs (entertainment, alcohol, most interest, federal income tax, contingencies, most lobbying) from indirect cost pools before submission.
- If pursuing SBIR grants (not contracts) with no current NICRA, evaluate the 15% de minimis rate under 2 CFR 200.414(f) against your actual indirect cost structure before defaulting to it.
Frequently asked questions
Does SBIR fall under FAR or 2 CFR 200?
Neither uniformly — it depends on the award instrument the funding agency uses for that specific SBIR award. Contract-based SBIR awards (common at DoD, NASA, DHS) fall under the FAR, specifically FAR Part 31 cost principles. Grant- or cooperative-agreement-based SBIR awards (common at NIH, NSF, and other civilian agencies) fall under 2 CFR 200, though the awarding agency may still specify FAR Part 31 as the applicable cost principles for a for-profit recipient even on a grant instrument. Always check the specific award document.
Do I need a NICRA for an SBIR contract?
Not necessarily in the Uniform-Guidance sense. A Negotiated Indirect Cost Rate Agreement (NICRA) is the 2 CFR 200 Appendix III/IV mechanism used mainly by universities and nonprofits. A for-profit SBIR contractor instead goes through the FAR 42.7 provisional-rate and final-rate-determination process described above, which produces a comparable outcome (an agreed indirect rate) through a different regulatory path and a different document.
What indirect cost rate can a small business charge on an SBIR Phase I contract?
There is no fixed government-wide percentage. The rate is whatever the contractor’s own cost accounting system supports and the government accepts as fair and reasonable during pricing (for FFP awards) or through the incurred cost submission and final-rate negotiation process (for cost-reimbursement awards) — see the rate lifecycle section above. Agencies do sometimes cap total indirect burden as a matter of solicitation-specific policy; check the specific SBIR solicitation.
Is SBIR Phase I typically fixed-price or cost-reimbursement?
It varies by agency and even by specific topic, but many agencies favor firm-fixed-price for the smaller, shorter Phase I award and are more likely to use cost-reimbursement or cost-plus-fixed-fee structures for the larger, longer Phase II award, where the greater cost risk to both parties makes a true-up mechanism more useful. Confirm the actual contract type on your specific award rather than assuming based on phase alone.
