Contingent fees, where a grant writer’s payment depends on winning an SBIR or STTR award (typically 10–15% of the grant amount). Federal regulations explicitly prohibit contingent fees. Specifically, FAR 31.205-33(f) prohibits such fees for securing government contracts or grants. [5] This prohibition applies whether the fees are categorized as direct costs (e.g., project-specific expenses) or indirect costs (e.g., facilities and administrative (F&A) costs). The prohibition aims to prevent conflicts of interest and ensure that proposals accurately reflect the project’s actual needs. It also seeks to avoid inflated or misrepresented claims designed to maximize funding opportunities ^[5]. Unfortunately, many companies submit grant proposals written by grant writers that contain False Claims and inflated budgets and labor rates. As I’ve written in many articles, the company submitting the proposal is liable, criminally and civilly, for false claims, rates, and invoices.

^{Therefore, th}e agencies participating in the SBIR/STTR programs allocate funds for R&D activities, commercialization efforts, and limited technical assistance^[1][7]. Contingent fees do not align with these purposes, as they incentivize grant writers to prioritize winning the grant over crafting a scientifically sound proposal. For example, the NIH emphasizes that funds must support the project’s technical merit and commercial potential. ^[2] Paying contingent fees risks diverting funds from critical research and development tasks, undermining the project’s objectives, and violating federal guidelines.

Drawing Down Funds to Pay Contingent Fees

Awardees cannot use SBIR/STTR funds to pay contingent fees. Grant funds are not working capital available to cover any expenses.

Recently, a company that won three, $2 million Phase II awards contacted me to develop their business and compliance systems.  This company had paid a grant writer a flat fee upfront for each proposal and agreed to a 7% contingent fee for each grant that they won. The grant writer told them that they could pay the contingent fee by drawing down funds from the grant. So, when the first grant funds became available, the COO drew down nearly $200,000 to pay the grant writer’s contingent fee. They also drew down the fixed upfront fee for the other two grants awarded but not yet received. Therefore, the first grant, whose total project costs exceeded $4 million over three years, with $2 million coming from NIH for a two-year project period, no longer had $250,000 in research funds.

Additionally, the project budget created by the grant writer used incorrect salary costs, miscategorized subcontracts, and other critical misrepresentations. The company had to repay the misused funds and received a probationary one-year period to implement compliance systems and execute the grant properly. The NIH rescinded the other two grants.

Consequences of Using SBIR/STTR Funds for Contingent Fees

Using SBIR/STTR funds to pay contingent fees constitutes misuse of federal funds, triggering severe financial, legal, and reputational consequences.

1. Repayment Requirement: Misusing funds for unallowable contingent fees may require repayment to the government.
2. Audit and Compliance Issues: Non-compliance triggers audits, which verify cost allowability in accordance with FAR 31.205 and 2 CFR § 200.403. Paying contingent fees could flag the accounting system as inadequate. This determination could result from the failure to segregate unallowable costs, which risks award termination or suspension from future funding^[3][6]. For instance, NIH’s Cost Analysis and Pre-Award (CAP) reviews for NSF grants require detailed expense justification, and unallowable fees can lead to compliance violations reported to SAM.gov^[6][7].
3. Penalties and Sanctions: Violating FAR or agency-specific rules (e.g., NIH’s ban on independent research and development costs) can result in financial penalties or termination of the award. Under the False Claims Act (31 U.S.C. § 3729), misrepresentation in proposals, potentially incentivized by contingent fees, may incur fines up to three times the misused amount plus $13,946–$27,894 per violation (as of 2025)^[5][6]. Such sanctions can devastate small businesses with limited resources.
4. Reputational Risk: Misuse of funds damages a company’s credibility with funding agencies, investors, and partners. For example, a flagged audit could deter venture capital, which is critical for Phase III commercialization ^[3][5]. Reputational damage can limit future funding opportunities across federal programs.

Alternative Arrangements for Grant-Writing Support

While government funds cannot be used to pay contingent fees, businesses may still engage grant writers using non-governmental sources, such as investor funds. However, these costs must be segregated in the accounting system as unallowable costs and excluded from any allowable direct or indirect expenses. This approach enables companies to leverage expert grant writing support while ensuring full compliance with SBIR/STTR funding regulations. (Note: Be sure your grant writer is qualified and understands all the proposal, budget, and cost rules. Use a contingent fee allowability question to identify a consultant who knows the rules.)

Strategies for Compliant Grant-Writing Support

To avoid the risks of contingent fees while securing expert support, SBIR/STTR awardees should adopt these strategies, informed by federal guidelines and best practices:

1. Use DCAA-compliant accounting systems.
2. Train Staff on Cost Allowability.
3. Engage Fixed-Rate Consultants.
4. Maintain Robust Audit Trails.
5. Consult SBIR/STTR and government funding compliance experts.
6. Maintain a non-government funds balance.

Conclusion

Contingent fees to grant writers are unallowable under SBIR/STTR programs. They violate FAR 31.205-33(f) and risk conflicts of interest, repayment obligations, audit findings, penalties, and reputational damage. Awardees must prioritize compliant alternatives, such as fixed-rate contracts, to secure expert support without jeopardizing their projects. Businesses can navigate the regulatory landscape, ensure compliance, and maximize the impact of their SBIR/STTR funding. These practices safeguard financial integrity, protect funding continuity, and drive innovation in the competitive SBIR/STTR landscape.

References

1. SBIR Tutorial 4: Cost Acceptability: https://www.sbir.gov/tutorials/accounting-finance/tutorial-4
2. NIH SEED: Understanding SBIR/STTR: https://seed.nih.gov/small-business-funding/small-business-program-basics/understanding-sbir-sttr
3. SBIR Basics: Costs of SBIR/STTR Funding: https://sbirbasics.com/2025/04/costs-sbir-and-sttr-funding/
4. SBIR Tutorial 6: Negotiating an SBIR/STTR Phase II Budget: https://www.sbir.gov/tutorials/accounting-finance/tutorial-6
5. SBIR Basics: Contingent Fees and SBIR/STTR Grant Funds: https://sbirbasics.com/2025/04/contingent-fees-and-sbir-sttr-grant-funds-a-word-of-caution/
6. SBIR Tutorial 7: Incurred Cost Proposals and Audits: https://www.sbir.gov/tutorials/accounting-finance/tutorial-7
7. NIH Grants Policy Statement: Allowable Costs and Fee: https://grants.nih.gov/grants/policy/nihgps/html5/section_18/18.5.4_allowable_costs_and_fee.htm

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