What You Need to Know about USDA Pre-Award Costs

  • May 22, 2020

Each of the 11 agencies that participate in the SBIR (Small Business Innovation Research) program have their own individual policy and guidelines regarding all allowable costs, including pre-award costs. Pre-award costs are any cost the company incurred prior to winning an award. This includes services rendered for business consultation or proposal preparation. By examining the clauses of the policy document, it can be determined what kind of professional service costs are allowable.

§200.459 Professional service costs.
(a) Costs of professional and consultant services rendered by persons who are members of a particular profession or possess a special skill, and who are not officers or employees of the non-Federal entity, are allowable, subject to paragraphs (b) and (c) when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Federal Government. In addition, legal and related services are limited under §200.435 Defense and prosecution of criminal and civil proceedings, claims, appeals and patent infringements.

(b) In determining the allowability of costs in a particular case, no single factor or any special combination of factors is necessarily determinative. However, the following factors are relevant:

(1) The nature and scope of the service rendered in relation to the service required.

(2) The necessity of contracting for the service, considering the non-Federal entity’s capability in a particular area.

(3) The past pattern of such costs, particularly in the years prior to Federal awards.

(4) The impact of Federal awards on the non-Federal entity’s business (i.e., what new problems have arisen).

(5) Whether the proportion of Federal work to the non-Federal entity’s total business is such as to influence the non-Federal entity in favor of incurring the cost, particularly where the services rendered are not of a continuing nature and have little relationship to work under Federal awards.

(6) Whether the service can be performed more economically by direct employment rather than contracting.

(7) The qualifications of the individual or concern rendering the service and the customary fees charged, especially on non-federally funded activities.

(8) Adequacy of the contractual agreement for the service (e.g., description of the service, an estimate of the time required, rate of compensation, and termination provisions).

(c) In addition to the factors in paragraph (b) of this section, to be allowable, retainer fees must be supported by evidence of bona fide services available or rendered.


While consultant fees are allowable throughout the project, the areas highlighted in purple show how these fees must be handled. A scope of work and documentation of ongoing services rendered must be available to support any costs involved in a retainer fee for consultants. This means a one-time service like proposal preparation is not an allowable consultant cost. For any applicants wondering why they can not use federal awards to pay for proposal preparation services, here is the answer: It is against the federal policy guidelines. The excerpt below offers specific language on the issue of pre-award services rendered such as proposal preparation costs:

§200.460   Proposal costs.

Proposal costs are the costs of preparing bids, proposals, or applications on potential Federal and non-Federal awards or projects, including the development of data necessary to support the non-Federal entity’s bids or proposals. Proposal costs of the current accounting period of both successful and unsuccessful bids and proposals normally should be treated as indirect (F&A) costs and allocated currently to all activities of the non-Federal entity. No proposal costs of past accounting periods will be allocable to the current period.


This means that the practice of contingency-based payments for proposal preparation services are not only unethical for a variety of reasons, but also illegal on a federal level. Should an audit occur on a company who chose to disregard this policy, the legal implication will likely take place, including the possibility of having to repay the misappropriated funds.

In addition to being forbidden by the federal government, contingency-based payments for these types of services are also both unethical and illogical. Many proposal preparation specialists are grant writing professionals. Here is what the Grant Professionals Association (GPA) code of conduct has to say about contingency-based payments:


Members shall work for a salary or fee.

Members may accept performance-based compensation, such as bonuses, provided such bonuses are in accordance with prevailing practices within the members’ own organizations and are not based on a percentage of grant monies.

Members shall not accept or pay a finder’s fee [3], commission [4], or percentage compensation based on grants and shall take care to discourage their organizations from making such payments.

Compensation should not be written into grants unless allowed by the funder.


In addition to breaking the law and codes of ethics from premier organizations, the idea of contingency-based payments is just plain silly. As with any service, Full payment for proposal preparation should be provided at the time services are rendered, not after an award is made. Grant proposal professionals but their best effort forth in every proposal with the hopes the client will win an award. They can not “try harder” for the promise of more money if they are already doing their best. Furthermore, grant writers and applicants have absolutely zero control over the outcome of the application. The decision to award a proposal rests in the hands of the reviewers alone. Why would a client pay an additional fee to a grant writer for a decision a reviewer made?

It is crucial for applicants to read and understand all policy guidelines when applying for USDA or any other federal funding. Ignorance of the policy is no excuse for breaking the law. For those to whom ethics matter, it is advisable to always research popular ethical guidelines before entering any contract. E.B. Howard Consulting has a strong commitment to both ethics and knowledge. Our staff undergoes ongoing professional development to stay knowledgeable regarding SBIR and other federal guidelines and policies and adheres to a strict code of ethics.

Do you need a management capability study?

Ready To Take the Next Step?

We assist our clients in locating, applying for, and evaluating the outcomes of non-dilutive grant funding. We believe non-dilutive funding is a crucial tool for mitigating investment risks, and we are dedicated to guiding our clients through the entire process—from identifying the most suitable opportunities to submitting and managing grant applications.