One of the most common SBIR/STTR budget questions is simple: can we include profit?

 

For many applicants, the answer can be confusing because federal agencies may use the word “fee” instead of “profit.” Some applicants do not request it at all. Others confuse fee with direct costs, indirect costs, contingency, or ordinary operating expenses.

 

That can create missed opportunities or budget confusion.

 

In SBIR/STTR budgeting, fee or profit should be understood as its own category. It is separate from the direct costs needed to perform the project and separate from the indirect costs needed to support the business.

 

At Peter Witts CPA PC, we help SBIR/STTR applicants review fee, direct costs, indirect costs, documentation, and budget structure so the financial side of the proposal is clearer, more supportable, and better aligned with award management.

 

 

Why Fee or Profit Matters in SBIR/STTR Budgets

 

SBIR and STTR programs are designed for small businesses. Unlike many federal grant programs, SBIR/STTR awards often recognize that a for-profit small business may request a reasonable fee or profit as part of the award budget.

That matters because small businesses are not only performing research. They are also building companies.

The fee can provide flexibility that direct and indirect cost categories do not provide. It can also help companies avoid trying to force ordinary business needs into direct or indirect cost categories where they may not belong.

A well-structured budget should clearly separate:

• Direct costs needed to perform the project
• Indirect costs needed to support the business infrastructure
• Fee or profit requested by the small business, when allowed

The fee should not be used to hide weak cost assumptions. It should be treated clearly and intentionally.

 

 

Fee vs. Profit: Why the Terms Can Be Confusing

 

Many applicants use the word “profit” because that is the familiar business term. Federal agencies may use the term “fee.”

SBIR.gov explains that most SBIR/STTR agencies do not call it “profit,” but instead use the term “fee.” NSF sometimes refers to residual funds in this context.

In practical terms, applicants should follow the terminology used by the agency and solicitation.

 

If the agency budget form calls it fee, use fee. If the agency guidance refers to profit or fee, follow that wording. The terminology should match the specific opportunity.

 

The important point is that fee or profit is not the same as direct project costs or indirect costs.

 

 

Fee Is Not a Direct Cost

 

Direct costs are costs specifically tied to performing the project. These may include project labor, materials, supplies, consultants, subcontractors, travel, testing, or other costs directly related to the statement of work.

 

Fee is different.

 

Fee is not the cost of an engineer working on the project. It is not the cost of materials. It is not a consultant invoice. It is not a subcontractor budget. It is not travel or testing.

Direct costs should be supported by the project work plan and budget narrative.

 

Fee should be shown separately when allowed by the agency.

 

If a company tries to treat fee like a direct cost, the budget can become confusing and harder to support.

 

 

Fee Is Not an Indirect Cost

 

Indirect costs are the shared business costs needed to support the company’s work across projects. These may include rent, utilities, administrative labor, accounting, payroll, insurance, software, compliance support, and general management.

 

Fee is also not an indirect cost.

 

NSF’s SBIR/STTR budget guidance states that fee is not a direct or indirect cost item and may be used by the small business for any purpose, including additional effort under the NSF SBIR/STTR award.

 

This distinction matters because indirect costs should be supported by cost pools, allocation bases, and accounting records. Fee does not belong in the indirect cost pool.

 

If a company mixes fee with indirect costs, it may distort the indirect rate or make the budget harder to explain.

 

 

Why Fee Should Not Be Confused With Ordinary Operating Expenses

 

A common mistake is using fee as a substitute for expenses that should have been budgeted elsewhere.

 

For example, if the company needs accounting support, payroll support, insurance, software, facilities, or administrative labor to perform and manage the award, those costs may belong in the indirect cost structure if allowable and properly supported.

 

If the company needs technical labor, materials, testing, travel, or consultant support for the project, those costs may belong in direct costs if allowable and tied to the work.

 

Fee should not be used to avoid building a real budget.

 

Instead, the budget should first identify the actual direct and indirect costs needed to perform and manage the award. Then the company can evaluate whether a fee or profit request is allowed and how it should be included.

 

 

How Much Fee Can Applicants Request?

 

The allowable amount can vary by agency, solicitation, phase, and award terms. Applicants should always review the current solicitation and agency instructions before finalizing the budget.

 

That said, several SBIR/STTR resources discuss fee in relation to total direct and indirect costs. NIH states that profit or fee normally will not exceed seven percent of total direct and indirect costs for each phase of the project. NSF also states that up to seven percent of total indirect and direct project costs may be requested as a small business fee.

 

Applicants should not assume the same rule applies in every situation. Some agencies may provide specific instructions, budget line treatment, or restrictions.

 

Before requesting fee, ask:

• Does the solicitation allow fee or profit?
• What term does the agency use?
• Is there a percentage limit?
• Is the percentage applied to direct and indirect costs?
• Does the fee count toward the total award limit?
• Where should fee be entered in the budget form?
• Should the fee be explained in the budget narrative?
• Are there agency-specific restrictions?

The right answer starts with the specific opportunity.

 

 

Fee Must Be Requested at the Right Time

 

Applicants should not assume fee can be added later.

 

NIH states that a reasonable profit or fee may be paid to a small business receiving an SBIR/STTR Phase I, Phase II, or CRP award, but the profit or fee must be included in the budget request at the time of application.

 

This is an important planning point.

 

If the company wants to request fee, the budget should include it before submission, following the agency’s instructions. Waiting until after submission or award negotiation may limit the company’s options.

 

Fee strategy should be part of budget planning, not a last-minute afterthought.

 

 

Avoid the “Gap Filler” Approach

 

One common mistake is treating fee as a gap filler.

 

For example, if the maximum award amount is $250,000 and the company’s direct and indirect costs total $243,000, the applicant may simply request $7,000 as fee to reach the cap.

That approach may not be strategic.

 

SBIR.gov warns against treating fee as a gap filler and explains that applicants should avoid simply using fee to fill the difference between combined direct and indirect costs and the maximum amount the agency will consider.

 

The stronger approach is to build the budget from the actual cost of the work first. Then, if fee is allowed, calculate and present it according to the agency’s instructions.

 

Fee should be intentional, not whatever amount is left over.

 

 

Do Not Use Fee to Cover Underbudgeted Direct Costs

 

Another mistake is underbudgeting direct costs because the company assumes fee can cover the difference later.

 

That can create performance problems.

 

If the project needs specific labor, materials, testing, consultant support, subcontractor work, or travel to be completed, those costs should be budgeted properly as project costs when allowable.

 

Using fee to patch underbudgeted project costs can create cash flow pressure and may make the company’s budget less realistic.

 

A strong proposal budget should give the project enough direct cost support to perform the work. Fee should not compensate for a weak project budget.

 

 

Do Not Use Fee to Fix an Unsupported Indirect Rate

 

Fee also should not be used to compensate for a poorly developed indirect rate.

 

If the company’s indirect rate is too low, the company may underrecover the cost of managing and supporting the award. If the rate is unsupported, it may create questions during review or after award.

 

The indirect rate should reflect the company’s real cost structure, accounting system, and funding strategy. Fee should not be used to avoid developing a supportable indirect rate.

 

Direct costs, indirect costs, and fee each have a different purpose.

 

A stronger budget gives each category the right role.

 

 

How Fee Can Support Business Flexibility

 

Fee can be valuable because it may provide flexibility that other federal budget categories do not.

 

NIH states that SBIR/STTR profit or fee is not considered a cost for purposes of determining allowable use, program income accountability, or audit thresholds, and that it may be used by the small business for any purpose, including additional effort under the award. NSF similarly states that the fee may be used by the small business for any purpose.

 

This can make fee useful for business needs that may not fit cleanly into direct or indirect cost categories.

 

However, applicants should still be careful. The budget should not imply that fee is being used to justify unallowable direct or indirect costs. The fee should be presented according to agency instructions and kept separate from cost categories.

 

 

Fee Usually Applies to the Small Business, Not Every Participant

 

Applicants should also understand who the fee applies to.

 

NIH states that the profit or fee applies solely to the small business receiving the SBIR/STTR award and not to any other participant. NSF also states that the fee applies solely to the small business receiving the award and not to any other participant in the project.

 

This matters when the proposal includes consultants, subcontractors, research institutions, or other partners.

 

The small business may request fee when allowed, but outside participants may be treated differently depending on their role, agreement, and agency instructions.

 

If subcontractors or vendors include their own pricing, profit, or fee, that should be handled according to the applicable rules and budget treatment for that cost.

 

 

Fee and Drawdowns

 

For grant-based awards, the timing of fee drawdowns may matter.

 

NIH states that profit or fee should be drawn from PMS in increments proportional to the drawdown of funds for direct and indirect costs.

 

This is another reason fee should be understood as part of the financial management process, not just a budget line.

Awardees should know:

• Whether fee is included in the award
• How fee should be drawn or billed
• How fee appears in the budget
• How fee is treated in the accounting records
• How fee relates to direct and indirect cost drawdowns
• What agency-specific guidance applies

Fee may be flexible, but it still needs to be managed properly.

 

 

Fee and Accounting Records

 

Because fee is separate from direct and indirect costs, the accounting records should reflect that distinction.

 

Awardees should avoid mixing fee into direct expense categories or indirect cost pools.

 

A clean accounting setup should help show:

• Direct costs charged to the award
• Indirect costs charged or allocated to the award
• Fee or profit received, when applicable
• Drawdowns, invoices, or reimbursement activity
• Budget-to-actual activity
• Award funding balance
• Documentation supporting direct and indirect costs

Fee may not require the same cost support as direct and indirect expenses, but the company should still track the award budget and payment activity clearly.

 

Agency-Specific Rules Matter

 

SBIR/STTR applicants should not assume every agency treats fee the same way.

 

NIH, NSF, DOE, DoD, NASA, and other agencies may use different forms, terminology, caps, budget line instructions, and award terms. DOE, for example, has a regulation stating that DOE allows profit or fee only under SBIR and STTR financial assistance programs, and the award must contain a specific provision allowing profit or fee.

 

Applicants should always review:

• The solicitation
• Budget preparation instructions
• Agency FAQs
• Award terms and conditions
• Budget forms
• Phase-specific guidance
• Grant or contract payment terms
• Any agency-specific fee language

The safest approach is to treat fee strategy as agency-specific, not generic.

 

 

Common Fee or Profit Mistakes

 

SBIR/STTR applicants often make fee mistakes because the category is misunderstood.

 

Common mistakes include:

• Not requesting fee when it is allowed
• Treating fee as a direct cost
• Treating fee as an indirect cost
• Using fee as a gap filler
• Assuming fee can be added after submission
• Confusing fee with contingency
• Using fee to cover underbudgeted project costs
• Using fee to compensate for a weak indirect rate
• Applying fee to the wrong base
• Including fee for parties that are not eligible
• Ignoring agency-specific instructions
• Failing to track fee separately after award

These mistakes can weaken the budget or create confusion during award management.

 

 

Questions to Ask Before Including Fee

 

Before finalizing an SBIR/STTR budget, ask:

• Does this agency allow fee or profit for this opportunity?
• What terminology does the agency use?
• What percentage or cap applies?
• What base should the fee be calculated on?
• Does the fee count toward the total award amount?
• Where should fee appear in the budget form?
• Does the fee need to be explained in the budget justification?
• Have direct costs been budgeted properly?
• Is the indirect rate supportable?
• Is the fee being used strategically, not as a gap filler?
• Does the accounting system track fee separately from costs?
• How will fee be handled during drawdowns, billing, or reporting?

These questions help make fee part of a clear budget strategy.

Final Thoughts: Fee Should Be Separate, Intentional, and Agency-Specific

 

SBIR/STTR fee or profit can be valuable for small businesses, but it should be handled carefully.

 

Fee is not the same as direct costs. It is not the same as indirect costs. It should not be used to hide weak assumptions, patch underbudgeted project costs, or compensate for an unsupported indirect rate.

 

A strong SBIR/STTR budget should first identify the real cost of performing and managing the work. Then, when fee is allowed, it should be requested clearly, calculated according to agency instructions, and tracked separately after award.

 

At Peter Witts CPA PC, we help SBIR/STTR applicants review fee strategy, direct costs, indirect rates, documentation, accounting system readiness, and post-award financial management so the budget is built for both submission and performance.

 

Need Help Reviewing Your SBIR/STTR Fee Strategy?

 

If your company is preparing an SBIR/STTR proposal, Peter Witts CPA PC can help review whether your fee or profit request is allowed, properly calculated, clearly presented, and aligned with your direct costs, indirect rate strategy, and accounting system.

 

Backed by 35+ years of government contract accounting experience and first-hand DCAA knowledge, our team helps innovators build SBIR/STTR budgets that are clear, supportable, and ready for federal funding management.

 

 

Schedule a strategic consultation with Peter Witts CPA PC to review your SBIR/STTR fee strategy.