If you in the process of preparing a budget for an NSF SBIR Phase I grant proposal, you may have noticed in the solicitation, there are a bunch of costs NSF will allow you to charge as direct costs, up to $10,000 of financials and accounting related costs under line G.6, other costs. As such, you may be asking yourself some questions. Why has NSF gone through the effort of specifically allowing these costs as direct costs? Should I include these costs in my budget? What are the advantages and disadvantages of including or excluding these from the budget? This blog post serves to helps answer those questions and provide you with more guidance on how to think about this.
My initial response is to give kudos to NSF for allowing small businesses to recover these costs as direct costs. Normally these professional services type costs would be recovered through a company’s indirect costs, depending on where the company’s indirect rate is running, may or may not be 100% paid for. So, thank you NSF for ensuring small businesses can pay for these valuable services! But why are they doing this? First, NSF is acknowledging that small businesses most often lack the resources to hire the much-needed professional CPA who understands accounting for government awards. Secondly, they want you to succeed and get to the next phase. However, in order to get to Phase II, they expect your company to have an adequate accounting system. In fact, they will audit the accounting system before they will even consider issuing a Phase II award. (See my blog post on NSF pre Phase II administrative and financial review aka CAAR or CAP review for more information on what to expect during the review.) This is where the $10,000 comes in very handy. You are going to need that money, perhaps more, to hire a CPA to help you through the review. I typically advise my clients to budget $10,000 now in the Phase I proposal, hire a CPA who understands government awards who can help set up an adequate accounting system so that you are ready to prove to NSF you are a viable candidate for Phase II.
The advantages of budgeting the $10,000 now is that the grant will pay for these costs. If you don’t budget for these costs, you will need to pay from other sources, like your personal checking account or even worse, you may need to borrow money to pay for them. Keep in mind that NSF will evaluate your financial capability during their pre Phase II review, so if you are borrowing money, this could have a negative impact on your score. Therefore, it is important to remain solvent.
The disadvantage of course is that you will have less money to spend on your project. But don't fret, if you find that you do not need the full amount budgeted, you can always re allocate any remaining funds to other budget categories. So, the safe bet is to budget the full $10,000 now and you can decide later if and how much you need for accounting versus other costs.
