Outside help on an SBIR or STTR award comes in three legal shapes — employee, consultant, and subawardee — and the shape you choose decides which cost rules apply. Agencies push back on budgets that blur them, usually by demanding a revised budget after selection, which pushes your start date out. It is one of the quieter entries on the list of budget mistakes that sink an application.
Consultant, subaward, or employee
A consultant is an individual paid a negotiated fee for personal services, normally at a daily or hourly rate, with no employment relationship and no fringe benefits charged. A subaward goes to an organization — a university lab, a test house, another company — that performs a defined portion of the scope of work with its own staff and its own indirect rate, and it generally needs its own statement of work and budget inside your application. An employee sits on your payroll and is charged as salary plus fringe plus indirect.
The practical test is control. If you direct the day-to-day work, set the hours, and supply the equipment, agencies expect an employment relationship rather than a consulting invoice. STTR layers a required research-institution partner on top of all this, which is not the same thing as an ordinary subaward; the comparison of the two programs explains where they diverge.
Documenting a rate as reasonable
The test applied is reasonableness: would a prudent person spending their own money agree to this rate for this work? You support it with the consultant's normal commercial rate, evidence of what comparable specialists charge, the number of days budgeted, and a sentence on what each day produces.
Experienced technical and regulatory consultants commonly quote daily rates from the mid hundreds into the low four figures, and specialized clinical or regulatory advisors run higher. Several agencies cap the daily or annualized rate they will reimburse, and those caps are adjusted periodically — read the figure in the current solicitation rather than carrying one over from an older application. Budget days times rate. A flat line reading "consulting: $40,000" with no basis behind it is exactly what a reviewer strikes.
When the consultant is an investor or a director
Paying a consultant who is also an investor, a board member, or a relative of the principal investigator is not automatically prohibited, but it invites scrutiny. The question is whether the price was set at arm's length. Document the person's relevant expertise, show the rate matches what an unrelated specialist would charge, and have someone with no financial interest approve it under a written conflict-of-interest policy. If the person is an officer of the company, the cost usually belongs in salary, not consulting.
Consultants and the work-share limits
Statute sets a minimum share of the work the small business itself must perform, that share differs between the two programs, and agencies can vary it. Consultant fees and subaward dollars both count toward the outside portion, so a consultant-heavy budget can breach the limit with no formal subcontract in sight. Run the split before you finalize numbers, and if you are near the line, ask — a call with the program manager costs nothing. The surrounding mechanics sit in the SBIR application guide.
This is general information, not accounting or legal advice; confirm treatment with your CPA and the agency's grants office. Projects House helps founders scope the engineering work a federal budget has to pay for — reach us through the contact form.