Why paying a grant consultant a percentage of your award is a problem
Success fees on federal grants are generally unallowable, and the exposure falls on the grantee rather than the consultant. What the rules actually say.
The arrangement that sounds fair
A consultant offers to work on your federal grant application for a percentage of whatever you win. No award, no fee. For an organisation with limited budget and an uncertain outcome, it is an appealing proposition, and plenty of firms offer it.
The difficulty is that the arrangement conflicts with the rules governing federal awards, and the consequences of that land on the grantee rather than on the consultant who proposed it.
What the rules say
Several provisions point the same way. Under the Uniform Guidance, contingency payments are treated as unallowable in the ordinary case (2 CFR 200.433), and costs of influencing the award of a federal grant are unallowable (2 CFR 200.450). Separately, grant-writing is a cost of competing for an award rather than of performing it, so it is generally a pre-award proposal cost that cannot be charged to the resulting award without prior approval.
For SBIR and STTR specifically, the Federal Acquisition Regulation is more direct: success fees paid from award funds are unallowable under FAR 31.205-33(f).
And 31 U.S.C. § 1352, the Byrd Amendment, prohibits using appropriated funds to pay anyone for influencing the award of a federal grant or contract, with disclosure required where non-federal funds are used for that purpose.
Where the exposure sits
This is the part that gets missed. The consultant is not the party audited. The grantee is. Unallowable costs charged to an award are refundable with interest, and in a serious case the exposure is not limited to the money.
A university research office or a biotech CFO who has been through an audit knows this, which is why a success-fee proposal often ends a conversation rather than starting one.
The compliant alternative, and why it is also better advice
A fixed or hourly fee, agreed in advance, procured and documented properly, does not raise the same problem.
It also changes the incentives in a way that favours the client. A consultant paid on contingency is paid to submit — to as many programmes as possible, as often as possible, because volume is how contingency pays. A consultant paid a fee has no reason to talk you into an application that will not win, and can afford to tell you a project is not fundable yet. That advice is frequently the most valuable thing in an engagement, and it is precisely the advice a contingency arrangement makes expensive to give.
What to ask
Ask any prospective consultant how they are paid, in writing, before anything else. If the answer is a percentage of the award, ask how they reconcile that with 2 CFR 200.433 and — for SBIR or STTR — with FAR 31.205-33(f).
It is a fair question and a knowledgeable firm will have a clear answer. This is a description of the rules rather than legal advice; your own counsel or sponsored programmes office should confirm how they apply to a specific arrangement.
This is a description of how these rules and processes generally work, not legal, financial or tax advice. Regulations change and specific circumstances differ — confirm anything that matters with your own counsel or sponsored programmes office.