What It Is, How It Works, and Strategic Impact

Small businesses receiving SBIR (Small Business Innovation Research) or STTR (Small Business Technology Transfer) awards often zero in on their budgets’ direct and indirect costs. Frequently, companies misunderstand that the Fixed Fee element of these awards can provide crucial flexibility.

Whether you’re new to federal funding or seeking to establish stronger compliance practices, understanding how and when the SBIR/STTR fixed fee applies is crucial for maximizing your funding and ensuring audit readiness.

What Is the Fixed Fee?

So, the Fixed Fee in SBIR/STTR awards is an additional amount, usually up to 7%, that can be added on top of your total eligible costs (i.e., direct + indirect (fringe, overhead, G&A). This Fixed Fee is intended as a reasonable margin for your business and helps cover general business risks that the federal government doesn’t otherwise reimburse.

From official guidance:
“The fixed fee provided as part of this grant award is in addition to direct and facilities and administrative costs. The fee is to be drawn down from the DHHS Payment Management System in increments proportionate to the drawdown of costs.”[1]

Key takeaways:

• The Fee is not part of your reimbursable project costs. It’s separate.
• You must draw it down proportionately based on the actual costs incurred.

Fixed Fee Limits

Whether you are applying for a Phase I or II, you may request up to the fee limit[i] for the agency for your total eligible project costs, excluding the fee itself.

Example:

Cost Category		Amount
Direct Costs		$350,000
Indirect (F&A) Costs		$150,000
Total Eligible Costs		$500,000
Fixed Fee (7%)		$35,000
Total Award		$535,000

Using the Fixed Fee

Unlike project costs, you don’t have to justify how you spend the Fixed Fee. It’s essentially discretionary, intended to support your business. While you don’t have to justify the expenditure, it must be for a reasonable purpose and adhere to sound accounting practices.

Appropriate uses include:

• Business development or marketing
• Strategic planning and growth activities
• Building financial reserves
• Internal audits or compliance support
• Supporting infrastructure not billed to the project

While there is flexibility, remember that you must still comply with federal cost principles for the remainder of your budget.

Drawing Down the Fee Correctly

One of the biggest pitfalls in SBIR/STTR awards is incorrectly drawing down the fixed fee.

What NOT to Do:

• Don’t draw the full Fee at the beginning.
• Don’t front-load the Fee in early periods without cost justification.

What TO Do:

• Track actual incurred project costs monthly or quarterly.
• Calculate the percentage of the total budget spent.
• Apply that same percentage to your fixed Fee.

Example:
If you’ve spent 50% of your $500,000 budget, you can draw 50% of your $35,000 fee,  $17,500.

Special Case: Cost-Plus-Fixed-Fee (CPFF) Contracts

While most Phase I SBIR/STTR awards are fixed-price, some Phase II awards, especially those issued as contracts rather than grants, may be Cost-Plus-Fixed-Fee (CPFF).

So, here’s how that changes things:

What Is CPFF?

In a CPFF agreement:

• The government reimburses actual, allowable costs incurred during the project.
• You receive a pre-negotiated fixed fee (profit), typically 7–10% of estimated costs.
• You do not keep the difference if you spend less than your proposed costs. Cost reimbursement is for actual costs, and the fee remains fixed as a percentage of actual costs incurred, drawn proportionate to the costs incurred.

Key Differences from Fixed-Price:

Feature	Fixed-Price (e.g., Phase I)	Cost-Plus-Fixed-Fee (e.g., Phase II)
Does the government pay for actual costs?	No	Yes
Fee tied to actual performance?	No	Yes, based only on actual costs
Keep savings from cost underruns?	Yes*	No
Flexibility in spending the fee?	Yes	Limited because the Fee is fixed based on costs incurred.

*A critical compliance note: Do not make the mistake of padding your costs in a firm-fixed-price proposal or decide to do less than the scope of work proposed so you can have “extra” funds. It may be tempting; however, both actions constitute fraud under government funding rules.

So, under CPFF:

• You can’t “make a profit”  or “increase a fee” by underspending.
• Overstating your costs to increase the Fee could be considered fraud.

Compliance Considerations

Even though the Fixed Fee is flexible, improper management of drawdowns or overcharging can trigger audits or repayment demands.

Ultimately, try these Best Practices to keep your company compliant:

• Keep clear documentation of expenses and fee drawdowns.
• Match fee drawdowns to incurred costs, not project timelines.
• Reconcile internal records with government reports like PMS (Payment Management System) reports.
• Understand your contract type (fixed-price vs. CPFF) and what rules apply.

Conclusion

Ultimately, the SBIR/STTR fixed fee is a powerful tool, whether a margin on a fixed-price award or a fixed profit on a CPFF contract. Managed correctly, it allows your business to grow, innovate, and invest in sustainability. Mismanaged, it can lead to compliance trouble or even funding loss.

Optimally, think of the Fixed Fee as a strategic asset, not just extra cash. Know your contract type, track costs, and build a resilient funding model that supports both innovation and compliance.

Need Help?

Are you looking to navigate SBIR/STTR budgeting or compliance?
Explore our guides on:

• Indirect rate calculation
• Effort reporting
• Grant accounting systems

Or reach out for a one-on-one consultation. We’ll help you set up your financial systems for long-term success in the federal funding ecosystem.

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[1] From the Department of Health and Human Services, National Institutes of Health, NATIONAL CANCER INSTITUTE, Notice of Award

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[i] The maximum allowable fixed fee (often termed “profit”) for SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer Research) awards varies by agency. Here’s a summary of the fixed fee limits for several key federal agencies:

National Institutes of Health (NIH)

• Phase I & II: Up to 7% of total costs (direct + indirect
• Note: The fee must be included in the budget request at the time of application. Furthermore, agencies do not consider it a “cost” for purposes of determining allowable use, program income accountability, or audit thresholds.

National Science Foundation (NSF)

• Phase I Up to 7% of total costs (direct + indirect)
• Phase II Up to 10% of total costs (direct + indirect)
• Note: The fee is intended to be consistent with normal profit margins provided to profit-making firms for R&D work.

Department of Energy (DOE)

• Phase I & II Up to 7% of total costs (direct + indirect)
• Note: The fee does not necessarily equate to profit. Instead, it is a factor available to for-profit organizations to provide a reasonable amount of discretionary funds similar to a profit margin. Rarely does the fee translate to actual profit, as the small business uses these funds to cover unallowable costs associated with the project.

Department of Defense (DoD)

• *Phase I: Up to 7% of total costs (direct + indirect)
• *Phase II: Up to 10% of total costs (direct + indirect)
• *Note: The fee must be consistent with normal profit margins provided to profit-making firms for R&D work.

National Aeronautics and Space Administration (NASA)

• *Phase I: Up to 7% of total costs (direct + indirect)
• *Phase II: Up to 10% of total costs (direct + indirect)
• *Note: The fee will be consistent with normal profit margins provided to profit-making firms for R&D work.

Important Considerations

• Agency-Specific Guideline: Each agency may have specific guidelines and caps on the fixed fee. For detailed information, it’s crucial to refer to the specific funding opportunity announcement (FOA) or solicitation.
• Budget Justification: The budget proposal must clearly justify the fixed fee.
• Not a Cost Item: The Fixed Fee differs from a direct or indirect cost item. The small business concern may use the Fixed Fee for any purpose, including additional effort under the SBIR/STTR award.

If you need assistance with a specific agency’s guidelines or have further questions, please don’t hesitate to ask.