Most biotech and medtech teams that lose grant money do not lose it by being ineligible. They lose it by putting a correct cost in the wrong line. The three grant budget rules below come up in almost every budget review: one from Horizon Europe, one from US federal awards, one from Innovate UK. Each is quoted from the official text, with a worked example, and each section ends with what the source does not say, so you do not fill the gap with an assumption.
1. Horizon Europe: the same outside work, two different totals
Horizon Europe grants reimburse indirect costs at a flat rate of 25% of the eligible direct costs. The detail that changes budgets is the base. The 25% is calculated on direct costs excluding subcontracting costs, financial support to third parties, and certain internally invoiced goods and services [1].
So the question “is this a subcontract or a purchase?” is not bookkeeping. It decides whether the 25% applies to that money. The Annotated Grant Agreement defines subcontracting narrowly: a subcontract covers action tasks, that is, work described in Annex 1 as part of the action itself [2]. Buying goods, works or services that are not action tasks (an analytical service, a piece of equipment, a licence) is a purchase under a different article and stays inside the indirect cost base [3].
Worked example. A medtech consortium partner has €200,000 of personnel costs and €40,000 of external laboratory work.
| Booked as subcontracting | Booked as a purchase | |
|---|---|---|
| Personnel | €200,000 | €200,000 |
| External work | €40,000 | €40,000 |
| Base for the 25% rate | €200,000 | €240,000 |
| Indirect costs | €50,000 | €60,000 |
| Total eligible | €290,000 | €300,000 |
A €10,000 difference on the same invoice. The classification is decided when the work plan is drafted: if the external work is a task of the action, it is subcontracting, whatever the invoice is called. Applicants write Annex 1, so the choice is theirs, but it is made at proposal stage, not at reporting stage, and it is checked against Annex 1 later [2].
Subcontracts also carry their own conditions: best value for money or lowest price, no conflict of interest, and the usual eligibility conditions for costs [2]. A purchase does not need to be in Annex 1, but it does need to be necessary for the action and priced at best value for money [3].
What the source does not say. The Annotated Grant Agreement sets no percentage cap on subcontracting. Whether the share is acceptable is for evaluators to judge from the proposal. Anyone who tells you “subcontracting may not exceed 30%” is not quoting the grant agreement.
2. US federal awards: the indirect cost base and the equipment line
For universities, non-profits and other recipients covered by the Uniform Guidance, indirect costs are charged on modified total direct costs (MTDC). The definition is in 2 CFR 200.1: all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $50,000 of each subaward. MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs, and the portion of each subaward above $50,000 [4].
The trap is the equipment line. Under the 2024 revision, equipment is tangible personal property with a useful life of more than one year and a per-unit acquisition cost that equals or exceeds the lesser of the recipient’s own capitalisation level or $10,000 [4]. “Lesser of” is the operative phrase. An organisation that capitalises at $5,000 must treat a $6,000 instrument as equipment, exclude it from MTDC and not charge indirect costs on it, even though it is below $10,000.
Worked example. A non-profit research institute with a $5,000 capitalisation level and a negotiated indirect rate of 50% of MTDC budgets:
- Salaries and fringe: $300,000
- Materials and supplies: $60,000
- Subaward to a university partner: $120,000
- One $8,000 analyser
Correct MTDC: $300,000 + $60,000 + $50,000 (the first $50,000 of the subaward) = $410,000. Indirect: $205,000. The analyser is equipment at this institute and is excluded.
If the analyser were booked as supplies because “it is under $10,000”, the base would be $418,000 and the indirect charge $209,000. The $4,000 difference is an unallowable cost that can be disallowed at audit.
Who this reaches. The Uniform Guidance applies in full to non-profits and institutions of higher education. For-profit companies funded by NIH are in a different position: the NIH Grants Policy Statement states that for-profit organisations are subject to the cost principles at FAR Subpart 31.2, not 2 CFR 200 Subpart E [5]. A for-profit’s indirect cost base is therefore whatever its negotiated rate agreement with NIH sets, and the MTDC definition above should not be assumed. Whether NIH applies the $10,000 equipment line or an organisation’s lower capitalisation level in a given award is a matter for the award terms and the rate agreement, so read both before you build the budget.
What the source does not say. 2 CFR 200.1 gives no list of what counts as a “supply” by name. The only test is the equipment definition: if an item does not meet it, it is a supply. The regulation also does not say that a company’s capitalisation policy can be changed for one award; the capitalisation level is the one used for the organisation’s financial statements.
3. Innovate UK: seven categories, and the items that do not belong in them
Innovate UK’s costs guidance for non-academic organisations funds seven categories: labour, overheads, materials, capital usage, subcontract costs, travel and subsistence, and other costs [6]. Many rejected costs are not exotic; they are ordinary costs placed in the wrong category, which is where grant budget rules catch applicants out.
Labour. Staff must be on PAYE and costs come from PAYE records. The guidance lists what labour may not include: blended rates that already contain overheads, discretionary bonuses or performance-related payments “of any kind”, time not spent on the project (sick leave, training days, maternity pay), overtime or time off in lieu, dividend payments, forecasted pay increases and the apprenticeship levy [6]. Founders of micro companies who are not on PAYE may claim up to 8 hours a day at £22 an hour, up to 40 hours a week, if timesheets support it [6].
Overheads. There are three options: none, a flat 20% of labour costs that needs no further evidence, or calculated overheads supported by a spreadsheet that the Funding Assurance team may review [6]. Once approved, the overhead “cannot be exceeded at any time throughout the project life” [6]. For a small biotech with ordinary office and lab overheads, the 20% option is usually the faster route; the calculated option only pays off if real overheads are well above 20% and the records exist to prove it.
Capital usage. Equipment is not claimed at purchase price. It is claimed as usage: purchase price excluding VAT, divided by depreciation months, multiplied by project months and by the percentage of use [6].
Worked example. A medtech SME buys a £120,000 test rig, depreciated over 60 months, and uses it 50% of the time on an 18-month project: £120,000 ÷ 60 = £2,000 a month; × 18 × 50% = £18,000 claimable. Booking the full £120,000 as a material cost is a common reason a capital item is cut from a budget.
Subcontracts and travel. Subcontracted work must be essential, require expertise the team does not have, and be impractical to develop in-house; a non-UK subcontractor needs a justification for not using a UK alternative [6]. Travel must be economy class and exclusively for the project; fuel purchases, first-class travel, entertainment, visas and unreasonable food costs on overnight stays are listed as ineligible, with car mileage at 55p per mile [6].
What the source does not say. The guidance sets no percentage limit on subcontracting, and it does not define “reasonable” overnight costs with a number. It also does not say that a 20% overhead will be accepted without question on every competition; competition-specific rules can override it.
The habit that saves the money
All three grant budget rules share one feature: the expensive mistake is made at budgeting time and discovered at audit time, when the cost is already incurred. The defence is the same in Brussels, Bethesda and Swindon. For every line above a few thousand, write down which category it sits in, which paragraph of the rules puts it there, and keep that note with the budget. A budget that can be checked against the source in thirty seconds is also one that survives a review.
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