SBIR/STTR Contracts - Know Cost "Eligibility" Rules

We use these pages to keep readers up to date on FAR (Federal Acquisition Regulation) cost principles (i.e. FAR Part 31) and supplemental cost principle regulations from individual agencies (e.g. DFARS or DoD FAR Supplement). Contractors need to understand however that there are many other factors that affect the allowability and eligibility of costs. Contracts and grants often contain specific limitations while agencies themselves impose their own limitations. When it comes to SBIR/STTR programs, things can get very confusing and its necessary to fully understand allowability and eligibility criteria when negotiating contract prices. Here are some examples of competing or conflicting guidance pertaining to SBIR/STTR contracts.

• Some agencies allow you to purchase equipment as a direct cost on a Phase 1 project while others do not.
• Some agencies prohibit travel in Phase 1 while others strongly encourage it and even others require it. This leads to "consistency" issues in estimating, recording, and reporting costs.
• NIH (National Institute of Health) limits Phase 1 indirect rate to 40 percent of all direct costs unless there is an approved rate on a recent Federal project. This 40 percent limitation can result in a significant hardship to small businesses.
• NSF (National Science Foundation)  limits the combination of fringe benefits and indirect costs to not more than 150 percent of direct labor.
• All agencies allow profit and commonly refer to 7 percent of total cost. However, some agencies take that to mean that profit cannot exceed 7 percent, others say that means "normally" profit should not exceed 7 percent, while still others say 7 percent is an agency average.

The eligibility of costs is usually mentioned in the agency's SBIR/STTR solicitations but usually requires some "digging" to find them. Before entering into an SBIR/STTR contract, be certain that you fully understand any unique cost eligibility requirements and restrictions that apply and query the contracting officer for others that might not be evident. Phase 1 projects are usually fixed price while Phase 2 are typically cost-reimbursable. Once Phase 1 costs are negotiated, contractors can pretty much spend the contract amount as it sees fit. Not so with Phase 2 projects. Phase 2 projects can cause the most problems to contractors because those contracts become subject to audit.

For some free training resources from the SBIR/STTR folks, see New Resources for Small Businesses Seeking R&D Funding.

DCAA Publishes 2017 Version of the FAR Cost Principles Guide

The FAR (Federal Acquisition Regulation) Cost Principles Guide was recently updated through FAC (Federal Acquisition Circular 2005-95 (January 2017) and is available for download here. The previous update was September 2014 (through FAC 2005-76). Here's how DCAA (Defense Contract Audit Agency) introduces the guide:

The FAR Cost Principles Guide – a chronology of revisions to FAR Part 31 since 1984 – is used to determine the cost principles in effect at time of contract award that may be necessary for audits of historical costs (e.g. Incurred Cost audits or Claims audits).

The FAR Cost Principles Guide traces all of the changes to the Federal Acquisition Regulation cost principle through the inception of the FAR system in 1984. It is useful for determining the precise cost principle or the precise version of the cost principle in effect at the time a particular contract was awarded.

While a few cost principle have never changed since the initial promulgation (e.g. bad debt expenses and alcoholic beverages), most have undergone some form of revision. Sometimes these revisions are frequent and significant. . The Compensation cost principle (FAR 31.205-5) for example has been revised 40 times, most recently in September 2016. Some FAR cost principles have been eliminated (e.g. ADP equipment FAR 31.205-2 and Civil Defense Costs - FAR 31.205-5).

Remember, in most cases, the cost principles that apply are those that are in effect as of the date of contract award. Without a good cross-reference of the cost principles and their effective dates, it would be very easy to apply incorrect standards. Compensation is a good example. The lower compensation cap (discussed here) applies to contracts awarded after June 24, 2014. Many contractors (and subcontractors) are working  on contracts awarded prior to that date and are not subject to the lower caps.